The rise in annual tuition prices has become a given in the world of private education.
Last week, Dean of the College Faculty Peter Lennie and Chief Financial Officer Ronald Paprocki discussed that education should be viewed as an investment and the tough problem of making private education affordable for the middle class.
Here’s part two of the interview.
According to The National Center for Public Policy and Higher Education, over the past 25 years, college tuition and fees have risen by over 440 percent. Besides paying high-skilled labor costs, what are some other broad cost themes that may push that number up?
Ronald Paprocki: There are other things going on in addition to people expenses: technology expenses. There is a need to both maintain what you have and keep current, whether it’s in the laboratory or it’s in the [information technology] domain.
For example, in IT we’ve been putting a lot of money in to upgrade our facilities, but also there are some costs imposed on us by the external environment hacking and intrusions into the network. We have to spend money to maintain our network integrity, so when you get an e-mail from somebody you are not affecting the whole system. There’s a lot of emphasis on costs like that.
Tuition increases are higher than inflation, so that is mainly because costs of private education are higher than inflation, correct?
RP: The consumer price index (CPI) isn’t the best indicator for higher education because of the mix of people and technology and costs and staying current and things like that. Over time you’ll find that higher education costs are probably a couple of percentage points over the CPI.
But again, that’s only one factor. It’s not just the rate, the general rate of inflation of salaries and wages and things like that, [it] is also doing things like adding to programs and adding facilities and that kind of thing.
Peter Lennie: It’s perhaps also worth emphasizing that the CPI is the aggregate of things that rise faster and some things that rise less fast. We are inevitably on the piece that is above average, but there are compensating pieces that are below average. It is not in itself something dreadful that our component is higher. [The CPI] is a basket of different inflation indicators. As long as we continue to be the kind of institution that we are, it’s pretty certain that we are going to be higher than average.
So what percentage of the budget is funded by tuition?
PL: So broadly speaking, and this is a round estimate, about a bit over half of the costs we provide comes directly from tuition. Tuition doesn’t by any means cover the cost of education. Important pieces of the overall contribution come from gifts and come from the endowment.
With another part of the master plan expanding the number of students, would more students necessarily relate to tuition not needing to go up each year as more students enroll?
PL: That’s a very interesting question. When we were thinking through the development for our plan, we were very interested in the question if there were economies of scale. As we grew, the cost of educating students would drop.
It turns out that that’s just not the case, and it was a slight surprise to us. And the way things work, there certainly don’t seem to be economics of scale in moving from 4,000 to 5,000 students.
It might be different if we were vastly larger; we don’t know that. But in the range of growth that we were completing, we believe there aren’t economics of scale. We will be able to provide more things because there will be more students who want to do different kinds of programs, but it’s unlikely to reduce the average cost of education.
If we are going to maintain the same faculty-to-student ratio we need to invest in faculty. If we don’t want very crowded classrooms we need to invest in more classrooms and buildings. And you already know that there is pressure in student life and athletics because of our growth. In a sense we need to make proportionality large investments in all of these areas as we grow.
RP: There is theoretically a point if you have excess capacity where your people aren’t fully occupied and you have lots of empty space and so forth, where that might be true. But the College certainly isn’t at that point.
PL: As you know well, we don’t have lots of empty space. And that’s why, at least for us, maybe not for a differently constructed university, we can’t say that there are going to be economies of scale. We will be able to do more because there’s a large portfolio of programs, and for these reasons it’s good to grow, not because it will reduce the average cost.
A lot of people see the endowment as, “Hey, we have roughly this $1.3 billion locked up in investments, why aren’t we using that for more financial aid?’
PL: We are. Remember, that even if you’ve got $1.3 billion dollars, the amount you can draw on is limited by, well, in fact our recommended percentage draw is 5.5 percent. We want our endowment to grow and our endowment has got to be there for us in the future. You’ve got to limit your draw on it so you don’t deplete it.
RP: A pause here to talk about what the endowment is. If I’m a donor, I can either give to help construct a building, or I can give a current gift and they can spend it or use it this year. Or I can choose to put it into the endowment, which means it is to be there in perpetuity, forever. And so you are constrained by law, and by the agreement with the donor, that you can only spend a certain amount each year. And many of the endowments are restricted for certain purposes.
For example, within that $1.3 billion, and this is a hypothetical example, you have a cancer patient who was cured at our hospital, and that grateful patient provides a endowed fund to support research there. And again, you have somebody who had a great experience here and gives an endowed scholarship to undergraduates. And so, it’s always with the intent that it will be there … so if I give a million dollars and the market declines, I have to stop spending that endowment so it gets back up so it doesn’t get depleted to honor the donor’s wishes.
I don’t want to give any more details, but the purpose of the endowment is that it is a designated gift that is meant to last, essentially forever … and we are restricted to the amount that we can spend on an annual basis. Typically institutions are spending between 4 and 5.5 percent per year, and that is judged to be a reasonable spending limit, assuming a rate of inflation, because if it doesn’t grow with inflation then it becomes devalued over time.
PL: It’s perhaps worth drawing attention to two additional things. You may have heard that until the recession, that very rich universities weren’t spending enough of their endowment. That’s not the case; we have always spent as much as is prudent to do, sometimes more.
But the other thing that is important to understand, at least from my perspective, in how we manage our obligations within arts and sciences and engineering, is that the income from the endowment is a non-trivial part in the income that I deploy for instruction. About 12 percent of our income comes from that. So we use it the way that it is supposed to be used, and we make as much use of it as we can.