Public College Revenue per Student Reaches Record High

Revenue per student at public colleges in the United States has reached a record high.

Reanalysis of the new State Higher Education Executive Officer’s (SHEEO) annual finance report indicates that in Fiscal Year 2015, revenues per student reached $12,972, surpassing the previous high of $12,440 from 2007. This detail is easily missed however, since the SHEEO report adjusts annual figures for costs rather than inflation. Note that the price index they use, the HECA, stands for the Higher Education Cost Adjustment. While SHEEO is a model of transparency (they note their use of HECA clearly and post their data online), if the goal is to determine if funding for higher education has changed over time, you need to adjust for inflation rather than costs.

An op-ed in Inside Higher Ed has more details, but adjusting for costs rather than inflation will lead to flawed conclusions. Consider the following:

  1. Cost adjustment hides the (slight) upward trend in total revenue over time

The cost adjusted figures reported by SHEEO claim that total revenue per student in 2015 was about $170 different than in 1999, leading to the conclusion that total revenue is just about stagnant. The inflation adjusted figures reveal the truth about a slight upward trend in total revenue. The first figure shows inflation adjusted total revenue per student at public colleges over time, broken down between educational appropriations (“state and local support available for public higher education operating expenses”) and net tuition revenue (tuition revenue after accounting for state and college funded financial aid).

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While recessions cause temporary dips, total revenue is growing over time by about $100 per student per year. The cost adjusted figures from SHEEO largely obscure this trend.

  1. Cost adjustment implies a long-term decline in state funding when in fact state funding is cyclical.

The SHEEO report is often cited as exhibit A by those arguing that state disinvestment is a plague that has been causing havoc in higher education for decades. Yet adjusting for inflation rather than costs reveals that state funding per student is down $900 since 1990, not the $1,700 that SHEEO claims.

The strongest argument in favor of the long-term state disinvestment story is the fact that inflation adjusted state funding per student (educational appropriations) was almost $900 lower in 2015 than in 1990. It is certainly true that this is a large gap, but it is rapidly decreasing – state funding increased by almost $950 per student in just the past four years. The second figure, which simply unstacks the revenue bars hints at a more accurate story of what is going on: rather than being in a long-term decline, state funding follows a cyclical pattern, falling during recessions and rising during the recoveries.

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  1. Cost adjustment misdiagnoses the cause of tuition increases. Tuition does not rise because state funding falls.

Perhaps the most commonly cited justification for increases in tuition at public universities are declines in state funding. Yet this notion finds little support in the SHEEO data. The second figure hints at the main problem, which is that state funding is cyclical, but tuition consistently increases. It’s difficult to explain how steady increases in tuition are driven by state funding which is subject to volatile swings both up and down.

The third figure directly tests the argument that tuition increases because state funding falls. Each year in the chart plots that year’s change in state funding and change in tuition revenue per student. For example, the “2012” label in the upper left corner indicates that from 2011 to 2012, state funding decreased by $621 and tuition revenue increased by $372 per student.

If tuition increases because state funding goes down, then there should be an offsetting relationship between the two with tuition increasing by $1 for every $1 decrease in state funding, as indicated by the red line.

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Very few years fall along the red line. The blue line shows the best estimate of the true historical relationship, and indicates that a $1 decrease in state funding is correlated with only a $0.07 increase in tuition. Not only is that much smaller than the presumed $1 increase, but the relationship isn’t even statistically significant (p-value = 0.3). The historical relationship also indicates that if there was no change in state funding per student, tuition revenue would still increase by $133. To put that figure in perspective, the actual average annual change in tuition revenue over the past 25 years was $135. In other words, there is little reason to believe that changes in tuition are driven by changes in state funding.

Main Implication for college affordability

The main implication of these findings is that the traditional remedy for addressing college affordability will not work. The conventional wisdom, in part fueled by references to the cost (rather than inflation) adjusted SHEEO data, holds that increasing state funding is the key to making college more affordable. The assumption is that there is some cost of providing an education, and that this cost needs to be covered by either state funding or tuition. In such a world, the way to keep college affordable for students is to increase state funding.

But the results here clearly show that the conventional wisdom is wrong. The upward trend in total revenue combined with resounding empirical evidence that tuition does not reliably decrease in response to increases in state funding imply that increases in state funding are more likely to “feed the trend” of higher revenue per student rather than result in lower tuition.

If increasing state funding is not the solution to the college affordability problem, then what is? Researchers have not been able to settle on a definitive answer yet, but a particularly promising avenue builds upon Howard R. Bowen’s revenue theory of costs. Under this theory, the key to college affordability is to change the incentives that college’s face.