• Confessions of a Community College Dean

    In which a veteran of cultural studies seminars in the 1990s moves into academic administration and finds himself a married suburban father of two. Foucault, plus lawn care.

Title

Price and Cost are Not the Same Thing

The economics of higher ed.

 

January 23, 2019
 
 

Folks who follow higher ed policy debates know that price and cost are not the same thing. But most people don’t. So, a brief foray into “explainer” blogging follows.

Price is what a college charges. Cost is what a college spends.

In the context of a for-profit college, price is supposed to exceed cost; the difference is profit. 

In the context of a public college, price is supposed to be a fraction of cost. The rest is made up through other revenue sources: state and/or local aid, auxiliary services, non-credit courses, grants, sometimes income from endowments, and, of course, other.  (“Other” is a capacious term, but at most community colleges, the top five or six revenue sources cover 98+% of what’s going on. For present purposes, I’m folding income from millages or local property taxes under “state and/or local aid.”)  Philanthropic giving doesn’t typically go directly into an operating budget. It can get there indirectly, whether through offsetting costs that otherwise would have been covered by an operating budget or through scholarships that channel revenue via tuition. 

Here, price is a fraction of cost by design.  The point of charging less than the cost of provision is to provide access for people of modest means, and to encourage people more generally to go to college.  It’s based on a judgment that higher education is enough of a social good that it’s worth discounting at the individual level. Given the way that income tends to track over the life cycle, discounting during the early low-income years is a practical necessity for many. 

Understanding that price and cost are not the same thing matters when discussing, say, tuition increases. A given college proposes a tuition increase of x percent. Does that mean that its spending is going up by that same number?

Almost always not.  In fact, its spending may be flat or even dropping.  That’s because the other sources of income are flat or dropping, and price is just compensating for those.  In my own experience, it’s partially compensating; the usual move is to split the difference between spending cuts and tuition increases.  Putting the entire onus on one or the other would be devastating.

For people accustomed to other industries, setting prices well below cost may seem perverse or insane.  But it isn’t; it’s part of the business model of a public non-profit institution.

I bring this up because I periodically hear that tuition increases are signs of out-of-control spending.  They can be, but frequently, they’re efforts to compensate for losses in other kinds of support. Put differently, they’re attempts to save the quality of the institution from an austerity-driven death spiral.  Contrary to popular belief, they may not be signs of bad management; depending on circumstances, they may represent responsible stewardship.

To the extent that other sources continue to fall short, the economics of public institutions will start to resemble more closely the economics of for-profit colleges.  Having worked in both settings, I’ll advise being very, very careful what you wish for. The more tuition-driven you get, the harder it is to hold the line on quality when students complain.  Customers may always be right, but students aren’t. Without some insulation from market pressure, the gravitational pull towards pleasing the customers just gets stronger. Eventually the whole edifice collapses. 

Obviously, my preference is for the other sources to step up so students don’t have to.  That was the original business model, and it’s the one in which our systems make the most sense.  If that’s off the table, then we need much more freedom to change the business model. But squeezing the same model a little harder, year after year, while lodging complaints about tuition increases that only cover some of the damage anyway, can go on for only so long.  

 

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