"College Spending is Out of Control and Students are Paying the Price"
What would Mark Twain have to say about the WSJ's reporting?
Note: I have written before about financial aspects of US higher education, a subject on which I am not an expert (not even close). My reporting has been based largely on my own research, but I have also been helped by a few individuals who are experts in this field, including David Feldman from W&M and Jonathan Cole from Columbia University. Neither David nor Jonathan have reviewed this post, and they may not agree with the views expressed here, but I did want to thank them personally. And also to recommend two of their books, The Road Ahead (Archibald and Feldman, 2017) and The Great American University (Cole, 2012). Thanks guys!
Those of you who have seen the film The Big Short will recall the opening lines attributed to Mark Twain: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” In the early 2000s, mortgage lenders and investors knew for sure that US house prices would continue to increase and mortgage defaults would remain low. But what they thought they knew about the US housing market turned out not to be true, and it got both them and the rest of us into a whole lot of trouble.
I was reminded of Twain’s aphorism while reading the Wall Street Journal’s recent investigative reporting on ‘out of control’ spending at fifty flagship state universities. This story ran in the print edition under this headline: “State Colleges Devour Money. And Students Foot the Bill”. In the online edition it ran under the headline “Colleges Spend Like There’s No Tomorrow. ‘These Places Are Just Devouring Money.’” And a condensed version with photos and pop-up commentary appeared under the headline “From an Italian Monastery to an Esports Lounge, Colleges Spend Big with Little Pushback”. Here is the WSJ’s own summary of its findings:
“The nation’s best-known public universities have been on an unfettered spending spree. Over the past two decades, they erected new skylines comprising snazzy academic buildings and dorms. They poured money into big-time sports programs and hired layers of administrators. Then they passed the bill along to students…. Colleges have paid for their sprees in part by raising tuition prices, leaving many students with few options but to take on more debt. That means student loans served as easy financing for university projects.”
The WSJ’s narrative is not new, and it seems broadly consistent with what many of us have observed over the years while attending college, working at a university or paying the bills for a college education. A quick walk around campus at many universities will provide ample evidence of increased spending and construction activity. Anyone who has worked in a university will have encountered armies of administrators. And we all know for sure that tuition costs have gone up astronomically over the years, imposing crushing debt burdens on students.
Or at least we think we do. And so does the WSJ. But is this really true?
Let’s explore
The flagship university financial model. Before we turn our attention to the WSJ’s reporting, let’s take a quick look at the financial model for a representative large flagship public university, the University of Kentucky, which is characterized in the WSJ’s reporting as a bastion of undisciplined and even frivolous spending. The University of Kentucky has over 30,000 students, approximately two-thirds of whom are undergrads. It offers more than 200 majors and degree programs in 16 academic and professional degree-granting colleges. UK is one of only eight public universities nationally with Colleges of Agriculture, Engineering, Medicine and Pharmacy on a single contiguous campus, located in Lexington KY. The UK runs a major hospital system, one of the largest in the state. The University of Kentucky also has a big-time athletic program, with the Wildcats competing in the SEC. Kentucky is one of the poorest US states, with a per capita income 20% below the US average, and ninety percent of UK in-state undergraduates receive financial aid in the form of grants.
Like other flagship universities, the University of Kentucky is a large organization offering a broad array of services to students and to the public. Total consolidated operating revenue for FY 2022 was $4.4 billion, 70% of which related to hospital and clinical services. Operating revenue from the university’s educational programs was around $1.3 billion, with another $500 million of non-operating revenue coming from state aid, donor gifts and endowment income.
In 2022, the UK’s hospital and professional clinics generated operating income of ca $300 million, about offsetting the operating loss from the UK’s educational and other operations. One-third of the UK’s educational operating loss was attributable to its athletic program, which had operating costs of $160 million but only $50 million in operating revenue.
As reported by the WSJ, the University of Kentucky has in fact invested a lot of money on physical plant, $3.7 billion over the past dozen years, some of which was paid for by private developers. This investment is reflected on the UK balance sheet which at YE 2022 included $6 billion in gross physical plant and equipment, $4 billion of which is buildings (before depreciation). Some significant portion of this balance sheet PP&E relates to the UK’s hospital and clinical facilities, but the UK does not break this out in its financial statements. (The WSJ stripped hospital operations out of its annual spending data, but it does not appear to have done so with the capital expenditure data.)
The UK’s educational operating costs consist largely of personnel expense (salaries, wages, benefits), which typically account for 50% or more of university spending (per the WSJ). (The consolidated number at UK was 57% in 2022, but this will include the hospital and professional clinics.) The cost of operating the UK’s physical plant represents about 13% of total educational operating expense (including depreciation). Interest on capital asset related debt amounted to $40 million in 2022.
At the University of Kentucky, revenue from tuition and fees covers less than half of total educational operating expense. During FY 2022, the total amount charged by the university for tuition and fees was $560 million, accounting for 40% or so of total educational operating expense, about equal to the revenue contribution from research grants. However, the amount of tuition and fees actually paid by UK students was much lower than the amount charged by the university. In FY 2022, net revenue from tuition and fees was $380 million, 30% below the gross amount charged by the university. The difference between gross and net tuition revenue, $180 million, is attributable to scholarship (grant) aid, including amounts paid by third party sources (eg state and federal government) and amounts funded by the university itself (not all of which will have been ‘paid for’ with donations and endowment income).
The UK’s published price for annual tuition and fees is currently around $12,000 for in-state undergraduates and $32,000 for out-of-state undergraduates, with in-state students composing roughly two-thirds of the total undergraduate student population. The average total cost of attendance (tuition and fees plus room, board and books) for an in-state freshmen starting UK in 2021-22 (and living on campus) was close to $19,000 per annum, a 40% or so discount to the published list price, reflecting the large amount of grant aid provided to in-state students.
So what are we to make of all this UK financial statement data? Well, I think we can safely say that the University of Kentucky is a large and complex organization. It has over the years invested a lot of money into its physical plant. Much of its operating expense comes in the form of personnel cost. Its hospital system is profitable but its athletic program is not. In-state undergraduates receive a lot of financial aid in the form of grants and university discounts. And its educational operations generate a large operating loss which is funded with state aid, donations and endowment income. In other words, the UK is a university. And a large one at that.
The WSJ’s analysis. The WSJ studied the financial results of fifty so-called ‘flagship’ universities, one per state, as reported by the schools themselves. It calculated the amount of capital investment at each school and documented anecdotally some of the larger and more controversial projects. For each school, the WSJ calculated the percentage increase over the past twenty years in university spending and net tuition revenue and it quantified the change in student enrollment and state aid during this period. The WSJ reported three principal observations from its review of the flagship university financial data:
Operating costs. Over the past twenty years, median university spending increased 38% in constant dollars, substantially more than the increase in student enrollment of 21%.
Tuition revenue. Revenue from tuition and fees (henceforth ‘tuition’) grew at a faster rate than university spending, with mean tuition revenue approximately doubling over the twenty year period. On a per student basis, tuition revenues increased by 64%.
State aid. Over the twenty year period, state aid to the flagship public universities was cut in 38 (of 50) states, in many cases substantially. But universities increased tuition by much more than was needed to make up for the lost state support. In those states which cut public support, the mean university increased tuition revenue by $2.40 for every $1 lost in state aid.
In reporting the results of its analysis, the WSJ concluded that the flagship public universities have over the past twenty years been “spending like there is no tomorrow”, with little if any pushback from their governing boards. It also concluded that this university spending spree was largely paid for by students in the form of increased tuition charges. And although the WSJ does not appear to have actually studied the student loan data at the flagship universities, it nevertheless concluded that the university students financed these higher tuition payments with increased amounts of student loan debt, which served as “easy financing for university projects”.
But what are we to make of this data and the conclusions drawn from it by the WSJ?
Critiquing the WSJ’s reporting. There is no doubt that many flagship public universities, like the University of Kentucky, have invested a lot of money over the years to enhance their physical plant. It is also true that university operating costs have increased substantially, in real as well as nominal terms, as universities have expanded and diversified their student populations. Even the most competitive schools lose a lot of money in their athletic programs. And the headline spending amounts do seem quite large. When we go behind some of the headline numbers, however, the amount of increased university spending over the past twenty years may not in fact be as shocking as the WSJ reporting would lead us to believe. There may also be a lot more to the university tuition story than is explained by cost-push inflation let alone ‘out of control’ spending and athletic department subsidies. And the timing of the biggest increases in spending and tuition may well have taken place many years ago, with recent trends reflecting a very different narrative.
According to the WSJ, the median flagship university increased its 'spending’ over twenty years by 38%, expressed in constant dollars. [I assume that ‘spending’ refers to educational operating expenses, not capital expenditures or total (non-educational) expense, but the WSJ doesn’t say.] However if we adjust this data to reflect the 21% increase in student enrollment over the same time period, the increase in real spending per student drops to 14%. [Math: 1.38/1.21 = 1.14]. Compounded over the twenty year period, this is an annual growth rate of just 0.65%. [To be clear, this is two-thirds of one percent per annum, not 6.5%.] And most of this increased spending, almost 80% of it per the WSJ reporting, occurred from 2002-2012, with much lower rates of growth reported in the past decade.
The WSJ reports extensively on athletic spending at some of the flagship schools, where revenues generally do not come close to covering the full cost of the entire athletic program. (Football and men’s basketball may make money, but track and field does not.). The WSJ calculates the total ‘subsidy’ associated with the flagship athletic programs at $650 million per annum, which certainly sounds like a lot, but is only $13 million per school on average. We do not know how the WSJ calculated this number, or how it defines ‘subsidy’, which may or may not be net of restricted donations made to the athletic programs (including scholarship funds). But even if $650 million is in fact a true subsidy, we should keep in mind that over 1 million undergraduate students attend these schools, and so the total per student subsidy is something less than $650, which is not nothing but it isn’t a lot either.
In order to assess the impact of increased university spending on tuition charges, the WSJ selected as its preferred metric net tuition revenue rather than gross tuition revenue. Which makes sense if the goal is to quantify the amount of tuition actually paid by students rather than the list price of tuition charged by the universities. As noted above, gross tuition revenue reflects the amount of tuition billed to students, regardless of who pays the bill. Net tuition revenue measures how much students actually paid to the university, after deducting from their tuition bills the amount of scholarship (grant) aid received by the university on their behalf. (Universities also ‘discount’ the cost of tuition for some students, without receiving reimbursement from third parties or from matching amounts of endowment income.) At the University of Kentucky, for example, in FY 2022 students on average paid only 70% or so of the billed amount for tuition and fees, with the balance paid for with grants and university discounts. And among in-state undergraduates, the size of the discount will have been larger.
The WSJ reports that net tuition revenue at the median flagship university essentially doubled in real terms over the past twenty years, and increased by 64% on a per student basis. It also noted that these tuition increases were much larger than the corresponding increase in university spending, suggesting perhaps that the tuition increases did not need to be this large in order to compensate for the universities’ increased costs. But the tuition increases were only larger than the cost increases when expressed in percentage terms, not in absolute dollars. As noted above, operating costs at flagship universities can easily be 3+ times as large as net tuition revenues, and so even a 100% increase in tuition revenue might not be sufficient to cover a 38% increase in operating costs, let alone a 38% cost increase plus large cuts in state aid taking place over the same time period.
The WSJ correctly points out that state aid to the flagship schools have decreased a lot over the past twenty years, a period during which the number of enrolled students will have increased. The WSJ reports that the flagship schools increased total tuition revenue by $2.40 for every $1 in reduced state aid, but on a per student basis the corresponding tuition increase was much lower, $1.25 for every $1 in lost state aid. Which does not leave a lot of incremental tuition revenue available to cover the universities’ increased operating costs (or vice versa).
It is difficult to tell from the WSJ reporting precisely when these large tuition increases actually took place, but it would appear that much of the increase may have occurred between 2002 and 2012, with little if any real increase during the past ten years. At the University of Kentucky, for example, the four-year average annual rate of increase for resident undergraduate tuition dropped from 5.8% in 2012 to 1.6% in 2022, which seems consistent with the gross tuition data presented by the WSJ. And so it may be that much of the WSJ’s “increased tuition” story, like that of increased spending, occurred more than a decade ago.
Whatever the timing, the increase in the cost of attendance (including tuition) may not be entirely a function of increased operating cost and reduced state aid. The price of a university education, like the price of other goods and services traded in the market economy, is impacted by both supply and demand factors, including changes in the quantity or quality of the component parts in the overall bundle of goods and services being offered by the universities. The price of college has gone up a lot over the years, not only because of cost increases but also because of changes in the perceived quality of the student experience at the flagship universities, whether or not these quality enhancements were strictly ‘educational’ in nature. Students expect to get more from university than what they learn in the classroom or the lab, and to the extent the bundle of services we call “college” has been enhanced over the years, we should not be surprised that the price has also gone up, and perhaps by more than the increase in operating costs, the cut in state aid or the rate of inflation would suggest.
Competition between universities is also an important part of this story, as is the rankings methodology employed by some of the college guides, as noted by the WSJ. Universities compete for the best (and most wealthy) students and one of the ways they do this is by enhancing the services they offer. And so while granite countertops and Tempur-Pedic mattresses in the dorms and the Esports Lounge at the University of Kentucky may seem frivolous to many of us, it may be that UK students (or their parents) are willing to pay more for these frills than it costs the universities to provide them.
Public and private universities have also made great efforts over the past two decades to diversify their student populations, which has increased the cost of student services and the amount of financial aid granted to students. To pay for this, universities have increased prices for those students who have demonstrated the ability and willingness to pay. And in the public universities, these students have disproportionately been out of state students.
We should also note that increased tuition revenues are not always the result of increased tuition prices. Revenue mix also matters. Universities have for years now attempted to hold down tuition prices (and related costs) while increasing tuition revenue (and profit margin) by shifting the mix of in-state and out-of-state students and by offering new programs with different pricing structures and/or higher profit margins (eg online courses and one-year masters programs). The WSJ’s reporting acknowledges these trends, but plays down their importance, concluding that whatever the cause, ‘increased tuition revenue’ means that ‘students pay more’, without getting into the more interesting questions of which students are paying more, how much more, and for what.
The WSJ reporting largely ignores the distributional impact of increased university tuition and other charges. Even if total or average net tuition revenue has increased over the years, this doesn’t mean that all students paid more for tuition, or even that most students paid more. Instead it most likely means that some students paid more for tuition, perhaps a lot more, some students paid less, and many students paid about the same amount as in prior years. Which is exactly what the public university data, not mentioned in the WSJ reporting, seems to suggest.
If we look at the data published by the APLU (Association for Public and Land-Grant Universities) for in-state undergraduate students at all four-year public universities (not just the flagships), a quite different picture emerges. Over the past 14 years (not quite the 20 years studied by the WSJ), the published total cost of attendance (COA) for all public in-state undergrads has increased by 17% in real terms, a compound annual growth rate of just over 1%. But this reflects published tuition prices, not net tuition revenues. When we strip out the increased amount of financial aid (grants) awarded over the years, the total net COA (in constant dollars) is essentially unchanged from 2006-7, and is down by 10-15% in recent years. [This decrease is due in part to the recent spike in inflation.] And if we look just at net tuition and fees (excluding room, board and books), the amount paid by in-state undergraduates has dropped close to 40% in real terms over this period. Which of course is not at all the picture painted by the WSJ.
Competing narratives. Despite some rather glaring weaknesses in its analysis and reporting, the WSJ may not be entirely wrong about the overall spending and revenue trends at the flagship public universities. Over the past twenty years, university spending in real terms has gone up, even if the annual increases have been more modest than the WSJ would like us to believe. Total tuition charges (and revenues) have also increased substantially, in real terms, even if the net amount paid by many students is flat (or down) due to increased financial aid. And student loan debt has definitely gone up over the years, on a nationwide basis if not at the flagship public universities. [The WSJ presented no student loan data for the flagship schools, which it does not appear to have reviewed.]
But even if the WSJ’s spending and revenue data is broadly correct, this doesn’t mean that its narrative is either correct or the only one consistent with the facts as reported. The WSJ has presented a narrative of flagship public universities spending like drunken sailors on shore leave, forcing students and their parents to take on huge amounts of debt to pay egregiously inflated tuition bills. But it is entirely possible that what has actually been going on at least some of the flagship public universities may quite different, and more benign, than what the WSJ would like us all to believe.
If you ask the universities themselves what they have been up to, they will tell you that they have been thoughtfully increasing their capital investment and operating budgets in a targeted attempt to meet the increased demand from students and their parents for enhanced facilities, programming and services, as well as to match the perceived quality of the ‘product’ offered by competing (and often richer) schools. To pay for this increased cost, and to make up for reduced state aid and government research grant revenues (and cost reimbursement), the universities have adjusted their overall revenue models and fine-tuned their tuition pricing, rather than simply implementing across-the-board tuition price hikes. As a result, overall tuition revenues have increased but the increases have been structured so as to be paid by those students (and their parents) who are most willing and able to pay, with less well-off students benefitting from increased scholarship (grant) aid funded by public and private sources (and by the universities themselves). All of which has mitigated the financial impact of increased costs on in-state undergraduate students, the primary population which public universities are meant to serve.
This sort of conscious price discrimination may appear to some well-heeled readers of the WSJ to be unfair or unduly ‘progressive’, but from a financial and economic perspective it actually seems to be quite sensible and even efficient. And it looks a lot like what well-run private sector businesses might do in this situation, which I doubt the WSJ or its readers would find to be controversial let alone objectionable. And so what the WSJ portrays as manifestly irresponsible governance and oversight at the public flagship universities may instead reflect rather savvy financial management, similar to what we generally expect from private sector companies if not from our state governments.
This competing narrative of efficiently run public universities will no doubt conflict with much of what the WSJ and its readers ‘know’ for sure to be true. But it might also be the case that much of what the WSJ and its readers think they know to be true ‘just ain’t so’, as Mark Twain told us over a hundred years ago.
And in this case I think it is Mark Twain, not the WSJ, who is correct.
Links
Colleges Spend Like There Is No Tomorrow, WSJ, August 10, 2023
Colleges Urged to Produce Better Information on How They Spend Money, WSJ, August 12, 2023