September 28, 2010

Big Reason Why College Costs Have Increased : State Spending vs Tuition

College costs have been rising at a pretty high rate.   But why are tuition bills going up so fast?  

I ran across a comment from someone who pointed out a fairly common sense conclusion  that: if state funding for universities goes down then tuition tends to go up.   This lead me to wonder if the reason tuition has been going up so much over the past couple decades is simply because state funding has decreased.

I was able to find some good data showing what the states pay for college.   This information is based on state funding for state schools.   So this is specific to public schools.

State Higher Education Executive Officers published a study State Higher Education Financing FY 2009.
Their study talks about state financing of education and the amount tuition revenue that goes towards education.      The report is looking at the money that the actual university systems have coming in.   
Looking at Table 22 on page 22 of the study they give amounts for the educational appropriations and net tuition levels for 1984 and 2009 as well as some years in between.

The College Board has information on trends in college pricing.   This table shows tuition prices over the years going to the 70's. 

Now if we combine the two you get the following comparison between 1984 and 2009: 

1984 2009 annual % increase
appropriations* $21,144 $75,009 5.2%
net tuition* $6,856 $44,527 7.8%
enrollment    7,374,779   10,839,907 1.6%
tuition as % 24% 37%
approp. / student  $      2,867  $       6,920 3.6%
net tuition / student  $         930  $       4,108 6.1%
Total / student  $      3,797  $      11,027 4.4%
Average tuition rate  $      1,228  $       7,020 7.2%

* figures in millions of dollars

Annual increases over 25 years from 1984 to 2009:

Appropriations / student :   3.6% increase
This is the amount the state budgets are spending from state budgets primarily funded by tax dollars.

Total spending / student : 4.4% increase
This is the amount spent by the colleges to support the university operations per student.  

Net tuition / student :  6.1% increase
This is the total tuition receipts less free financial aid grants given to lower income students. 

Average tuition rate : 7.8% increase
This is the sticker price of tuition.

There you go.  

While the sticker price for tuition has been going up at a rate of 7.8% per year the actual tuition paid has gone up 6.1%.   The net tuition has gone up slower than the tuition charges because financial aid keeps tuition lower for lower income students.   The schools keep costs low for low income students so they don't get the full tuition from those individuals and a larger share of the overall tuition is paid by higher income individuals who end up paying full sticker price.   And at the same time the amount colleges spend on students has only gone up 4.4% annually.    State spending has only gone up 3.6%.    This all adds up to mean that tuition rates are going up faster since a higher % portion of the cost of college is being paid by tuition now compared and the portion of the higher education budget paid by state budgets is declining.

College costs aren't really going up as fast.   Tuition is going up because the tuition paid by students is paying a higher portion of the bill and state taxes are contributing less.

Put another way, the states pay less and the students pay more.

How does this work?    Lets look at an example to illustrate how this kind of thing can happen.

Lets say that a small public school only has 400 students.   The school gets $2,800,000 from the state.  They charge $7,000 for tuition.   Students in the bottom 25% of income levels get 100% tuition grants, students in the 2nd lowest income quarter get 50% tuition grants and the students in the top half pay full tuition.   Altogether the school brings in $1,750,000 in net tuition.    The schools total budget is $4,550,000 and they spend about $11,375 per student.   Now lets suppose that the costs of running the school goes up by 5%.   The amount the state gives the school from tax revenues goes up by 3%.   The schools budget is now $4,777,500.   The state is paying $2,884,000.   That leaves $1,893,500 to pay out of net tuition.   If net tuition goes from $1,750,000 to  $1,893,500 then thats an increase of 8.2% in a single year.   But the university decides that the middle income students who currently get 50% tuition grants cant afford a tuition increase, so they give those students the same $3500 tuition rate after grants.   This shifts more of the tuition costs to the students who dont' get financial aid.   The actual tuition rate goes up to $7,717 for a 10.2% increase.  This example is basically what has been happening in general at universities over the past 25 years.

Here's how the example breaks down:

2010 2011 % increase
Budget $4,550,000 $4,777,500 5.0%
State spending $2,800,000 $2,884,000 3.0%
net tuition $1,750,000 $1,893,500 8.2%
tuition $7,000 $7,717 10.2%

Each State is Different

The numbers above are the national totals and national averages.   The figures at the state level differ 50 different ways across the 50 states.   Some states are up in some areas and down in others.

An example of the before and after of budget sources at University of Texas Austin.  In 1984-1985 the tuition segment was just 12.2% of funding but by 2009 it was 23.7%.   In the same time period state funding went from 47% of their budget in 84-85 to 16% in 2009.

Bottom Line:   A key reason college tuition is going up so fast is that states are not increasing spending as fast and a higher portion of the bill is falling on the students.

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