Two trends college seekers should understand

This report (PDF) from the Boston Consulting Group outlines five trends to watch in higher education.

Two of these are especially important for students searching for a high-quality education: declining revenue and calls for transparency.

BCG reports that declining revenues may lead to “one-third to one-half of all U.S. universities going bankrupt over the coming decades.”

Some details on colleges’ failing finances:
– The percentage of top public universities’ revenue that comes from state appropriations now ranges from 1 to 36 percent. (One percent! How does that institution still qualify as a public university?)
– Enrollment has slowed, and is expected to decline, so colleges and universities can no longer depend on tuition as an ever-increasing source of revenue.
– Endowment portfolios have been underperforming.
– Federal agencies also have less money to give, including the NSF and NIH.

So, how are colleges compensating for these losses? Some tactics:

  • steep increases in tuition and fees
  • cutting tenured faculty in favor of adjuncts
  • cutting entire programs (including some that might surprise or disappoint you)
  • deferring billions of dollars in maintenance
  • less expensive alternative certificate and degree programs (online, hybrid, shorter in duration, sand/or vocationally focused)*
  • recruitment of more out-of-state and international students, who, at least at public universities, pay higher tuition than do in-state students

Note that we’re not seeing a disinvestment in college athletics.  You can see how much your favorite university spends on college sports in this spreadsheet; check out by how many millions of dollars each athletic department is subsidized, despite the popular belief that major football teams make money for their schools.

Another place where spending is increasing is university administration. Beware the college that has an ever-growing list of vice presidents, vice provosts, deanlings, or bizarrely named administrators in a Byzantine org chart.  (I once met an “executive associate vice chancellor.” Note the three adjectives, none of them explanatory or illustrative of the job duties.)

Here, instead of just being a Negative Nellie, I’ll highlight a college that seems to be doing it right: Claremont McKenna College, whose Student Affairs website explains “The Office of the Vice President for Student Affairs, Admission, and Financial Aid is really just two people, Jeff and Julia, who oversee a wide spectrum of programs at CMC to ensure that the College is running smoothly for students.” I admire that lack of administrative bloat.

Not surprisingly, stakeholders are asking for a greater return on investment in higher ed, especially since the rapid increase in the cost of a college education comes at a time when median family incomes are stagnating. Furthermore, recent college graduates are experiencing a soft job market and high debt loads.

The good news: stakeholders expect greater transparency, and colleges, universities, and higher ed consortia are starting to deliver. We can now discover, for example, exactly how much a college or university spends on average educating each student. During the college advising process, I find this data for my clients and use it to help them make especially informed college choices.

If you’re going the DIY route, Michelle Kretzschmar compares the data available in various college search websites and these databases’ ease of use.

 

*From what I’ve seen so far, I’m not a fan of these plans, as you really do get what you pay for; if you know of one that looks especially promising for first-year, first-time college students, I’d love to hear about it.

Colleges’ real discount rates–and what they mean for you

You may have heard the term “discount rate” tossed around in regard to college tuition.  But what is it, and why does it matter?

Typically, the discount rate is calculated one of two ways:

Total institutional grant aid ÷ Total gross tuition and required fee revenue

or

Average institutional aid per student ÷ Published tuition and required fee rate

As Sandy Baum and Lucie Lapovsky explain in a College Board report on tuition discounting, “the discount rate is calculated relative to only tuition and fee prices.” If room, board, and other living costs—which are sometimes covered by grant aid—were included with tuition, it would be difficult to compare discount rates at residential colleges, colleges with few students in residence, and commuter or community colleges.

So far, it seems relatively straightforward: a college’s discount rate is calculated like a regular discount on any good or service, only it’s expressed as an average of students’ discounts.

Problem is, there’s more to it than that.

In addition to the aid some colleges offer to cover living costs, many nonprofit colleges don’t charge students the actual cost of their education.  The Integrated Postsecondary Education Data System (IPEDS), which collects all kinds of higher education data and uses it to identify and analyze trends in the sector,  allows colleges to count the annual costs of operating and maintaining a college—but not the capital costs of ever-more-impressive buildings and equipment–toward the total cost of educating students.1

Just how generous is the actual tuition discounting at some colleges?  Here’s a slide from a 2011 presentation Grinnell College made to its alumni and other stakeholders:

GrinnellSlide

 click to enlarge image

 The chart reveals the college’s actual per-student costs varied from $50,600 to more than $58,000 per year, while the comprehensive fee hovered under $40,000.  Even if all students paid the full fee, Grinnell was eating up to $20,000 per year per student!  Even more astonishing, very few students pay the full fare at Grinnell, so the college was “losing” even more revenue per student.  If you look at the blue portion of the bars, you’ll discover that revenue from students and their families covered on average only 36.5 to 38.5 percent of the college’s total cost. (Currently, about 85 percent of Grinnell’s students receive financial aid.)2

Why am I going into such detail?

It’s not just because I appreciate these behind-the-scenes glimpses into collegiate budgets and financing. (I also appreciate Grinnell’s commitment to grappling publicly with some potentially troubling long-term trends; I wish all colleges would make this data so accessible and understandable.)

More significantly, Grinnell offers a case study in what you’re really getting for your tuition dollars. Grinnell’s discount rate, when calculated according to IPEDS’s rules, is 50 percent—meaning the average student receives a combination of grants, loans, and other financial aid totaling half of the advertised cost of attending the college.  But when you look at the costs Grinnell is absorbing—the $20,000 or so per year above the comprehensive fee it charges—you can see Grinnell students are getting an excellent deal.  If the college charges $38,000 as its comprehensive fee, and students pay on average half of that, they’re paying $17,000 per year.  But the actual cost to Grinnell per student is, as the chart shows, around $56,000.  The average student, then, is getting a $56,000-per-year education for $17,000 per year—or, over four years, $68,000 for a $224,000 education.

But wait, you say, that’s still a lot of money.  Yes, it is!  But Grinnell limits the amount of its graduating students’ debt, capping it at $19,000, and the average student with need-based loans graduates with only $12,350 in debt.  Grinnell requires student self-help contributions of $2,500 per year, but excuses the student from this requirement for one summer’s internship or research at Grinnell, meaning many students pay $7,500 while in college and graduate with $12,350 in debt.  Before student loan interest, that’s less than $20,000 for a $224,000 education.

How families can use this information

Imagine your student is offered admission to two colleges, and each offers $10,000 per year in financial aid toward a $20,000 tuition bill.  Assuming both colleges are a good fit with your student’s personal values, interests, and goals, you might want to find out the actual amount each college spends per year educating each student.  If one school spends $40,000 per year, and the other only $18,000, that suggests there may be a higher quality of education and life at the first college.

Want help determining colleges’ actual costs, evaluating financial aid packages, and the real discount rate to you and your family? I’m available to help.

  1. For  details on tuition discounting practices, including a list of 49 colleges’ actual costs vs. the comprehensive fees they charge, see Roger T. Kaufman’s essay “Discounts and Spending at the Leading Liberal Arts Colleges” in Liberal Arts Colleges in American Higher Education: Challenges and Opportunities (American Council of Learned Societies, 2005): 70-79. []
  2. Full disclosure: Grinnell was my alma mater; during my time there in the 1990s, I received loans and, in my senior year, a need-based grant. []