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Blog Post: Why Do Tuition Fees Increase, and Where Does the Money Go?

Posted by:
February 24, 2015

ASPLU President Sarah Smith gave a very good speech to the PLU Board of Regents earlier this month on the subject of tuition fee increases. The gist of her speech was, “We’d like to know more about why tuition fees increase, and where does the money go?” These are great questions, and worthy of being answered. We’re working on having a series of discussions for students with members of the Board of Regents as well as with senior administrators, including yours truly.

In the meantime, some facts: About 90 percent of PLU’s revenue comes from tuition and other fees. The rest comes from gifts, interest on the endowment, and proceeds from various auxiliary services (the Garfield Book Company, 208 Garfield, Old Main Market, etc.). About two-thirds of PLU’s expenditures goes toward providing salaries and benefits for faculty and staff members. The rest goes to maintain facilities; to provide services and purchases to support the educational mission; and to support missions such as Admission, Advancement and Marketing & Communications.

PLU’s commitment to a low student-to-faculty ratio of about 13:1 means that we have relatively high personnel costs compared with some of our peer institutions in the region. PLU does maintain a pretty lean staff-to-faculty ratio of about 1.6:1. Most universities maintain a ratio of between 1.7: and 2.2:1. But, even at a lean 1.6:1 ratio, we still provide a high level of personal support and engagement for our students.

The decision to set tuition fees is one that the whole institution takes very seriously. The fundamental decision rests on the question, “What revenue do we require to fulfill our mission in the coming year?” In a simple world, we would just take that figure for the money required, divide by the number of places available for students, and come up with a flat fee (minus revenues from other sources, which, as I mentioned above, constitute about 10 percent of total revenues).

But, we live in a complex world, where we need to be able to support smart students who don’t have the means to afford a college education, and we need to compete in an educational marketplace that includes public universities that receive direct subsidies from the state and private universities with far larger endowments. So, our tuition fee often rises at a rate very similar to those at other colleges and universities.

Since all colleges and universities spend most of their revenue on personnel costs (salaries and benefits for faculty and staff members), it’s worth noting that the cost of highly trained personal services —like education, medical care, dental care, legal advice, therapy services, etc.—tends to rise at a rate faster than the increase in consumer prices for all goods and services.

This tendency is called the “Cost Disease” by economists. There’s an excellent 2012 book by that title by William J. Baumol that explains how it works. Baumol points out that society is able to continue to afford such highly trained personal services because the productive side of the economy (manufacturing, etc.) reduces the relative costs of things like food, clothing, and transportation to such an extent that the average family is able to afford, say, a college education, in part because other things have become relatively cheaper as a percentage of household income. And, while this is generally true for “the average family,” it does not always work across all income levels (Baumol points out that in our current system, the bottom fifth of incomes is doing much less well now than in earlier decades).

So, institutions like PLU also spend considerable sums to help students with demonstrated financial need afford to come here. In fact, 97 percent of PLU students receive some form of financial aid. PLU also “backfills” that part of the Washington State Need Grant that the Legislature fails to fund.

Another thing to think about is the fact that even the students paying the full sticker price at the most expensive college in America (currently that’s Sarah Lawrence College, at $67,000 per year) are still receiving some subsidy from society—tax breaks, tax exemptions, gifts, endowment proceeds, federal and state grants for research, construction, and equipment, etc. So, as “commodities” go, a college education is one of the most complex “products” there is.

That’s probably enough for now. Please comment below, and let me know what other questions I can try to address—both here in the blog as well as in the upcoming open discussions we’re planning.

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