Now here is a title that you do not see very often! We have all heard about the continually rising price of college tuition, about affordability, value, and even the relevance of a college education. Most people, at least those who are employed outside of the higher education sector, remain befuddled about high tuition costs and prices. Having put two children through private colleges, I can relate to the frustration that parents feel when faced with six figure price tags for a child’s education.
So how did we get here? Given that most private colleges and universities are not-for-profit organizations, the college and university business model is not based on private inurement or greed. Having worked with dozens of colleges and universities in my career, I am often frustrated with the ever-increasing excess of operating expenses over net tuition revenues. You may wonder how this is possible, given the price of admission.
Unfortunately, tuition pricing is anything but straightforward. You might say that it is an exercise in smoke and mirrors. Although high tuition prices are often quoted, the fact remains that most students do not pay full tuition. In addition to federal grants, which are need-based, colleges and universities grant institutional scholarships, some of which are funded by donors and many of which the college or university “fund” themselves. In fact, today’s astute applicants are becoming increasingly proficient at negotiating better deals for themselves. According to the 2017 study by the National Association of College and University Business Officers, Colleges were, in fact, getting only 47 cents on the tuition dollar in fiscal 2018.
While it is true that many of our more prestigious colleges and universities have significant endowments (which the federal government is now taxing for the first time), college and university management are responsible for maintaining the spending power of these funds in perpetuity in order to satisfy donor requirements and to continue to meet the needs of future generations. Using prudent guidelines, a typical college or university should generally spend less than 5% of these funds in any given year.
Alumni donors are the lifeblood of the higher education sector and colleges and universities continue to depend on the generosity of alumni to fill the gap between net tuition prices and cost. Under the new tax laws, however, the tax advantages of charitable giving are no longer available to those taxpayers who take the standard deduction.
The primary drivers of expense or cost in higher education are human resources and bricks and mortar. The salary structure in higher education is, of course, like no other. The notion of tenure, which dates back to the thirteenth century, originated in the United States in 1940 with the American Association of University Professor’s (AAUP) Statement of Principles on Academic Freedom and Tenure in an effort to ensure freedom of speech.
According to the AAUP, a tenured appointment is an indefinite appointment that can be terminated only for cause or under extraordinary circumstances such as financial exigency and program discontinuation. Approximately 21% of faculty positions in the United States are currently tenured according to AAUP. Keep in mind that tenured faculty generally have the longest years of service and the highest salaries.
According to the Bureau of Labor Statistics, US Department of Labor, in 2018, the unionization rate among workers in education, training, and library occupations was 33.8 percent, the second highest sector in the study.
These factors limit the ability of higher education administrators to react quickly to the decreases in enrollment that we have seen in recent years. As a significant percentage of labor costs are fixed, college management is not as nimble as management in other sectors.
The traditional model for delivering a quality education is a residential campus, complete with manicured lawns, ivy-covered towers, and gardens in the school colors, meticulously tended.
Now that the children of the baby boomers have made their way through the system, the number of traditional high school graduates in the U.S. has decreased, particularly in the northeast. Mid-tier colleges and universities are competing for a smaller and more demanding pool of applicants.
Today’s college campuses are therefore grander than the simpler campuses where baby boomers resided. Food service offers a variety of ethnic and healthy food options and the number of places that students can eat on campus has increased. Technology is top-notch because students demand it. Dorms and campuses are equipped with more safety features in order to mitigate the increased risk of campus violence, and athletic facilities are bigger and better than ever before.
College campuses have become small cities, subject to a level of regulation previously unseen. Dollars spent on compliance with rules and regulations over areas such as sexual harassment, campus safety, cybersecurity, health service, and federal financial aid have skyrocketed in recent years. Vanderbilt University shocked the world in 2015 when it commissioned a study on the cost of compliance activities.
The study, which was conducted by the Boston Consulting Group, indicated that regulatory compliance represented 3 to 11 percent of higher education institutions’ nonhospital operating expenses, and that faculty and staff spent 4 to 15 percent of their time complying with federal regulations.
At many mid-size colleges and universities, financial management is under increasing pressure to keep the institution’s head above water. Top line pressure, triggered by unfavorable demographics, has forced most colleges and universities to trim expenses. I believe that colleges and universities have a responsibility to do this. Innovative revenue enhancement and strategic cost cutting, continued development efforts, prudent investment and strategic alliances are all required to maintain a viable institution.
While it is easy to criticize colleges and universities for the high sticker prices that we all read about, solutions to the challenges that lie ahead are not abundantly clear or easy to facilitate. Let’s admit that we don’t have all the answers just yet, but that we will work together to keep college affordable.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
