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How Much Does It Cost to Educate an Undergraduate?

March 17th, 2014 by dfarish

Wow! Such a big question! Let’s start by making a key distinction:

(1) One might interpret this question as, “How much does a university charge the student and parents?” Allowing for such significant complications as different sticker prices at different universities, different financial aid packages for different students at the same university, different fees for different majors, additional charges (primarily from rising tuition prices) in the sophomore, junior and senior years – it is nonetheless the case that, when the incoming freshman arrives on campus, he or she (and the parents) know fairly accurately what their out-of-pocket costs will be, at least for the first year. So while this is an important question, and answering it can be confusing and time-consuming, in the end it is answerable. But consider the second alternative.

(2) One might also interpret this question as, “How much does a university spend on the education of one of its undergraduates?” Answering this question would be hopelessly confusing if it were asked on behalf of each individual undergraduate. Did the student register for a lab course, and create additional costs not incurred by students in lecture-only courses? Is the student in a program that is inherently expensive to teach, such as engineering, or one that is much more classroom oriented and relatively inexpensive, such as philosophy? Was the student being taught primarily by well-compensated senior professors, or by relatively inexpensive adjuncts or teaching assistants?

Answering the question at that level of detail would be very arduous, and, in the end, not particularly helpful. It would be like calculating the value that each individual taxpayer receives from the taxes that he or she pays. We can reasonably assume that the figure is unique to each taxpayer – some receive more value than they pay in taxes, and others less – but knowing the specific figure wouldn’t change the size of the individual’s tax bill (or tuition bill), so why bother?

However, knowing the average amount spent by a given college or university for an average student would be very useful information – because now the prospective student and his or her parents could determine with some accuracy if they were being asked to pay an amount that exceeded the institution’s cost to educate the student, and whether, therefore, they were receiving fair value for their money.

The problem, of course, is that most institutions do not want the students and parents to know that figure. Take a college that lists its tuition at $30,000. Among private colleges and universities, the average current discount rate (that is, the percentage by which the list price is reduced for purposes of providing need or merit aid) is about 45 percent. Thus, we can deduce that $13,500 of this $30,000 posted tuition is actually being waived for a significant fraction of the incoming class of students, leaving just $16,500 per student to pay for educational costs and to run the university. So anyone paying the full sticker price is paying $30,000 to receive a $16,500 education. (To be fair, the average private college derives about 10 percent of its aid dollars, or in this example roughly $1,350, from its endowment  – so that figure –  $1,350 – should be added to what the college spends on educating each student.)

Using this adjusted figure, the full payer is receiving a $17,850 benefit for having spent $30,000.

As I said earlier, this is the kind of information most colleges and universities are reluctant to share with prospective students and their parents – and when they are drawn into the discussion, the colleges can become inventive with their explanations.

Consider a recent radio story regarding Duke University (NPR Planet Money, “Duke: $60,000 a Year for College Is Actually a Discount,” Feb. 21, 2014). In this broadcast, the executive vice provost at Duke says, “We’re investing on average about $90,000 in the education of each student.”

Is that the same thing as saying that Duke spends $90,000 per year to educate a typical undergraduate?

No.

What Duke is apparently doing is dividing its operating budget by the number of students it enrolls. But Duke has a medical school, a law school, and a significant number of graduate students, all of whom cost far more to educate than does a typical undergraduate. They have faculty teaching reduced loads because of the volume of research they do – but while research is relevant to the education of graduate students, it has far less relevance (I would not argue that it has no relevance) to undergraduate education.

Duke’s $90,000 figure also includes an average of $20,000 per student in financial aid. To the extent that Duke is drawing on its endowment to provide financial aid, that would be a legitimate cost. But Duke apparently is including the value of the discount given to students who receive institutional aid – money that it doesn’t collect in the first place. If that is the case, then their $90,000 figure is considerably inflated.

Finally, Duke devotes 24 percent of its budget to “sponsored direct activity.” It’s not at all clear whether these funds represent research dollars coming to the institution, or institutional funds used to sponsor faculty research – but it’s almost surely not the case that these funds are used primarily to educate undergraduates.

NPR concludes its report as follows:

“So if you’re a student at Duke, are your getting a massive discount on the cost of your education? Or are you subsidizing a giant educational edifice that you as an undergraduate will barely come into contact with? ... If you’re a full-paying student, who’s not learning much from professors outside the classroom, it’s the university that’s getting the deal.”

More than half the undergraduates at Duke are full-payers.

It is important to note that Duke is by no means alone in this overly generous calculation of costs to the university relative to the sticker price. Most of the Ivy League campuses, for example, do the same thing.

It would take some work to separate the costs of graduate and professional education from the costs appropriately attributed to undergraduate education (a task that is far easier at small private colleges without graduate programs or extensive research agendas), but if the federal government is intent on providing more transparency to prospective students regarding the costs of higher education, requiring all colleges and universities to make a good-faith effort to calculate the institutional costs of educating an undergraduate would be eminently worthwhile.

Final point: Last year, as we at Roger Williams University introduced our Affordable Excellence initiative, we endeavored to calculate the actual cost to us of educating our undergraduates, in order to be able to reference that figure to our tuition sticker price. Our first pass at this calculation showed that, exclusive of room and board, we were spending approximately $28,500 per student per year; tuition was $29,960, but less than 10 percent of our students were paying the full sticker price, and the average institutional aid for incoming freshmen exceeded $11,000 per student. In other words, almost all our students were receiving an education that cost us substantially more to provide than we were collecting in tuition – an outcome that illustrates our commitment to providing a very high quality educational experience while ensuring that we remain affordable to successive generations of students.

In the coming months, we will refine our calculations for the current fiscal year and post the results in a table that will be easily accessed from the homepage of our website. It is only right and proper that prospective RWU students and their parents should be able to see, in actual dollars, what they are receiving in educational benefits relative to the money they will be expending.