Colleges Face Challenge of the Class Divide

[interesteddad]

<p>

I didn’t ask you because I know you would be happy if Swat increased costs $50,000, as long as you paid a penny less.

</p>

<p>Not at all. I’m much more selfish than that. I’m pragmatic about the whole thing. I pay what I pay and Swarthmore’s costs per student have nothing to do with that…the price I pay or anyone else pays is set by the market and need based aid formulas. So I figure that as long as I’m paying “x”, the more Swarthmore wants to spend on my daughter while she’s there, the better. I mean, what’s not to like about that, right? I actually wish they weren’t so conservative with their endowment spending policy, but that’s just part of the ethos of the place. It’s a very conservative school. <grin></grin></p>

<p>I understand that few consumers actually go through the process of looking at spending per student. But, in reality, anyone who picks up a USNEWS ranking is doing exactly that. Highly ranked, highly selective schools are highly ranked and highly selective because they offer a product that costs more to manufacture than they sell it for. Consumers instinctively shop for bargains. The vast majority of colleges spend what they take in from tuition and fees and not a penny more. Very few of them make the front pages of USNEWS.</p>

[dstark]

<p>You don’t know how much Swat actually spends on your daughter, and you don’t know what the payback is going to be.</p>

[interesteddad]

<p>

You don’t know how much Swat actually spends on your daughter, and you don’t know what the payback is going to be.

</p>

<p>I know exactly what they spend creating the overall collegiate experience available to her. It’s in the annual financial reports. The overall experience is the sum of everything they spend money on.</p>

<p>I have never looked at return on college in a financial sense. I actually think that’s a flawed model.</p>

[dstark]

<p>Yeah, nobody uses return on investment in the financial world</p>

[interesteddad]

<p>

Yeah, nobody uses return on investment in the financial world

</p>

<p>We aren’t talking about buying commodities futures.</p>

[dstark]

<p>“We aren’t talking about buying commodities futures.”</p>

<p>No we aren’t. We are talking about peoples futures.</p>

<p>Are your numbers similar to the numbers from this link?</p>

<p><a href=“Institutional Effectiveness, Research & Assessment :: Swarthmore College”>www.swarthmore.edu/Admin/institutional_research/Budget.pdf</a></p>

<p>May we eliminate the debt service from the subsidy?</p>

<p>It’s just a financial decision. If we change the capital structure of the school we can eliminate the debt, which eliminates an expense, which eliminates a subsidy.</p>

[interesteddad]

<p>Those are just internal budgeting numbers, with the following footnote:</p>

<p>

These figures reflect internal management reporting of budgeting activity. They reflect only a portion of activity represented in audited financial statements.

</p>

<p>I use the official audited financial reports whenever possible in looking at a college’s revenues and spending.</p>

<p>The most recent year (2005-6) for Swarthmore is available here:</p>

<p><a href=“http://www.swarthmore.edu/Admin/investment_office/FinancialRpt_05-06.pdf[/url]”>http://www.swarthmore.edu/Admin/investment_office/FinancialRpt_05-06.pdf&lt;/a&gt;&lt;/p&gt;

<p>The prior six years and some other reports are available here:</p>

<p><a href=“http://www.swarthmore.edu/Admin/investment_office/[/url]”>http://www.swarthmore.edu/Admin/investment_office/&lt;/a&gt;&lt;/p&gt;

<p>Page 14 of the PDF has the officially reported operating expenses: $106.4 million</p>

<p>Page 22 of the PDF has a list of the same operating expenses broken out by “natural classification”, i.e. salaries, etc.</p>

<p>Sure, you can back out debt service ($6.6 million) if you want to. In Swarthmore’s case, the debt service is all related to four major construction projects in the last decade: new academic building, new science center, new dorm, and a major gut/renovation of the biggest building on campus (a combined admin/dorm/student services building). They can get long term bonds at interest rates much lower than they can earn from endowment investments, so it would be stupid to pay cash. I could go either way on whether the debt service is a legitimate part of the subsidy. It does represent a reasonable annual proration (30 years) of the cost of building those facilities, but I could go either way as they could certainly be put on the capital investment side of the leger.</p>

<p>BTW, I will say that the hardest part of trying to compare college financials is sorting out capital from operating expenses. For example, Wellesley’s numbers weren’t making any sense to me until I figured out they were putting quite a few million dollars a year into a “future capital projects” fund. They called it an operating expense to separate it from the endowment, but it was an operating expense that was going straight into the bank.</p>

<p>The other “gotcha” is how the schools report financial aid discounts. Swarthmore’s approach is the most common. It is NOT treated as an expense. Rather, they report it as a reduction in received revenue (a tuition discount). This is the technically correct way to report financial aid since it is revenue that the college never actually receives.</p>

<p>I noticed that either Williams or Amherst reports the full invoiced tuition and then reports financial aid as an expense item…so you have to be careful to compare apples to apples. It’s a wash on the bottom line, but not if you are trying to compare revenues or expenses.</p>

<p>BTW, the management discussion in these annual reports is often a great source of information about schools: whether the budget is in “equilibrium”, whether they are spending too aggressively from the endowment, whether financial aid needs to be reduced, whether faculty cuts are planned, whether deferred maintenance is a problem, etc.</p>

<p>Spending 4% of the endowment to balance the budget is conservative and financially solid. Spending 6% or more is considered trouble and usually leads to plans to increase revenue (by reducing financial aid) or reduce spending (almost always requires faculty cuts).</p>

[standrews]

<p>With respect to the rate of increase of college costs versus the consumer price index, one needs to look at what governs the behavior of each. “People” are more expensive than “things”. I would think college costs have a much higher labor cost component than the CPI. Productivity gains over the past 30 years have helped to keep CPI low relative to college costs. The notebook I’m typing on costs far less than the IBM PC introduced in 1981. Electronics as a whole have seen price declines and have had a ripple effect in terms of productivity gains. Production costs fueled by off-shore factories, particularly in China where labor is cheap, have limited increases in CPI. Retailers like Walmart, Best Buy, Kohls, Home Depot have figured out how to lower cost of selling these “things” through better inventory management, distribution, and lower labor costs.</p>

<p>OTOH, Swarthmore’s compensation costs amount to almost 60% of the budget. It’s hard for colleges to capitalize on economies of scale when they want to keep class size small. It’s hard to lower labor costs when having classes taught by PhD’s, rather than grad assistants, is a priority. Lower class size and more PhD’s are legitimate goals, but they are expensive. Likewise, it’s hard for US colleges to lower compensation costs in any meaningful way by outsourcing the work to off-shore sources.</p>

<p>Consequently, I’d agree with dstark’s statement, “Disposable personal income is a better norm than consumer prices for evaluating the cost of higher education.” But that doesn’t ease the shock of paying for college. As a parent with kids just about to start college, I have been living in a world where my wages have increased faster than the CPI, (4.2% vs. 2.5%). As a result of the positive differential I have acculumated assets. With the shift to the college years, I am moving into the 4.2% vs. 6% realm retroactively. The negative differential will take a healthy chunk out of my assets. I expected that to happen, but it’s still a shock.</p>

[epiphany]

<p>Interesting timing. Tangentially related to this discussion is the last portion of this article, just posted on another forum yesterday:</p>

<p><a href=“http://thenews.choate.edu/2007/02/16/News/Early_Application_Results_.php[/url]”>http://thenews.choate.edu/2007/02/16/News/Early_Application_Results_.php&lt;/a&gt;&lt;/p&gt;

[StickerShock]

<p>

I certainly hope that all schools spend money to benefit the surrounding community, and it’s silly to assume that that won’t benefit the students. I can’t think of many Yale students who oppose Yale putting money into developing and helping New Haven.

</p>

<p>Your post misses the point. I am talking about the cost to educate each student. We don’t know what it is. You can’t take total college expenditures & divide by the # of students & get an accurate figure, becasue so much of the college’s expenditures are for non-student beneficiaries.</p>

<p>Your post has an odd tone of smugness. I’m talking about statistics. Actual costs. You are bringing up the virtue of pumping $$ into a community. The auditors calculating true costs don’t make value judgments on the worthiness of these costs. They just do the math. Whether Yale students are happy to suppot the community or not is irrelevant. The fact is, that they ARE! So those dollars should not be included when calculating the cost of an education at Yale.</p>

[StickerShock]

<p>

When inflation rises less than 3% a year for 25 years, personal income rises around 4.2% a year for 25 years and college costs rise 6% a year for 25 years, we have a huge disconnect. To argue that it is OK because of subsidies when the subsidies are calculated incorrectly (maybe on purpose), and may not exist or students may not benefit from them, makes no sense to me.

Very true.</p>

<p>The subsidy concept is a brilliant marketing tool. </p>

<p>And as idad’s posts show, the financial accounting method chosen makes all the difference. Plenty of “gotchas” all around.</p>

[dstark]

<p>Interesteddad, thanks for the numbers.</p>

<p>After looking at the numbers, I don’t know how you can talk about these large subsidies with a straight face. I can’t see you so maybe you don’t have a straight face.</p>

<p>Let’s see. Instruction costs 37.7 million
Academic Support 13.9 million</p>

<p>And then there are these other expenses that you count as educational
expenses
Institutional support 20.1 million
Auxiliary activities 18.8 million
Research and public service 4.7 million</p>

<p>Then there are revenues</p>

<p>Student tuition and fees 46.65 million
room and board 12.725 million
less student aid (17.267) million</p>

<p>Less than 52 million in education and academic support.
Student tuition and fees of 46.54 million.
We don’t know what makes up the $52 million.</p>

<p>I don’t see these large subsidies going to the full payers. Barely any subsidies at all. Maybe, when the numbers are broken down further, there are no subsidies to full payers. Don’t know, it’s probably close.</p>

<p>What I do know is these large subsidies that you and Mini talk about…
Don’t exist.</p>

[mini]

<p>“I don’t believe the average college kid is made up of the top 3% of the population.”</p>

<p>No, but the MEDIAN one at these institutions IS (actually, at Williams and Amherst, higher than that.) </p>

<p>“On the surface, however, critics of higher education have a point. Tuition at Swarthmore is six times what it was in 1979-1980. During the same period, consumer prices rose by a factor of almost 2.5, and disposable personal income today is about 4.2 times what it was 24 years ago. Disposable personal income is a better norm than consumer prices for evaluating the cost of higher education (or anything else), in that the ability of households to pay for goods and services is largely determined by the available income. Even so, had Swarthmore tuition risen at the same rate as disposable income since 1979, it would be approximately $19,740.”</p>

<p>It misses the point, though. Had Swarthmore tuition rise at the same rate as income/assests of the top 3%ers, the tuition would be HIGHER than it is today. So Williams, Amherst, Swarthmore, Princeton, etc. are a greater bargain for top 3%ers today than at any time since 1979. (and, also, at least in the case of Williams, and I expect the others as well, less economically diverse.)</p>

<p>As to the “value-added”, well, educationally, I expect overrated, but that’s in the mind of the purchaser (I’d say the same for a Jaguar over a Toyota - Jaguar owners would loudly protest). There’s no requirement that one purchase it. University of Phoenix has open enrollment.</p>

<p>The biggest value-added of course is prestige. If you don’t want it (or don’t think it exists), you won’t see the product as particularly desirable. But those who do are willing to pay for it, and as the prices rise, more and more folks are willing to pay for it, and 8 out of 10 or more are turned away. When top 3%er Mom expresses her pride that her brilliant son goes to Princeton, you can be sure the discussion doesn’t turn to the content of his courses, relative to the same courses taught at the state u.</p>

<p>As I’ve said before, the biggest value-added FOR ME was the opportunity to hobknob with the wealthy. I’m not being cute, or sarcastic, or silly - I’m being totally serious. In terms of educational value, this added more to my life than anything I learned in any particular class (most of which I’ve long since forgotten), and is a value-added that would simply have been unavailable to me had I attended City College of New York, as my parents would have preferred.</p>

[dstark]

<p>Mini, what income and net worth does it take to be in the top 3% of the households in the US?</p>

[dstark]

<p>Mini, you don’t have to worry. Your daughter is getting a subsidy, and I’m sure she is getting a good return on your investment, financially and otherwise. :)</p>

[mini]

<p>Income is roughly $180k. It should be noted that at schools where fewer than 50% receive need-based aid, the median family is above that. (It is likely $250k+ at Williams; $225k at Amherst). </p>

<p>IRS data shows AGI’s for top 1%ers in 2004 at $328,049. That was an 11% rise in one year over 2003 (know any prestige colleges that raised tuition 11%?)</p>

<p>5%ers were $137,056, a 5.4% rise over 2003.</p>

<p>Assets rise rapidly once one makes it into the top 5%. House values go up; IRAs go up; stock market accounts go up; real estate investments go up. Perhaps more critically, one is much, much more likely to have health insurance, and much less likely to be bankrupted by health events.</p>

<p>“Mini, you don’t have to worry.”</p>

<p>No worry here. The way we look at it, we’ve rented her out. We pay so little, it is almost laughable. Sigh. It should only happen to the younger one.</p>

[dstark]

<p>Hopefully, it will.
Is your youngest looking at Pitt?</p>

[mini]

<p>Depends on gymnastics. She’s still putting together her act after long-healing injury. Will depend on whether she gets it together. (But we have a good safety in Western Washington, and, perhaps, UW. The school that fits her absolutely the best is George Washington, but that is totally dependent on her gymnastics. Pitt has everything except Arabic. But we won’t pay - actually won’t even let her apply - to OOS publics without the gymnastics, since UW has everything she is looking for except east coast location. I just don’t see the “value-added”.)</p>

[dstark]

<p>“I just don’t see the “value-added”.)”</p>

<p>Yeah. I don’t either.</p>

<p>But what about the subsidies? ;)</p>

[mini]

<p>To my thinking, ID has substantively demonstrated the subsidies are there. There is nothing in Swarthmore’s accounting that would be different had similar accounting been done at a state u.</p>

<p>Whether the subsidies buy things which are of value are a matter of opinion on the part of the purchaser. (I happen to think Swat’s especially high subsidy on balance probably hurts them, as it is built on an enrollment which - in my opinion - is too small to maintain critical mass in certain areas. HOWEVER, there is no reason why they should be all things to all people, and what they do, they do extraordinarily well.)</p>