A Special Report from the Office of MIT President Charles M. Vest • June 1998

College Costs in Context

University budgets are still under the microscope -- and under the gun 

The cost of higher education is a topic for magazine cover stories, party conversation, family table talk and editorials. Usually it is described as the "high cost" -- or even the "too-high cost" -- of higher education. But are those labels really accurate or fair?

Last July, Congress created a National Commission on the Cost of Higher Education to study the issues and report back. (I was named as a member by Senate Minority Leader Tom Daschle.) Six months later, the Commission issued a very thick volume of conclusions, recommendations, and supporting documentation. Here, boiled down to their essence, are the key findings:

• Price controls will not work
• There is confusion everywhere about price and cost
• The public is ignorant of the enormous range of institutional types and prices available in US higher education
• Cost containment is downplayed in favor of quality (one reason why quality is unmatched in the world)
• Federal regulations add substantially and unnecessarily to costs
• New information technologies have not reduced costs but may in the future

Underlying these findings is a fundamental truth: every college spends more on the education of its students than it receives in tuition. The difference, which would be an operating loss in the for-profit world, amounts to a general subsidy of all students, even full-pay students. No student, in any state or private institution, pays a tuition equal to the actual cost of his or her education.

Professor Gordon Winston of Williams College, an authority on the economics of higher education, has come up with a simple formula -- price plus subsidy equals cost -- which defines this non-profit transaction. It also defines the difference between the non-profit and for-profit worlds.

If colleges and universities hope to convince a skeptical public that this equation works in favor of the student, they must begin to recognize the educational value of their capital assets. Normally we don't consider plant and equipment as educational costs, as if chemistry were taught in a borrowed vacant lot. This may arise from our origin as charities and the quixotic notion that our capital assets are somehow not fiscally real.

Those working in higher education are often as confused as the public about the elements of price, subsidy and cost. A critical recommendation of the Commission is that colleges become "transparent" on these issues, publishing reports to show net tuition revenue, expenditures per student, and general subsidy. This will not of itself reduce tuition, but it will clarify what is now a mystery to those within and without the academy. (In fact, rates of tuition increase for the last five years are half the rates of the previous five years, so some moderation is already in evidence.)

A second reality is that families everywhere grossly overestimate the average cost of college -- and underestimate the impact of financial aid -- reflecting the media focus on the most expensive colleges: only four percent of total enrollment is at colleges with tuitions greater than $20,000, while 55 percent of students enrolled in four-year colleges pay a tuition charge less than $3,000 per year. There is an American college for every taste, talent, and pocketbook. Of course, even these lower costs are hard for poor families to bear, but an average full-pay charge of $30&endash;35,000 for a bachelor's degree is a far cry from the headlined $120,000 degree.

Since 1945, American universities have focused on quality improvement, increasing their depth and breadth. Their missions have tended to expand. This admirable commitment to enhancing quality must now be joined with an equal attention to containing costs. Some colleges and universities -- MIT is an example -- have become leaders in improving quality while containing costs. The future will require a sharper focus by all.

The cost of government regulation is particularly difficult to quantify, but there are persuasive estimates that it consumes at least ten percent of tuition revenue in a research university. Here, the Congress can take direct action:

• In environment, health, and safety areas, to develop differential regulations distinguishing between industrial facilities and research or teaching laboratories;
• In the area of federal student aid, to adopt a performance-based regulatory model rather than the present command-and-control model, i.e., regulations that recognize results rather than regulations that prescribe precisely how to achieve the result.

The faculty-administration dichotomy, played out in every policy area from tenure to pricing, may be the most damaging and most pervasive of our problems. Administrators have been known to say that faculty do not teach much; faculty have been known to say that there are too many administrators making too much money. Such statements are barriers to understanding. Policy makers strongly believe them and they haunt the policy debate. The facts: most faculty work very hard; colleges and universities are thinly, not thickly administered.

To communicate these realities effectively, we must, in the words of the Commission's chair, President William Trout of Belmont University, find a ground of common citizenship on our campuses. In educating a suspicious nation about the true costs, benefits, and requirements of higher education, we all have our work cut out for us -- and, as Ben Franklin once reminded his own fractious colleagues, "We must all hang together or most assuredly we will all hang separately."

Clare Cotton
President, Association of Independent Colleges and Universities of Massachusetts