Price, Cost and Subsidy in US Higher Education

1. Price, Cost and Subsidy in US Higher Education Craig W. Bowen, Ph.D., M.B.A. Postsecondary Institutional Studies Program National Center for Education Statistics 1990 K Street, NW Room 8134 Washington, DC 20006 Craig.Bowen@ed.gov This paper is intended to promote the exchange of ideas among researchers and policy makers. The views expressed in it are part of ongoing research and analysis and do not necessarily reflect the position of the U.S. Department of Education.

2. Surely one of the fundamental anomalies in the economics of higher education is the fact that US colleges and universities sell their primary product—education—at a price that is less than the average cost of its production. The subsidy that that gives to nearly every college student in the country is neither temporary nor small nor granted only by government institutions. (Winston and Yen, 1995)

3. Take Home Messages • Capital instructional costs should be included when estimating college instructional costs. • It is possible to use existing IPEDS data, and a methodology developed by Winston and Yen to estimate instructional costs that include capital.

4. Overview • What is the methodology that Winston and Yen developed to estimate price, cost and subsidy in the 1990s? • What are some of the results using their methodology based on the FY 1991 data? • What are challenges and possible solutions for the methodology as a result of changes in IPEDS reporting? • What are results when applying this methodology to more recent data?

5. Overview • What is the methodology that Winston and Yen developed to estimate price, cost and subsidy in the 1990s?

6. 1 Total Cost 2 Total Cost Including Total Capital 3 Educational & General Cost with Related Capital 4 Instructional Cost with Related Capital Net Tuition and Fees Total Subsidy 5 6 Net Tuition and Fees General Subsidy Individual Subsidy Winston and Yen Components Based on Winston and Yen (1995). Costs, Prices, Subsidies, and Aid in U.S. Higher Education. Discussion Paper No. 32.

7. 1 Total Cost 2 Total Cost Including Total Capital Total Capital 3 Educational & General Cost with Related Capital 4 Instructional Cost with Related Capital Net Tuition and Fees Total Subsidy 5 6 Net Tuition and Fees General Subsidy Individual Subsidy Winston and Yen Components E & G Capital Instr. Cap.

8. Accounting for Instructional Costs Instructional Cost = Capital Cost + Direct Cost + Joint Cost

9. Accounting for Instructional Costs: Capital Cost Instructional Cost = Capital Cost + Direct Cost + Joint Cost

10. Accounting for Instructional Costs: Capital Cost Total Capital = Depreciation (Build. and Equip.) + Cost Opportunity Cost (Land, Build., and Equip.) = 40-year Depreciation rate (Replacement cost Build. and Equip.) + 30-year Treasury rate (Replacement cost Land, Build. and Equip.) = 0.025 (Replacement cost Build. and Equip.) + 0.0855 (Replacement cost Land, Build. and Equip.)

11. Accounting for Instructional Costs: Capital Cost Total Capital = 0.025 (Replacement cost Build. And Equip.) + Cost 0.0855 (Replacement cost Land, Build. and Equip.) E & G Capital = E & G percent of Total Cost X (Total Capital Cost Cost) Instructional = Direct and Joint Instructional percent of Capital Cost Total E & G Cost X (Total E & G Capital Cost)

12. Accounting for Instructional Costs: Capital Cost Instructional Cost = Capital Cost + Direct Cost + Joint Cost • IPEDS Variables, 1991 • Land, book value • Building, book value • Building, replacement value • Equipment, book value • Equipment, replacement value

13. 1 Total Cost 2 Total Cost Including Total Capital Total Capital 3 Educational & General Cost with Related Capital 4 Instructional Cost with Related Capital Net Tuition and Fees Total Subsidy 5 6 Net Tuition and Fees General Subsidy Individual Subsidy Winston and Yen Components E & G Capital Instr. Cap.

14. Accounting for Instructional Costs: Direct Cost Instructional Cost = Capital Cost + Direct Cost + Joint Cost IPEDS Variables, 1991 • Instruction total • Student services total

15. Accounting for Instructional Costs: Joint Cost Instructional Cost = Capital Cost + Direct Cost + Joint Cost • IPEDS Variables, 1991 • Academic support total • Institutional support total • Operation and maintenance of plant • Nonmandatory transfers total

16. 1 Total Cost 2 Total Cost Including Total Capital Total Capital 3 Educational & General Cost with Related Capital 4 Instructional Cost with Related Capital Net Tuition and Fees Total Subsidy 5 6 Net Tuition and Fees General Subsidy Individual Subsidy Covering Instructional Costs E & G Capital Instr. Cap.

17. Covering Instructional Costs Instructional Cost = Revenue for Instruction Revenue for Instruction = Net Tuition and Fees + Individual Subsidy + General Subsidy IPEDS Variables, 1991 • Tuition and fees: total • Total federal Pell grants • Total institutional scholarships and fellowships

18. Covering Instructional Costs Instructional Cost = Revenue for Instruction Revenue for Instruction = Net Tuition and Fees + Individual Subsidy + General Subsidy IPEDS Variables, 1991 • Total federal Pell grants • Total institutional scholarships and fellowships

19. Covering Instructional Costs Instructional Cost = Revenue for Instruction Revenue for Instruction = Net Tuition and Fees + Individual Subsidy + General Subsidy IPEDS Variables, 1991 • Same variables as for instructional cost and net tuition and fees because General Subsidy is the difference between Instructional Cost and the sum of Net Tuition and Fees and Individual Subsidy

20. Overview • What is the methodology that Winston and Yen developed to estimate price, cost and subsidy in the 1990s? • What are some of the results using their methodology based on the FY 1991 data?

21. Applying the Methodology to FY 1991 Data N = 2,665 postsecondary education institutions had complete finance and enrollment data Excluded institutions that: 1) Had less than 20 % undergraduates of total student FTE 2) Had less than 100 undergraduate student FTE 3) Were for-profit 4) Were Below the Associates Degree level

22. Applying the Methodology to FY 1991 Data Note: Results inflated to 2009 dollars.

23. Applying the Methodology to FY 1991 Data Note: Results inflated to 2009 dollars.

24. Applying the Methodology to FY 1991 Data Note: Results inflated to 2009 dollars.

25. Overview • What is the methodology that Winston and Yen developed to estimate price, cost and subsidy in the 1990s? • What are some of the results using their methodology based on the FY 1991 data? • What are challenges and possible solutions for the methodology as a result of changes in IPEDS reporting?

26. IPEDS Data Elements, 1991 and 2007: Capital Instructional Costs

27. IPEDS Data Elements, 1991 and 2007: Capital Instructional Costs

28. IPEDS Data Elements, 1991 and 2007: Sources for Instructional Costs

29. Overview • What is the methodology that Winston and Yen developed to estimate price, cost and subsidy in the 1990s? • What are some of the results using their methodology based on the FY 1991 data? • What are challenges and possible solutions for the methodology as a result in changes in IPEDS reporting? • What are results when applying this methodology to more recent data?

30. Applying the Methodology to FY 2007 Data N = 2,461 postsecondary education institutions had complete finance and enrollment data of the original 2,665 in the 1991 panel

31. Applying the Methodology to FY 2007 Data Note: Results inflated to 2009 dollars.

32. Applying the Methodology to FY 2007 Data Note: Results inflated to 2009 dollars.

33. Applying the Methodology to FY 2007 Data Note: Results inflated to 2009 dollars.

34. Comparing Methodology Results from FY 1991 and 2007 Note: Results inflated to 2009 dollars.

35. Comparing Methodology Results from FY 1991 and 2007 Note: Results inflated to 2009 dollars.

36. Take Home Messages • Capital instructional costs should be included when estimating college instructional costs. • It is possible to use existing IPEDS data, and a methodology developed by Winston and Yen to estimate instructional costs that include capital.

37. Price, Cost and Subsidy in US Higher Education Craig W. Bowen, Ph.D., M.B.A. Postsecondary Institutional Studies Program National Center for Education Statistics 1990 K Street, NW Room 8134 Washington, DC 20006 Craig.Bowen@ed.gov This paper is intended to promote the exchange of ideas among researchers and policy makers. The views expressed in it are part of ongoing research and analysis and do not necessarily reflect the position of the U.S. Department of Education.