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The Commercialization of American Higher Education – Part I

Student charges and public support don’t provide enough resources to operate American higher education. Cranking harder on those two sources will not be enough. Image courtesy of Presenter Media.

I believe the Commercialization of Higher Education is one of the many dangerous crises facing American higher education in the 21st century. Everyone knows that higher education costs money to operate. It’s also no surprise that those costs keep going up every year. What may surprise many people is that since the earliest days of American Higher Education, colleges have never really been able to operate on the combination of funds that they charge students or the support they receive from public governmental sources. Even in their earliest days, the American Colonial Colleges had to resort to fundraising to supplement the budgetary shortfalls from student charges and public support. In today’s world, the combined sources of student charges, public support and fundraising are still not enough.

Derek Bok’s book, Universities in the Marketplace, exposed one of the fault lines in American higher education. Image courtesy of Presenter Media.

In a previous post A New Millennium – The Same Old Story, Part II, I introduced the idea that the Commercialization of Higher Education posed a serious threat to the academy by citing Derek Bok’s seismic work Universities in the Marketplace: The Commercialization of Higher Education. Bok served as President of Harvard University from 1971 to 1991, and as Interim President from 2006 to 2007, after a faculty no-confidence vote against Lawrence Summers, and his abrupt departure.

Bok wore a traditionalist hat on some issues like the commercialization of higher education. However, there were many issues on which he was ready to “wear a hard hat” and get down to the business of changing higher education. Image courtesy of Presenter Media.

President Bok is known to be something of an enigma. His book Universities in the Marketplace shows him to be a staunch traditionalist on some higher education questions. On the other hand, Bok blisteringly criticizes many aspects and actions of the academy in his books Our Overachieving Colleges and Higher Education in America.

Commercialization of American Higher Education is a monster hiding in the closet. We don’t want to let it out. Image courtesy of Presenter Media.

In his book Universities in the Marketplace, Bok wears a traditionalist’s hat. He warns higher education about a monster hiding in their closet. The monster Bok denounces is the eagerness with which colleges and universities seem ready to “make a buck” wherever they can. I agree with him up to a point.

Many in higher education feel as if they have fallen into a pit from which they can’t escape without help. Image courtesy of Presenter Media.

As I have studied the situation, I believe that many colleges and universities felt that they were pushed into a pit from which there are no avenues of escape.    

In 2016, I began a series of posts on the business model of higher education with the provocative title The Business Model of All of Higher Education is Broken.

Without the help of all hands, trying to operate
American IHEs without fundraising and other sources of revenue is like trying to row a leaking boat across a lake. You’ll never make it. Image courtesy of Presenter Media.

In the opening paragraph of that post, I made the claim that in my fifty years in higher education, I never saw a public or private, non-profit institution of higher education cover “their educational and general costs with just tuition and fees.” Trying to do so is like trying to row across a lake in a rowboat with a large hole in it. Colleges and universities have an inherent structural operating deficit built into their fiscal models. 

In the aforementioned post, I identified the five sources of revenue that institutions of higher education (IHEs) have available to them: 

    1. Tuition and fees 
    2. Fundraising, advancement or development efforts
    3. Endowment income, appreciation, interest or dividends
    4. Auxiliary enterprises
    5. Governmental appropriations (usually reserved for public institutions)
There is no magical money tree dropping hundred dollar bills for the eager IHEs waiting to scoop them up. Image courtesy of Presenter Media.

Not appearing in this list is a magical money tree that drops money like leaves in the fall. Borrowing a phrase from an old television commercial, IHEs have “to make money the old fashion way. They have to earn it.” The most traditional avenue is charging students tuitions and fees for educational services such as courses, credits, certificates, and degrees. Prior to the formal separation of higher education into public and private sectors, many IHEs were the recipients of governmental appropriations (funding). Today, governmental appropriations are almost exclusively reserved for public institutions.

Data from the Delta Cost Project. Graph constructed by this blog’s author using Libre Office Software

I began writing this post with what I thought was going to be a simple agenda. Consistent with my previous claim that public and private, non-profit American IHEs can’t cover their educational and general expenditures with just tuition and fees, it would follow that the difference would have to be made up from other sources.

In 2016 when I was working on the previously mentioned series The Business Model of All of Higher Education Is Broken, one resource that I relied on for data was the Delta Cost Project managed by the American Institutes for Research. Their data reinforced my findings from my research on IPEDS data from the 1980s.

As a single, independent researcher, I don’t have the time to track down all the audit reports. Image courtesy of Presenter Media.

Unfortunately, it appears that the Delta Cost Project was abandoned several years ago. Therefore, the best source of current data is from IPEDS or the annual audits of the IHEs themselves. The difficulty with the IPEDS data is that the reporting categories are different than the ones used by the Delta Cost Project, making it difficult to match up the results. The problem with looking at the annual audits of IHEs is obviously the time and availability factors. Public institutions are required to publish their annual audits. Private institutions are encouraged, but not required to publish their audits. I don’t have enough time as one researcher to track down thousands of audit reports.  

Governmental appropriations are reserved almost exclusively for public institutions. Image courtesy of Presenter Media

As noted in my opening paragraph, except for the very early days of American higher education, the revenue source Government Appropriations is strictly reserved for public institutions. I will be dealing with how well that source of revenue is holding up in a future post entitled The Shrinking Public Support of Higher Education.

Two sources of revenues for American IHEs, Fundraising, advancement or development efforts and Endowment income, appreciation, interest or dividends, are closely related and highly correlated. In planning this post, I believed that I could dismiss these sources of revenue as inadequate to make up the shortfall in a couple of short paragraphs and then move on to the topic of this post. I was wrong! As I began writing, the couple of short paragraphs turned into a long post in and of itself. 

Too often, the impression potential donors have of IHEs’ fundraising efforts is that of a panhandler begging for their next meal. Image courtesy of Presenter Media

In the opening paragraph of this post, I alluded to the necessary fundraising efforts of Colonial Colleges to make ends meet. In today’s world, the pressure to raise outside funds has increased many times over. In 2018, the most recent year for which data is available, voluntary support for all of American higher education was $46.73 Billion. According to the Council for Aid to Education (CAE), this represented a 7.2% increase from 2017. Both of these statistics sound impressive until you look inside the numbers.

They can see the other side. However, the gap between the “Haves” and the “Have Nots” is usually too wide to cross. Image courtesy of Presenter Media

Unfortunately, the distribution of gifts is very uneven. It is the story of the great divide between the haves and the have nots. The top 20 fundraising institutions raised $13.26 Billion (28.4% of all voluntary support for higher education). These 20 institutions represent less than 0.6% of all US degree-granting IHEs, public and non-profit private, required to submit data to the federal Department of Education’s National Center for Educational Statistics (NCES). 

What about all the other colleges and universities? According to the Council for the Advancement and Support of Education (CASE), more than two-thirds of all funds raised (68% – $32 billion) this past year went to public and private doctoral/research universities. These institutions are raising billions of dollars in multi-year campaigns heavily focused on capital expansion, research programs, and endowments.

Too many students are held back by underfunded community colleges. Image courtesy of Presenter Media

According to the same report, less than one-half of one percent of the funds raised (0.4% – $0.19 billion) went to community colleges. Even though community colleges educate more than 40% of all American undergraduates annually, and the largest proportion of first-generation, low income, minority, and at-risk students, these institutions are almost invisible to the donors who regularly contribute to American higher education.

Restricted gifts are locked piggy banks which can be unlocked only for specific projects. Image courtesy of Presenter Media.

Funds raised by IHEs typically go into two different accounting pots which are, in turn, divided into two pots. The first division of donations consists of two pots that are labeled restricted and unrestricted gifts. Although IHEs routinely ask donors to give contributions for specific purposes, donors may designate the assignment of their donations to particular projects (restricted gifts) or leave the assignment to the discretion of the institution (unrestricted gifts).

Endowments are rainy day funds for colleges & universities. Image courtesy of Presenter Media.

Funds from each of these two pots are further divided into two more pots. The first of these pots is called the current fund, which is used to pay for current operating expenses or to balance the budget in the year in which the donation is received. The second is called endowment, which consists of funds reserved for future spending. These funds comprise the equivalent of a savings account or a rainy day fund for the institution.

The second of the closely related sources of revenue for colleges and universities was Endowment income, appreciation, interest or dividends. Gifts to institutions are not always in the form of cash. Donors may give physical property, stocks, bonds, or gifts of services. These gifts are sometimes called paper or non-liquid assets. Other than gifts of service, the perceived value of these gifts is the amount of money the institution could get by “cashing in” or selling the asset.

Appreciation is not like having a bank teller hand you money while you do nothing. You have to either sell the property or borrow against it. Image courtesy of Presenter Media.

Appreciation is a different ballgame altogether. It is the increase in the appraised value of a property. It only adds to the real wealth of an institution in two ways. The first is by selling the property and reaping the harvest of that increased value.  Instead of disposing of the asset outright, an institution could borrow against the appraised value of the asset. Borrowing against an asset has two disadvantages. The first is that the loan is now a liability to the institution which must be repaid at some point. In addition, loans usually carry the liability of ongoing interest charges which must be paid periodically. The second disadvantage is that as collateral for a loan, the use of that asset may be restricted partially or fully until the loan is repaid.

Depending upon whether the initial gift of stocks and bonds was restricted or unrestricted, the institution may have to restrict the use of resultant appreciation, interest or dividends to specific projects.

If IHEs always spend more money than they receive, they will eventually fail. Image courtesy of Presenter Media.

Turning our attention to endowments, we run into a new set of problems. We have an interesting dilemma: The public and non-profit private institutions can’t legally show a profit in annual audits or on their cash flow sheets. However, if they continually expend more than they take in their revenues, they will eventually fail (as many have). How do we handle these accounting anomalies? Non-profit organizations can legally hold savings accounts for future spending. Rainy day accounts for IHEs are actually encouraged, not only by federal and state law but by most educational pundits and commentators.

1% of US IHEs appear to be “sitting easy” on piles of money. Their endowment tops $1 billion. Image courtesy of Presenter Media.

If that is the case, what’s the current state of endowments for IHEs? It is also a land divided. The chasm between the haves and the have nots in endowments is just as great as the one that exists in the land of fundraising. The rich get rich and the poor get poorer. There are two ways to measure endowments. You could rank institutions in terms of total endowment in current dollar value, or you could measure it in terms of the current dollar value of endowment per student enrolled.

Which measure you chose probably depends upon your view of how endowment should be used. If you believe that endowment should strictly be dedicated to assisting students in attending a particular institution, you will use the value of endowment per student enrolled. If you are more open to taking a broad, holistic view of the health of an institution, you will look to the total dollar value of the endowment. It doesn’t really matter which way you look at the top institutions. You will find many of the same names. The top 30 institutions by the total endowment are in the list of the 100 institutions of endowment per student and vice versa.

Look at us! We’ve got it made. We’re standing on a pile of money. Image courtesy of Presenter Media.

Why did I choose the number 30? It happens to represent approximately 1% of the public and private, nonprofit 4-year colleges in the United States. In the last several presidential elections there has been much discussion about the wealthiest 1% in the United States. So I thought I would follow the lead of Forbes Magazine which in July, 2016, published the article How the Wealthiest 1% of Colleges Own Higher Education. Forbes’ conclusion in 2016 was that the top 30 colleges and universities held over 52% of all endowment funds. Forbes has not updated their data. From my calculations, using the most recent 2018 data available from the National Association of College & University Business Officers (NACUBO) and the Teachers Insurance and Annuity Association of America (TIAA), the top 30 colleges may have increased their holdings to almost 54% of all endowment funds.

One quick aside: My 2018 top 30 list differs by two colleges from Forbes’ 2016 top 30 list because two institutions just outside the Forbes’ list received very large gifts designated for endowment during the past two years. If you pull back your focus just a little, the top 100 schools (just over 3% of colleges) in both 2016 and 2018 held almost 80% of all endowment funds. In 2018, every one of the top 100 colleges had an endowment valued at more than $1 billion. Pulling back a little further, in both years the bottom 20% of institutions held less than 1% of all endowment funds.

Where can we find the money needed to run our college? Image courtesy of Presenter Media.

In the face of a structural operating deficit, declining public support, and a lack of sufficient endowments or donations to fill-in these gaps, many IHEs felt they had to turn to other sources of revenue. Where could they find these sources? The two most obvious solutions are to resort to auxiliary enterprises or to sell off assets.

Whenever everything of value is sold, the last one out of the door should turn off the lights and lock the door behind them. Image courtesy of Presenter Media.

Auxiliary enterprises provide goods or services to college personnel or the general public on a fee-charged basis. These enterprises are meant to be profit-making, or at the least self-supporting. In some circumstances, selling off assets can be considered a last-ditch effort. Many view it as a final desperate action before closure.

The major decisions for both avenues involve what properties or services can or should colleges offer. I will take up that question in my next post, The Commercialization of Higher Education – Part II.

 

 

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The Business Model of All of Higher Education Is Broken, Part III – Tuition and Fees

from Presenter Media

In this current post, I return to the discussion of the Business Model of All of Higher Education. In a previous post, The Business Model of All of Higher Education Is Broken,  I introduced the five sources of revenue for Institutions of Higher Educations(IHEs): 1) Tuition and fees; 2) Fundraising, advancement and development efforts; 3) Endowment income, appreciation, interest and dividends; 4) Auxiliary enterprises; and 5) Governmental appropriations. In this post, I had originally planned to consider all of those sources of revenue in one post. However as I began to work with that idea, I found the explanations growing too large for one post. In addition, no matter how hard I cranked the revenue generating machine for each revenue source in an attempt to create additional funds, I discovered that increasing the effort in any given area did not produce a commensurate return on investment (ROI). Therefore, I decided that I needed to expend more time and coverage in this series to each source of revenue to give it the analysis I felt it deserved.  Thus, I have decided that I will begin to plan to cover each of the revenue sources individually in separate posts. As I get into the ins and outs of the revenue source, I may have to add more posts. I begin this process with the source of revenue with which all students and their families are most familiar, Tuition and Fees . It is also the revenue source that the general public most clearly associates with Institutions of Higher Education (IHEs).

from Presenter Media

The revenue from tuition and fees obviously depends upon enrollment. This means that there are really only five ways to increase the useable revenue from tuition and fee. These five possibilities are:

  1. increase the tuition and fees, thus increasing the base amount each student pays;
  2. increase the number of students paying the tuition and fees, i.e, increase tuition-paying enrollment;
  3. decrease the discount rate on tuition, thus decreasing the average amount of institutional financial aid given to enrolled students;
  4. change the model of teaching and learning in order to increase the efficiency of the use of this revenue stream;
  5. do a combination of two or more of the above at the same time.

With points 3 and 4 above, I apologize for sneaking the expenditure side of the business model into the conversation. However, much of the general public acts as if it believes that tuition and fees cover the cost of a college education. This is definitely not the case, and has not been the case since the beginning of formal American higher education in the mid-17th century. Since this rabbit trail would take us deep into the expense side of the budgets of IHEs, I will leave the exploration of this topic to another post. I will devote the remainder of this post to just addressing the issue of increasing tuition and fees. I will cover the problems of increasing the number of students, decreasing the discount rate and changing the model of teaching and learning in additional posts.  I will also address the four other IHE revenue sources in additional posts.

from Presenter Media

When IHEs announce tuition increases each spring for the following fall, it is usually met with varying degrees of disdain. Students, parents, the general public, as well as federal and state governments are already enraged at the current level of tuition and fees. The data are clear. Tuition and fees have increased at rates exceeding the annual general inflation rate for years. Just at the suggestion of another increase, the reaction varies. It runs the gamut from a reluctant acceptance to a loud murmur to a campus uproar and rebellion.

The following three charts use the same data extracted from the College Board Pricing Trends, which has the most comprehensive collection of data on college pricing trends. Although the charts are based on the same data, they give us three different pictures of the history of Tuition and Fee Increases over the past 40 years. Why have I chosen to present this information in three ways? It is to try to help my readers understand that there are different ways to look at the same data and that one’s first impression may not be the only or best way to view the subject.

The first chart is a 40-year history of tuition and fee increases in “current  dollars,” i.e, the average list price of tuition and fees for all colleges in a given segment weighted by full-time undergraduate enrollment. These list prices are compared against the 40-year average increase in list prices. The current dollar tuition and fees are the prices that students, their parents, and government officials will see first. These are the dollar figures against which everyone reacts. The first impression from the graph is how similar the tuition and fees were for all three segments in 1975. Based on the scale of this graph, it is almost impossible to distinguish the price of the four-year, public institutions and the two-year, public institutions. Although the private, four-year institutions were more expensive, on the scale of this graph, in 1975 they did not appear “that much more expensive.”

CHART 1: History of Tuition and Fee Increases Compared Against 40-Year Average Annual Increases

The second impression that this graph conveys to me relates to how the actual increases fall below the projected increases based upon the 40-year average annual increase. This means that the early increases were less than the average annual increases and it took quite awhile for the actual increases to catch up with the average annual increases. It appears that the sharp increases in both public and private four-year schools occurred in the period from 2000 to 2010.  This would coincide with decreased support from government appropriations for financial aid.

This graph clearly gives the impression that the gap between the three segments has grown significantly. This is the feeling that students and their parents get when they start looking at colleges and the tuition prices. The fourth and fifth impressions that this graph gives me revolve around the two-year public institutions. The first of these impressions is how much more affordable this choice seems compared to the other two choices. The second impression is how close to a straight line the actual increases appear. To me, and many other commentators and critics of higher education,  this raises the spectre of whether these institutions “know the secret” for holding down tuition increases.

The two primary conclusions that many will draw from this graph are: 1) the two-year, public institutions are the most affordable choice for an education; and 2) the four-year, private institutions have had uncontrollable tuition increases over the past 40 years.

The second graph, entitled Growth Factors of Tuition and Fees from 1975 to 2015 Across College Segments, Selected Academic Years, portrays the same data that the first graph did, but gives a very different slant to that data. This chart tells us how fast tuition and fees grew. Surprisingly, it says that the time to double has been relatively constant. In rough terms throughout the 40 years from 1975 to 2015, it has generally taken 15 years for tuition in any of the college segments to double.

CHART 2: 40 Years of Tuition and Fee Growth Factors

SInce the blue bars representing the public, two-year institutions increase in height the most consistently, this is another verification of the steady, almost constant rate of growth of tuition and fees for the colleges in this segment. During the first 20 years, I find it very interesting to note that the public, two-year institutions increased their tuition and fees at the fastest rate, while public, four-year institutions at the slowest rate. In the second half of the 40-year period, the growth rate of public and private four-year institutions shot up, far out stripping the two-year public institutions. Does this represent a shift in public funding priorities for higher education?

Although the growth factors were very close since the private four-year institutions started out with higher tuition and fees, doubling the higher rate increased the differential. Thus, the actual dollar spread in tuition did indeed produce growth.Two different graphs give you two different pictures.

The third graph is entitled the Five-Year Percentage Changes in Tuition and Fees Across College Segments, From 1975 to 2015. This graph plots the percentage change in tuition and fees over five-year periods from 1975 to 2015. This graph gives one a very different picture of tuition and fee increases over these 40 years.  The overall trend of data points in this graph are actually decreasing. This doesn’t say that tuition and fees are decreasing. What it says is that the rate of change is slowing.

CHART 3: Five-Year Percentage Change in Tuitions and Fees, 1975 to 2015

Looking at the three different sets of points and lines joining those points, it is not surprising that the blue points representing the two-year, public institutions show the least variation. That confirms what we have seen in the other two graphs. The red points show the most variation away from a straight, decreasing line. The four-year, public institutions have been the institutions most affected by the whims of state legislatures or governors. Again, even though the rate of increase for private, four-year institutions is slowing down, don’t look for the public, four-year institutions to catch them in list price anytime in the near future.

Chart 1 hit me right between the eyes. To those who can remember, I challenge you to go back to your college days and put your tuition and fees into an appropriate year in the chart. For some of us we will have to add lines at the beginning of the chart. My experience would extend the chart another 10 years to the left. In the early sixties at the flagship university in a small state, I never paid more than $175.00 annual tuition plus $10 lab fees per science course, which usually added $20 or $30 per semester. Since computers were just coming into use, as a mathematics and physics major I had to pay a $25 per semester technology fee for the right to put my card decks in the hopper each night and come back the next morning to get the print out from the pin-fed line printer. In addition, as a commuter, I had to pay $50 per semester for a “hunting license” to try to find a parking space in an on-campus parking lot. Thus, my total annual tuition and fees bills were less than $550. My textbooks and supplies were less than $150 per semester. I lived at home, and my mother never charged me anything for room and board, because I took care of everything around the house since my father died during my freshmen year in college. Gasoline averaged about $0.30 per gallon, and I spent maybe $10.00 per week to keep my car in gas, and $25 per week for coffee and lunches. Thus, my total out-of-pocket expenses to go to college were less than $2000 per year, or $8000 for my entire undergraduate education. If you subtract the $6000 in scholarships that I won or was awarded, my B.S. degree in mathematics cost me less than $2000 out of pocket. Even in early 1960 dollars, that was entirely possible to pay for out of summer or part-time school year earnings. For my four years in graduate school, I had a fellowship that paid tuition and living expenses. I didn’t pay one nickel out of pocket for my Ph.D. I graduated in eight years of schooling, with a B.S. and a Ph.D.in mathematics, with a wife, a child, a house, two cars, money in the bank, NO DEBT, and an offer of a tenure track job! In today’s world that would be definitely an anomaly. According to CNN, for the most recent year for which data is available, the undergraduates of the class of 2013 walked off the commencement stage with an average debt of $35,200, while Ph.D. graduates “stumbled” off the platform with an average debt of $57,600. Among Ph.D.s, more than 28% had debts of more than $100,000. The average J.D. and M.D. graduating from Law School and Medical School respectively, had a debt of more than $140,000. Much has been written and debated about the debt bubble that has overtaken or is overtaking American higher education. It looks like I have created at least one more blog post on the Debt Bubble.

from Presenter Media

Why does this picture look so bleak? I believe it looks bleak because we could be on the verge of very bleak times for higher education. American higher education is heading for a perfect storm, unless it changes course or one or more components of the storm change direction. A perfect storm is the confluence of events which individually may not necessarily be dangerous, but the combination of these events creates a potentially disastrous situation. Here, too, I am taking you to the suspenseful edge, and leaving you to dangle. The perfect storm will be another post in this series on the broken business model of American Higher Education.

http://www.hamiltonproject.org/assets/legacy/images/uploads/thp_image_uploads/charts/college_cost_large.png#college%20cost%20chart%20520×520

 

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The Business Model for All of Higher Education is Broken

from Presenter Media

I recently came across a very thoughtful and extremely well-written blog post This Needs to Be Run More Like A Business written by Jason McNeal. In this post, Jason gives an impassioned plea for a different approach to private education since “the business model approach to higher education is helping to discourage giving.” Jason suggests that board members and I would assume he would include administrators should know better than to say, “Our business model in higher education is broken.”  I am sorry Jason, but “The Business Model for All of Higher Education is Broken.” I say this as an administrator with 40 years of effective service in private higher education.  I have also spent considerable time praying, studying, thinking and writing about higher education. You do make a valid point when you imply a criticism of the board member’s statement, “I simply do not understand why our tuition and fees are not sufficient to cover our costs.”  In the worlds of private, non-profit, higher education and public, higher education, no traditional college or university covers its education and general costs with just tuition and fees. It is like one individual in a sinking rowboat trying to bail out the boat, with other sitting by, just watching and doing nothing to help. This model is broken. However, the model of using a leaking boat to try to get across a lake is also broken.

from Presenter Media

Why do we want to get across the lake? We want to build an excellent education that works for students, faculty, and the general public. This education must be affordable for everyone involved, including the students, faculty and the general public. This education must be sustainable not only in the short run but for the long run. I, for one, see problems in all the current approaches that we are using to reach these goals. For 40 years, I tried to work toward these goals in the best way that I could. I had some successes, but I also had some failures. I will discuss some of both in future posts. Why? Because we can learn from both our successes and failures. When Thomas Edison was asked about thousands of experiments on light bulbs that didn’t work, he is reported to have said, “We haven’t failed. We now know a thousand things that won’t work, so we are much closer to finding what will.” When we find something that partially works, we should try to determine why and what we could do to make it work better. These are the steps to success. Let’s work together to bail out the leaky boat, find the leak and fix it. Then we can row together across the lake to the land of success, where we will have excellent, affordable and sustainable education for all.

We can begin by looking at two partial successes. The two areas where we see tuition and fees possibly covering all the costs of fulfilling the educational mission of the institution are non-traditional higher education and proprietary, for-profit, higher education. I say “possibly” because more than half of the non-traditional programs or for-profit institutions lose money and eventually fail. The traditional higher education institutions have been variously described as time and location fixed, brick-and-mortar, bastions of teacher-centric delivery of education to late adolescents recently graduated from high school. Non-traditional education disrupts one or more characteristic of traditional higher education. In other blog posts, I will speak more about the differences between traditional and non-traditional higher education.

Institutions of higher education have five sources of revenue. I am sorry if I offend educational purists who do not want to use business terminology to describe operations within higher education. In using the term “revenue”, I did resist the temptation to use the more highly-charged business term “income.” Thus, I will label money coming into the institution to pay for the operations of the institution as “revenue.” There can be no argument that colleges are required to pay operating expenses like salaries, fringe benefits, construction and maintenance costs, utility and insurance costs, supply, equipment and service costs. Since I am focusing on the revenue side of the institution in this post, I will reserve discussion of the expense side to other posts.

There are four sources of revenue for the not-for-profit segment of higher education. There is a fifth source for public institutions.The five sources of revenue are:

  1. Tuition and fees;
  2. Fund raising, advancement or development efforts;
  3. Endowment income, appreciation, interest or dividends;
  4. Auxiliary enterprises;
  5. Governmental appropriations (Reserved for public institutions).

There are two very distinct ways to look at these sources of revenue. The first is how the general public sees these categories of revenue. The second is how colleges and universities are legally required to report them in audit statements. (OOPS, another hint at the trouble lurking within the presence of the higher education business model) In this post, I will restrict my attention to how the general public understands these five sources of revenue. In future posts, I will discuss how colleges are forced to handle and report the revenues associated with these categories.

from Presenter Media
  1. Tuition and fees: These are the charges (I apologize for another business term) the institution individually imposes upon students for the privilege of attending and obtaining an education, and possibly a degree or some other credential. By “tuition” I mean that portion of the financial obligation imposed upon students for enrolling in classes. By “fees” I mean extra charges for a number of other things such as student services or activities, laboratory, clinical, internship, practica, music, travel, technology, special class charges, health or insurance fees, parking fees, and a myriad of other add-ons such as application, matriculation, course change, graduation and transcript fees, . I also throw into this category “Room and board charges”  because these charges are individually assessed to participating students. These are the financial obligations imposed upon students who reside and eat in college-owned or operated facilities. The students and their parents see these charges on their college bill (a residue of a business model). Student and their parents refer to these charges as the total cost or the price of attending. I haven’t yet considered financial aid. Whether the financial aid is not from the institution or comes directly to the student as a government appropriation, it is usually considered a discount by the students and their parents Either way, when we get to the accounting of financial aid, it must be treated as a cost to the institution(another business model problem lurking in the forest).

    from Presenter Media
  2. Fundraising, advancement or development efforts: For the private, non-profit, and public segments of higher education, this category includes all charitable gifts and donations. These gifts may be in the form of cash, stocks, bonds, or physical property, including real estate, art, supplies, or equipment. They may also include services in lieu of payment. This category seems to be the area about which Jason is most concerned. From reading Jason’s blog, I know he doesn’t consider fundraising and development work as begging. However, in the eyes of many of the general public, this is what it comes across as. In the for-profit segment of higher education, this category also includes what is known in financial circles as the investment of assets. Investments are the purchase of assets with the hope of generating a profit. Investments are not always profitable and may incur a loss. Many colleges and universities, across all segments of higher education, raise funds through gifts that are known as grants. Grants are funds or products that do not have to be repaid given by the grant maker, which can be a government department, corporation, foundation or trust to a recipient. Usually, grants are awarded after the recipient has made a written request for funding of a specific project through a process that is known as grant writing. Most grants that are awarded will require of the recipient some level of verifiable compliance and reporting of outcomes. In future posts, I will consider the topic of university fundraising, including its rewards and perils.

    from Presenter Media
  3. Endowment income, appreciation, interest or dividends:  By an endowment, I mean a financial asset, which normally came into the possession of the institution in the form of a gift or donation. Endowments may or may not have a stated purpose at the bequest of the donor. This category of revenues also includes the return or dividends on the investment of charitable donations. It also includes the appreciation in value of the gifts that the colleges and universities are holding in “trust.” Most endowments are designed to keep the principal amount intact while using the investment income from interest or dividends for the “charitable” efforts of the institution. By “charitable” efforts, I mean those efforts which contribute to the stated primary mission or purpose of the not-for-profit institution. This category also includes what are commonly known as “quasi-endowments.” These are funds set aside by the institution from institutional funds. These funds may have come from donors or excess institutional funds. As with “endowments” the principal of quasi-endowments are reserved, and only the interest or dividends are expended. The management of endowment principals and investment demands close scrutiny on the part of professional managers, whether internal or external to the organization. In future posts, I will deal with the topic of endowments and their management.

    courtesy of GrahpicStock
  4. Auxiliary enterprises: Auxiliary enterprises are entities that exist to furnish fee-based goods and services to the general public, students, faculty or staff, acting in a personal capacity and not as an agent of the institution. Auxiliary enterprises should be self-supporting in the sense that the revenue covers the full direct and indirect costs of providing the goods and services. Some definitions of auxiliary enterprises exclude areas that are outside the core functions of an academic institution. For all academic institutions, core functions would include teaching and learning activities. For many, they would include research activities. For some, they would also include service activities. such as agricultural extensions for land-grant institutions.  There are many possible uses of the wealth of physical facilities associated with a college or university, which could be used outside the core functions of the college. There is an army of experts at a college which could be deployed to service students and the general public in areas outside the core functions of the college.  When auxiliary enterprises produce a surplus of revenue over expenses, those surpluses may be used to offset budgetary deficits in any area of the institution, including areas essential to the mission of the institution. Although there are many calls for colleges and universities to stick to their knitting, and stay clear of auxiliary enterprises, these programs may be a way for a college to fill in some budget gaps. I will speak to this argument in a future post.

    from Presentation Media
  5. Governmental appropriations: With recent rulings of federal and state courts, Departments of Justice and General Accounting Offices, this category may seem to be reserved for public institutions. Because education is not mentioned in the United States Constitution, including its ByLaws, it is one of the areas reserved for the prerogative of the states. However, Congress has enacted certain laws with which all employers and public buildings must comply. In addition, there is a federal Department of Education (DOE). The DOE exists primarily to safeguard the federal investment in education. This investment comes from the billions of dollars over the years that have been designated for educational concerns by Executive Orders and Federal Appropriations approved by the US Congress. These monies have been augmented by state and local appropriations. Although direct appropriations primarily only go to public institutions, the federal and state loans and grants to individual students greatly affect the well being of most private institutions. With the acceptance of federal and state funding, colleges and universities must also accept certain increased levels of governmental oversight. Compliance regulations control what colleges can and must do in many disparate areas. These areas include human subject research compliance, environmental health and safety compliance related to research, animal research compliance, export controls compliance, conflict of interest, technology transfer requirements, research misconduct requirements, accreditation, financial aid, FERPA, sexual misconduct (Title IX), Clery Act, drug and alcohol prevention, IPEDS reporting requirements, Title IX athletics administration, gainful employment, state authorization, and equity in athletics data analysis (EADA), immigration, disability, anti-discrimination, and environmental health and safety regulations outside of those related to research. Uncle Sam surfing the dollar is in control. The perverse version of the “Golden Rule: He who holds the gold, makes the rules,” dominates the day here. In future posts, I will discuss governmental funding and compliance issues in higher education.

As with any living organism, colleges and universities ingest monetary resources in order to perform the life functions of growing or producing fruit. For colleges, the desired fruit includes student learning, research and scholarship, and community service. The five categories listed above are the life-giving resources upon which colleges and universities depend. They are the food and water of colleges. If colleges and universities do not get enough funds for their nutritional needs over extended periods of time, they will starve to death. Thus, in higher education, we have three choices. We can 1) increase funding from these sources;  2) cut expenditures, or 3) do a combination of increased revenue and decreased spending. To me, this sounds like a business model. If we look more closely at each of the five funding sources, we will easily find huge difficulties in getting significantly more funds from any of these sources. Due to the length of this post, I will look at those difficulties in future posts.