MIT Faculty Newsletter  
Vol. XX No. 5
May / June 2008
Financing Undergraduate Education
MIT Faculty Survey: It's About Time
Berwick, Lee, and Orlin Elected to
FNL Editorial Board
Reconsidering the Value of Service to MIT
Confidentiality in Recruitment, Promotion, and Tenure Reviews
Provost Announces Faculty Renewal Program
Endowment Spending Policy at MIT
A New Approach to MIT's Financial Planning
A Primer on Indirect Costs
Changes in Engineering Education
Anthropologists Express Concern Over Government Plan to Support Military-Related Research in Universities
Reflections on Nominations and Elections for Faculty Officers and Commmittees at MIT
Initiative on Faculty Race and Diversity: Research Team and Effort Launched
The Man I Killed; Lise
Creating a Culture of Communication: Assessing the Implementation of the Undergraduate Communication Requirement
The Vision Thing
Lerman Now Dean for Graduate Education
The Spellings Commission Backs Off
Who Should Be Allowed to Speak
at Faculty Meetings?
from the 2008 Faculty Survey: Reasonableness of Workload
from the 2008 Faculty Survey:
Satisfaction with . . .
from the 2008 Faculty Survey:
Sources of Stress
Printable Version


Financing Undergraduate Education


As the cost for attending college continues to skyrocket, the burden of funding deserving students is being shared by both the students’ families as well as the university. Exacerbated by the weakened U.S. economy, traditional student funding methods often are proving insufficient in the short term and lacking an extended view that would improve them over the long term.

MIT finances are a key theme of this issue of the Newsletter. Articles include “Endowment Spending Policy at MIT”; “A New Approach to MIT’s Financial Planning”; and “A Primer on Indirect Costs”. Continuing with that theme, in this editorial we offer a perspective on the current financial climate for undergraduate students and some thoughts on how to improve things in the future.

Since World War II, MIT and most of our peer universities have followed a common path toward funding undergraduate education. Initially, the largest revenue source was tuition paid by the student and his or her family. As time passed, private universities developed additional resources through fundraising from benefactors, which yielded a flow of annual expendable gifts as well as the annual payout from ever-increasing university endowments. But even these revenue-generating sources are proving insufficient for raising the funds to enable the university to support the ever-increasing costs of undergraduate education.

Indeed, consider the current picture at MIT. Over the last 10 years we have increased our tuition and fees at an average annual rate of 4.2%; at the same time the financial aid budget has increased at an average annual rate of 9.1%.

One consequence is that for students who qualify for MIT financial aid, the net tuition in real dollars has actually fallen by 15% over the last 10 years [President Susan Hockfield, letter to the MIT Community, February 29, 2008]. This is a truly remarkable accomplishment, demonstrating MIT’s commitment to assuring access for all of our exceptional students. But is this sustainable? Can we continue to increase our financial aid budget at this rate? And do we need to do even more in light of the much more generous financial aid that Harvard and other universities are able to offer families in the $100K to $200K income bracket?

Even with these dramatic increases in the financial aid budget, we still know that for many families the cost to send a child to MIT is too much. Each year many students choose to go elsewhere due to the financial burden that their families would need to assume for an MIT education. Other families and students take on more debt so that the student can attend MIT, frequently requiring the student to begin repaying enormous sums upon graduation.
These challenges are by no means specific to MIT. The rise of the costs of higher education over the past few years and the accompanying rise of tuition have been well above the general inflation that the economy as a whole has faced. The rise has placed an increasing burden on families to support the educational expenses of their children. As noted by President Hockfield [President Susan Hockfield, letter to the MIT Community, February 29, 2008], many of our “affordable” public universities have had to raise their fees at even greater rates due to reduced state funding.

Over the past few decades a variety of means have been developed to reduce the burden of education on the families of students. These have included in general the elimination of the ability to pay as a criterion for admission. Many schools also promise aid packages that meet the “full need” of the student. But the need determination has often been predicated upon unrealistic assumptions about the student and his/her family's ability to pay. As a consequence, a large portion of this need is often to be met by a combination of work-study and loans, which greatly constrain the student’s flexibility during school and post graduation.

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Financing Undergraduate Education

More than 50 years ago, the economist Milton Friedman argued for income-contingent loans as a way for financing higher education. The basic idea is that the repayment of a student’s loan is contingent on the student’s post-graduation income.

For instance, in exchange for a loan, the student commits to paying a given percentage of his/her annual gross income for a set number of years.

This concept has surfaced in a number of different forms. In 1967, a White House panel chaired by MIT Professor Jerrold Zacharias proposed the creation of an Educational Opportunity Bank. Although never adopted, the idea was that a student would repay on the order of 1% of gross annual income each year for 30 years for each $3000 of loans. In 1971, Yale actually introduced on an experimental basis a Tuition Postponement Option; upon graduation a student paid 0.4% of income for each $1000 of loans for 35 years. Nearly 4000 undergraduates participated in this program between 1971 and 1978. More recently Great Britain introduced an income-contingent student loan program called Pay As You Earn. Student loan repayments are 9% of any income in excess of an annual income threshold of £15,000 (~$30,000), and repayments continue until the loan is paid off.

Perhaps this idea deserves revisiting. Such loans would help to shift the financial burden from the parents to the student, who receives the value of the education. Making the repayment contingent on income would allow students more flexibility in making their post-graduation choices; for instance, a student could take a low-paying community service position or continue into graduate school without an overwhelming repayment obligation. Furthermore, the repayment fraction could vary with income, as with a progressive tax rate, or vary with time since graduation, to reflect different stages of one’s career. The system might also assist the Institute by allowing it to increase tuition closer to real costs, with the expectation that students would use income-contingent loans. In this way we might move closer to a system by which more and more of the Institute’s revenues are tied to the income streams of the graduates, which arguably reflect the value added from the education.

Of course, in developing such a plan, the devil is in the details. An implementation plan would need to address many issues: how to secure the initial capital needed to launch such a program? what type of provisions to permit one to buy out from the repayment scheme? how to manage the potential problem from adverse selection? how to manage the collections?

Nevertheless, in light of the challenges of financing undergraduate education, new ideas are needed. We welcome other suggestions.

Editorial Sub-Committee
Ernst Frankel
Steven C. Graves
Fred Moavenzadeh
George Verghese

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