The Finance of Higher Education

Sound Bite

The high cost of going to college is an increasingly urgent issue. The classic textbook on financing higher education, this volume is a comprehensive examination of governmental and institutional policies and practices, and of the essential theories and areas of research that in combination establish the foundation, explore and extend the boundaries, and expand the base of knowledge in the field of higher education finance. Graduate programs nationwide rely on this fundamental text for seminars on higher education administration.

About the Book

Making college affordable is a goal of administrators and students alike. Yet even student aid is a complex issue, as there are pros and cons to both need-based aid and merit-based aid. Edited by Michael B. Paulsen and John C. Smart, this volume considers these and other key issues in financing university costs. Fifteen separate chapters add up to a comprehensive examination of policies and practices and the essential theories and areas of research that comprise the field of higher education finance. A unique feature of the book is its comprehensive, systematic presentation of the theories and models from the policy science of economics that have been the most frequently and productively applied to the study of higher education finance. These perspectives include human capital theory, public sector economics, the microeconomic theories of cost and productivity, and the price theory of microeconomics, as they apply to the problem of financing higher education; each topic is addressed in a separate chapter.Among topics addressed in other chapters are how affordable college attendance really is for students under different circumstances; trends in the revenues and expenditures of public and private colleges and universities; detailed examinations of the nature and effects of federal, state, and institutional policies in the area of higher education finance; the new student-choice construct as a framework for expanding our thinking about how financial policies related to grants, loans and tuition can affect students' enrollment decisions; the effects of financial and other policies on the aspirations and participation of prospective and current students from families of varying socioeconomic status; state and institutional budgeting practices; and the many issues associated with the finance of community and technical colleges, including the special role of state and local sources of revenue and the importance of the tuition charged by such institutions. A groundbreaking chapter by David W. Breneman, James L. Doti, and Lucie Lapovsky examines the analytics of tuition discounting as the predominant means by which many private colleges and universities achieve enrollment targets. Based on the results of their latest research, the authors present a new model of the pricing and enrollment practices of private institutions and use it as a framework for examining the key relationships between tuition, enrollment, merit-based and need-based aid, composition of the student body, and tuition discounting practices.Their analysis redefines the boundaries and extends the frontiers of knowledge about tuition discounting.Taken together, the fifteen chapters of this book provide a set of rigorous, but accessible and workable, frameworks that can help build a strong analytic foundation to better inform and forearm those engaged in the development of policies and practices related to the finance of higher education. Nine of the fifteen chapters were written for this volume; the other six are reprinted from various volumes of Higher Education: Handbook of Theory and Finance, each with an updating epilogue provided by the authors.

Introduction

We believe that higher education finance is reemerging as a matter of tremendous importance, and as a field of study with the potential to both inform and forearm decision makers as they grapple with the wide range of challenges that characterize the rapidly changing, uncertain and complex environment of the higher education enterprise. However, as we venture into the 21st century, we join others in expressing our impression and concern that federal, state and institutional policies and practices appear to be in a period in which substantial changes in policies and practices are taking place, but without the benefit of a thorough analytic approach and foundation for insightful policy formation, implementation and evaluation. For example, in the Preface to their recent book, Public and Private Financing of Higher Education, Callan and Finney (1997), assert that it would be difficult to identify a public policy area that has undergone as much change with as little public discussion or explicit policy direction as the financing of American higher education in recent years (p. xi). It is easy to identify examples of such change. The federal devolution has shifted obligations for various social programs from Washington to state capitols, and thereby has intensified the competition between higher education and other powerful claims on state budgets (Roherty, 1997). As the shares of institutional revenues derived from state appropriations to public institutions and federal grants and contracts to both private and public institutions have decreased (Breneman and Finney, 1997), tuition growth at public and private four-year colleges and universities has outpaced inflation every year since 1980 (College Board, 1999; Lewis, 1989; Paulsen, 2000). The responsibility for financing higher education continues to shift away from government or public sources and toward students and their families; institutions in both private and public sectors continue to derive an expanding share of their resources from tuition revenue paid by students (Kane, 1999; McPherson and Schapiro, 1998). And federal financial aid to students continues its shift away from grants toward loans (Hearn, 1998). Responses of both public and private institutions have included expanded use of institutional aid or tuition discounting to attract students (McPherson and Schapiro, 1998) and expanded efforts to increase private giving (U.S. Department of Education, 1999, Tables 332, 333). 1 We would like to express our appreciation to Jim Hearn for his thoughtful contribution of ideas toward the preparation of this essay. In an insightful, if somewhat overstated, view of recent developments, Bruce Johnstone (1999) has heightened our awareness of the fundamental nature and extent of recent changes by pointing out that the fabric of the American system of financial assistance and tuition policy seems to be unraveling (p. 3). For example, the overarching goals of our financial aid system appear to be shifting from access to affordability (King, 1999), as evidenced by the substantial increase in the proportion of merit- versus need-based grants to students from both state and institutional sources (Kane, 1999; McPherson and Schapiro, 1998). These shifts in roles, responsibilities and resources are unlikely to moderate. Instead, they are more likely to persist, and perhaps even accelerate. As explained by Kane (1999), the next fifteen years will offer little respite as demographic forces increase the pressure on higher education budgets with a rebound in the number of college-age youth of all income levels (p. 3). Policy analysts Callan and Finney (1997) have also observed that the respective responsibilities of students, families, colleges and universities, and government have altered significantly, but with little debate and without any public policy consensus (p. xi). In the absence of careful discussion and debate, the relative shares of educational costs covered by students compared with government or public sources have been altered without adequate attention to, and analysis of, the social benefits and the social rates of return to investment in higher education, or the social efficiency of such a reallocation of our nation s resources (Paulsen, 1996). Tuition has increased relentlessly, but apparently without adequate attention to the shifting patterns of potential inequities in access or choice in higher education (McPherson and Schapiro, 1998), or to the latest research on how students respond differently to such increases according to income level, race, and type of institution attended (Heller, 1997). And with the apparent aim of enhancing access and choice, loans have come to dominate federal financial aid to students while the purchasing power of Pell grants has been allowed to diminish, even though price-response research indicates that students are significantly more sensitive to the availability of grants than to loans in their enrollment decisions (Heller, 1997). Moreover, while states have experienced consistent increases in tuition at their public and private institutions, they have not been as consistent in their coordination of tuition and financial aid policies (Griswold and Marine, 1996). As a result, the market-model hypothesis about the high-tuition, high-aid approach to public finance has not been meaningfully tested in states where tuition increases have not been offset by commensurate, need-based increases in state grants to students (Hossler, et al., 1997). Finally, the combination of tuition growth and tighter limits on state budgets has led state agencies to conduct studies of faculty workload (Meyer, 1998) and require that institutions provide adequate educational services with fewer resources (St. John, 1994). However, such actions appear to have been taken with only minimal attention to the underlying economic theories of costs and productivity that can inform such policies and strategies (Hoenack and Collins, 1990). OVERVIEW OF THE BOOK The central purpose of this book is to provide a set of rigorous, but accessible and workable, frameworks within which to build strong analytic foundations to better inform the development, implementation and evaluation of policies related to the finance of higher education. There are five distinct parts of the book, each contributing to the purpose in a special way. Part I presents the fundamental facts about where institutions get their funds to cover the costs of educating their students and where students get their funds to pay the out-of-pocket expenses of their college education. Part II provides readers with opportunities to study, learn and apply a range of economic perspectives, theories and models that serve as important and relevant foundations for the study of higher education finance. Part III examines the nature and development of financial policies at the federal and state levels and the special challenges posed by the interplay between rational-empirical perspectives and political-contextual influences in the development, nature, implementation, effectiveness, and evaluation of financial policies. Part IV of this book addresses special topics and issues that are important but rarely receive substantial attention in books on the subject of higher education finance. Finally, Part V provides a critical examination of the field of higher education finance, both synthesizing and critiquing implicit and explicit themes in the book and in the field, and raises challenges for future inquiry, policy analysis and advancement of knowledge in the field. The chapters in Part I present the most fundamental facts and issues from the perspectives of institutions and students in the finance of higher education. Ultimately, two of the most important sets of financial facts to know about an institution relate to where it gets its funds and how it spends them. And from the perspective of most students and their families, the most important issues relate to how affordable college really is and where students get their funds to pay for their college education. Of course, society either through government or private agencies and individuals is an important source of funds or subsidies for both institutions and students (Winston, 1999). The first requirement of any substantial analysis of financial policies in higher education is a prior and comprehensive knowledge and understanding of the answers to the two most fundamental and revealing financial questions about the higher education enterprise: Where does the money come from? and Where does the money go? In Chapter 1, Rob Toutkoushian provides the reader with a comprehensive presentation and analysis of the primary sources of revenues and expenditures for public and private institutions of higher education. Numerous tables and figures serve to thoroughly document and highlight notable trends from 1975 to 1995 in the sources of revenues and the functional uses of expenditures, illustrating differences in such trends between the private and public sectors. The analysis also features an examination of the relative shares of the expenses an institution incurs in educating its students paid by students and society. An appendix presents clear definitions for all measures of different types of revenues and expenditures examined in the chapter. In combination, these resources provide a rich reference for policy analysts, administrators, researchers and students interested in the financial aspects of the higher education enterprise.

Table content

Introduction to the Volume [Michael B. Paulsen, University of New Orleans and John C. Smart, University of Memphis] Part I: The Revenues, Expenditures, Costs and Affordability of Higher Education Chapter 1: Trends in Revenues and Expenditures for Public and Private Higher Education[Robert K. Toutkoushian, University System of New Hampshire] Chapter 2: College Education: Who Can Afford It?[Sandy Baum, Skidmore College] Part II: Economic Theories and the Finance of Higher Education Chapter 3: The Economics of Human Capital and Investment in Higher Education.[Michael B. Paulsen, University of New Orleans] Chapter 4: The Economics of the Public Sector: The Nature and Role of Public Policy in the Finance of Higher Education.[Michael B. Paulsen, University of New Orleans] Chapter 5: Costs and Productivity in Higher Education: Theory, Evidence and Policy Implications, by Darrell R. Lewis & Halil Dundar, [Reprinted from J. C. Smart (ed.), Higher Education: Handbook of Theory and Research, Volume XIV . (pp. 39-102). New York: Agathon Press.] [Plus a new Epilogue][Darrell R. Lewis and Halil Dundar, University of Minnesota] Chapter 6: Economic Perspectives on Rising College Tuition: A Theoretical and Empirical Exploration, by Michael B. Paulsen. [Reprinted from J. C. Smart (ed.), Higher Education: Handbook of Theory and Research, Volume XV . (pp. 39-104). New York: Agathon Press.] [Plus a new Epilogue][Michael B. Paulsen, University of New Orleans] Part III: Federal and State Policies and the Finance of Higher Education Chapter 7: The Paradox of Growth in Federal Aid for College Students, 1960-1990, by James C. Hearn. [Reprinted from J. C. Smart (ed.), Higher Education: Handbook of Theory and Research, Volume IX . (pp. 94-153). New York: Agathon Press.] [Plus a new epilogue][James C. Hearn, University of Minnesota] Chapter 8: State Efforts to Keep Public Colleges Affordable in the Face of Fiscal Stress, by Michael Mumper. [Reprinted from J. C. Smart (ed.), Higher Education: Handbook of Theory and Research, Volume XIII . (pp. 148-180). New York: Agathon Press.] [Plus a new Epilogue][Michael Mumper, Ohio University] Chapter 9: State Policy and Private Higher Education, by William Zumeta. [Reprinted from J. C. Smart (ed.), Higher Education: Handbook of Theory and Research, Volume XII . (pp. 43-106). New York: Agathon Press.] [Plus a new Epilogue][William Zumeta, University of Washington] Part IV: Topics in the Finance of Higher Education Chapter 10: The Role of Finances in Student Choice: A Review of Theory and Research[Edward P. St. John and Eric H. Asker, Indiana University; Shouping Hu, Seton Hall University] Chapter 11: Access to Postsecondary Education: Financing Equity in an Evolving Context[James C. Hearn, University of Minnesota] Chapter 12: Financing Private Colleges and Universities: The Role of Tuition Discounting[David W. Breneman, University of Virginia; James L. Doti, Chapman University; Lucie Lapovsky, Mercy College, New York] Chapter 13: The Finance of Community and Technical Colleges[Rick Voorhees, Colorado Community College & Occupational Education System] Chapter 14: College and University Budgeting: What Do We Know? What Do We Need to Know? by William F. Lasher & Deborah L. Greene. [Reprinted from J. C. Smart (ed.), Higher Education: Handbook of Theory and Research, Volume IX . (pp. 428-469). New York: Agathon Press.] [Plus a new Epilogue][William Lasher, University of Texas & Deborah Greene, Texas Higher Education Coordinating Board] Part V: The Finance of Higher Education in the Twenty-First Century Chapter 15: The Finance of Higher Education: Implications for Theory, Research, Policy and Practice[Edward P. St. John, Indiana University; Michael B. Paulsen, University of New Orleans] Author Index Subject Index