Higher Ed Revenue per Student only $118 Short of Record High

New data from the annual SHEEO finance report reveals that educational revenue per public college student is at the third highest level in the past quarter century. When adjusted for inflation (see below), total revenue per student in 2014 was $12,329. The only two years with higher figures were 2008 at $12,396, and 2007 at $12,447.

However, most people won’t notice this because the SHEEO report itself and virtually all of the commentary focuses on figures using the Higher Education Cost Adjustment (HECA) to adjust for inflation. But the HECA doesn’t adjust for inflation, it adjusts for costs. If revenue goes up by 20%, and costs go up by 20%, then using HECA will show no increase in “inflation” adjusted revenue, which would be incorrect.

To find out how much revenue-per-student changed over time, you should adjust for inflation using something like the Consumer Price Index (CPI) (see this subtly titled report for more discussion on this point). While it is no secret that I have issues with SHEEO using the HECA instead of the CPI, SHEEO does deserve credit for being a model of transparency – their report clearly indicates that they use the HECA, and they make their data available (this year’s raw data isn’t ready yet, but they did make the highlights available here, including calculations using the CPI instead of the HECA.)

How could the seemingly boring choice of what price index to use possibly make any difference?

I’m glad you asked.

The distinction between adjusting for costs or inflation is important because it gives a false impression of why tuition increases. Adjusting for costs leads one to conclude that the cost to educate a college student has been about the same—$12,000— for the last 25 years. It therefore stands to reason that cuts in state funding cause tuition to rise dollar for dollar.

But if you adjust for inflation, the data no longer tell that story. The chart below shows total revenue per student over time adjusted for inflation rather than costs.

sheeo blog 1 While total revenue per student bounces up and down with recessions, there is an upward trend over time. From 2008 to 2012, state funding fell by 24 percent and total revenue by 8 percent, yet total revenue in 2012 was still 8 percent higher than in 1989. It is unlikely that we could experience such brutal reductions in state funding and total revenue and still end up with greater total revenue than we had 23 years ago unless there was an underlying upward trend in total revenue.

Because of this overall upward trend in total revenue per student, we shouldn’t expect to see a perfectly offsetting relationship between state funding and tuition. And if we look at the data, we don’t see much of an offsetting relationship. The next figure simply unstacks state funding and tuition revenue per student to show this more clearly.

sheeo blog 2State funding per student follows a cyclical pattern, falling during recessions; rising during recoveries. But tuition generally rises, regardless of whether state funding is rising or falling. Some might argue that tuition revenue rises even when state funding is rising to “catch-up” to the old baseline (note that tuition revenue doesn’t increase by enough to fully offset falls in state funding during recessions). But this argument is not convincing because of the overall upward trend in total revenue per student over time.

The next figure looks deeper into the relationship between state funding and tuition by plotting the change in tuition revenue per student in response to the change in state funding per student for each year.

sheeo blog 3The red line shows the presumed $1 for -$1 relationship where tuition revenue per student increases by $1 for every $1 decrease in state funding per student. If tuition only rises to offset cuts to state funding, then each year should fall somewhere along the red line. They do not. Far from being 1 for -1, the historical relationship is 0.11 to -1 (p-value = .14). Every $1 decrease in appropriations revenue per student is only associated with $0.11 higher tuition revenue per student.

From a public policy perspective, the bottom line is that tuition at state colleges does not rise merely to offset cuts in state funding. This means that increasing state funding is not an effective method of preventing tuition from rising. Based on the historical data from the last quarter century, a $100 increase in state funding per student will save each student only $11.

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