The Poverty of Revenue Maximization, Part II

The Fundamental Nature of Tuition-Dependent Institutions

“Colleges and universities, whether public or private,” Gabriel E. Kaplan stresses, “are embedded within market and political environments that place certain [external] demands and expectations” on higher education executives and internal constituents.^[1] In that respect, the fundamental nature of tuition-dependent colleges and universities reflects the political economy of higher education in the nation, while the recent discourse regarding tuition dependency and tuition discounting perhaps embodies the “demands and expectations” of particular market and political factions outside of the higher education sector. What, we must ask, has changed in the political economy of higher education to spur the severe outlook regarding private, nonprofit institutions in recent years?

From the political environment, the negative connotations assigned to “tuition dependency” and “tuition discounting” in part capture sentiments of a by-gone national era in which the states and federal government in the United States more directly funded public institutions of higher education. In the modern 20th-century revenue model, state and federal taxes funded public higher education institutions that in turn utilized admission practices to target the best and brightest, to be generous, of the nation. The college applicants, and their families, who were denied admission to their flagship public colleges and universities, nevertheless, paid their state taxes to support those among their states who earned entry into the nation’s selective public institutions. The civic revenue model for higher education suited a society that regarded the civic support of the “natural aristocracy” as the benefit of all.^[2] The applicant rejected by his or her local public university who subsequently chose to work in a department store or local factory ultimately paid taxes to support those who had been accepted and enrolled in the state colleges and universities. The applicants’ family heads, moreover, paid state taxation during the course of their entire lifetime, to educate other people’s children without the promise of a direct benefit to their own children who may or may not be admitted to the flagship public colleges and universities. The system, however, never operated entirely on principles of academic or social merit. The enactment of civil rights laws in higher education trace their origin to the correction of discriminatory practices in state higher education institutions in the United States as recently as 50 years ago (recently, in a properly historical perspective).

In the system that solidified subsequently, nearly every high school graduate or GED recipient is allotted a minimum sum of grant and loan dollars to cover the cost of a college education depending on his or her expected family contribution. The minimum sum differs for each student based on financial need as measured by the Pell Grant Program, Perkins Loans Program, subsidized and subsidized loan programs, and a myriad of state and other federal aid programs that offer every young American an opportunity for a college or technical education. In its application at the level of the individual student or citizen, the recent revenue model for higher education may accurately be regarded as an economically liberal model that diminishes direct infusions of tax revenues to selective public universities, but also, with measurable outcomes, seeks to gird a socially liberal model of college access that corresponds to the expansion of civil rights in the nation. Private, nonprofit institutions stood to benefit from the new college funding model in that state and federal dollars followed the enrolled student. Institutional tuition discounting, on top of the state and federal aid afforded to most American high school graduates, provided an additional logic to financial aid packaging that enabled private institutions to attract the student body that best adheres to its mission and institutional effectiveness, while potentially maximizing revenue (as charted in Part I) to grow expenditures per FTE student. In sum, the political environment enhanced access to private nonprofit institutions without compromising the value of the education.

In the economic environment, however, corresponding to what Moody’s calls a period of “overall stable enrollment,” U.S. higher education has only nominally recovered from the second substantial decrease in the traditional 18-24 year old college age population during the past twenty years. In 2002, the National Center for Education Statistics (NCES) projected a decrease in the secondary school population beginning in 2007, similar to the decline in the millenial generation that came of age in the mid-1990s to early 2000s.^[3] More recently, the NCES released projections to 2022 affirming that the high school graduate population peaked in 2009-10 and would not again reach similar headcounts through 2022-23 at the earliest. The total number of high school graduates declines by 2% across the nation between 2009-10 and 2016-17, effecting the northeast (-8.8%) and midwest (-7.6%) most dramatically. While the volume of graduates stabilizes in 2014-15, the demographics of the American high school graduates will transform the college-aged population. The “white” high school graduate population reached its largest total in 2007-08 (1.9 million) and will fall thereafter through 2022-23 (1.6 million, or 16% fewer), while the nonwhite population will grow to be 50% of the American high school graduate population in the next 7-10 years. During the same era, in contrast, the federal government projects total enrollments in 4-year institutions and conferrals of bachelor degree to incrementally increase through 2022-23.^[4] In order for these two projections to be realized, 4-year colleges and universities need to enroll a growing a number of the traditionally underrepresented student populations in higher education: minorities, first generation, and low income students. In light of the current high school graduate and 18-24 year old demographics trends, the 2.7% revenue growth recently projected for 4-year private, nonprofit institutions by Moody’s Investor Service perhaps may be regarded as an accomplishment in light of the U.S. national projections for the baccalaureate-aged population and its demographics.

Recently, the National Association of College and University Business Officers (NACUBO) suggested the false premise that increasing tuition discount rates during the 2000s eroded the value of the higher education offered. Claiming that higher discount rates “limited” net tuition revenue in recent years, NACBUO claimed that “over the last 13 years, institutions have had flat net tuition revenue (0.4%), demonstrating that increased gross tuition and fee revenue has been given back to students in the form of aid, rather than put back into the institution.” The National Center for Education Statistics, which directly tracks total expenditures by higher education institutions in constant dollars, provides evidence to the contrary. As illustrated in Figure 3 above, private nonprofit institutions increased the core student expenditures^[5] per full-time equivalent (FTE) student in every year between 2000-01 to 2008-09 — at which time the most recent recession and the most recent decline in the college-aged population simultaneously occurred. In the four years following the recession, expenditures per FTE student in the academic functions have been flat, but more has been allocated to student service expenditures per FTE student in every year since 2000-01. The decline or stagnation in instructional, research, and academic support expenditures, in part, reveals the flexibility for higher education institutions to hire part-time employees in recessionary periods when the commitment to full-time employees is risky, as Inside Higher Ed jobs services recently reported (see “Finding” on page 7). Generally, then, the assertion that tuition discounting in the 2000s came at the expense of investments in educational resources at private, nonprofit institutions is not evidenced by the real expenditures of such colleges and universities.

In the revenue curve illustrated in Figure 2 (part I of the brief), the section of the curve prior to the revenue maximization point (in the brown oval) flattens to the point where the additional revenue per FTE student falls far short of the standard expenditures per FTE student. If private, nonprofit 4-year colleges and universities recklessly discounted tuition to prioritize revenue growth without regard for investment in their institutions, the expenditures per FTE student illustrated in Figure 3 would show a fall in constant dollars over the twelve year period. What we see, rather, is that the private, nonprofit sector managed to grow the quality of higher education – as measured by expenditures per FTE student – in the years prior to the onset of the most recent recession. Subsequently, during the environmental storm forecast in the declining high school graduate population and compounded by an unexpectedly deep recession conditions in the economy of the nation, the private nonprofit colleges maintained the expenditures per FTE student. Rather than decline or crisis, the trends suggest, the private nonprofit higher education sector has merely realized an end to a period of transformation in the 2000s spurred by a shift in how the nation funds colleges and an era of growth driven by sophisticated tuition discounting practices.

What explains the end of this era? The stagnation of family income in the United States is the more likely culprit than the tuition discount rate of higher education institutions. The College Board’s Trends in College Pricing 2014 notes, “With a deep recession followed by a recovery characterized by very slow increases in income, average income was lower in inflation-adjusted dollars in 2013 than it had been in 2003 for all but the highest-income families.” In light of family income conditions, Figure 4 illustrates that private nonprofit colleges and universities have held down tuition increases in real dollars in the years around the recent recession. A student starting college as a freshman in 2006-07 paid nearly the same (+4%) average net price of attendance as a student starting college as a freshman in 2010-11, as measured in constant dollars.^[6] Affirming the limitations placed on tuition increases by the decline in median family income in the U.S., the National Center of Education Statistics shows that the out-of-pocket net price paid by full-time students in private, nonprofit 4-year institutions has increased more slowly than other higher education sectors. In constant dollars, out-of-pocket costs increased from $17,500 in 2003 to $18,100 2011-12, only 3.4% more than the real out-of-pocket costs a decade earlier.^[7] In the absence of increased funding from a key revenue source, U.S. family incomes, the private nonprofit sector in higher education relied on tuition pricing strategies and efficiencies to grow and maintain expenditures per FTE student over a dozen years.

The political economy of higher education favors a college funding model that improves access and diversity to college by funding and empowering individual student choice at a time when the social diversity and economic disparity of the college-going population is increasing. As the National Association of Independent Colleges and Universities shows in its 9 Myths about Private Nonprofit Higher Education, the private nonprofit sector of higher education embraced the “demands and expectations” of the current market and political environment. Tuition dependency and tuition discounting, far from impoverishing private nonprofit institutions, fostered inclusion and opportunity for underrepresented and low income applicants, while affording the private higher education sector the resources to increase and then sustain core educational expenditures for its enrolled students. In doing so, private colleges and universities largely weathered the recent decline in the high school graduate population and prepared themselves for the projected growth in college enrollments among underrepresented populations for the next ten years. If the efficiencies from tuition discounting and revenue maximization have plateaued, however, rather than redirect institutional priorities to the demands and expectations for “revenue growth” and “profits” with arbitrary decreases in tuition discounts, the next substantive challenge for the private nonprofit and mission-driven sector is to meet the demands and expectations for inclusive campus climates that foster broad success for the economically and socially diverse college students of the nation.