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Paying For Higher Education

Multiple authors examine the financial challenges public universities face in sustaining and strengthening their programs

by Robert L. Lichter
April 23, 2007 | A version of this story appeared in Volume 85, Issue 17

"Privatization and Public Universities"
edited by Douglas M. Priest and Edward P. St. John, Indiana University Press, 2006, 280 pages, $39.95 hardcover (ISBN-13: 978-0-253-34735-0).
edited by Douglas M. Priest and Edward P. St. John, Indiana University Press, 2006, 280 pages, $39.95 hardcover (ISBN-13: 978-0-253-34735-0).

Hardly a week goes by that yet another buzzword-filled report about the rising costs of higher education does not appear. Educational outcomes, preparation of an adequately trained workforce, equitable access to higher education, institutional position in national rankings, and, most recently, the role of colleges and universities in strengthening American competitiveness—all are subjects of intense scrutiny linked through the common bond of how the enterprise of higher education is financed. Measurements of value received by students, their families, employers, and society at large for the investment they have made continue especially to drive the generally friendly competition between public and private institutions.

Public institutions of higher learning have a long history in the U.S., going back to the late 1700s. Many contemporary and largely sectarian private institutions were intended to train clergy and teachers. But public (state) institutions had practical objectives, which rapidly expanded in the mid-19th century with the passage of the Morrill Act. That legislation made federal funds available to every state for establishment of colleges with a "popular and practical orientation," focusing primarily on the "agricultural and mechanical arts." The explosive growth of these land-grant institutions, some of which were established at private colleges, set the stage for financial commitment by the states that lasted well into the 20th century.

One might assume that, given their high quality, public institutions would be able to exploit their lower costs compared with private institutions and attract an increasing population of high-achieving students. Indeed, many studies suggest this to be so to a measurable degree. However, even though the average cost for tuition, fees, room, and board at public universities still remains lower than at private institutions ($12,796 versus $30,367 in 2006), the overall average rate at which costs have increased during the most recent decade is greater for public (37.9%) than private (26.7%) colleges and universities. One striking outcome, as revealed in the most recent annual survey by the Higher Education Research Institute at the University of California, Los Angeles, is that almost half the freshmen attending their second-choice institutions had been accepted to their first-choice colleges, but they elected not to attend their first choice primarily because of concerns about costs and financial aid.

Public Education
Credit: Rob Crandall
University of Virginia Rotunda.
Credit: Rob Crandall
University of Virginia Rotunda.

Public institutions inescapably face many of the same financial challenges in sustaining and strengthening their programs as do those in the private sector. To confront these challenges in times of shrinking public funding, public institutions—especially but not exclusively the doctoral institutions—have adopted many of the financial management and operational strategies that have served private institutions. That shift has been the subject of many articles and the highly comprehensive 2005 American Council on Education book, "Peering Around the Bend: The Leadership Challenges of Privatization, Accountability, and Market-based State Policy," by Peter Eckel, Lara Couturier, and Dao Luu.

Into this discussion strides "Privatization and Public Universities," a critically broad look at the financing of public institutions that sets out to "explore the challenges of improving the quality of education and research while facing reduced financial support." The reader is advised that the book "explores some of the important revenue-generating and cost-reduction tools, examines their usefulness, and discusses their implications for both the university and the constituencies it serves."

Such a daunting preview might presage a dry, tedious discussion of economic arcana useful for curing insomnia. In fact, this astute and highly informative book is eminently readable and full of useful and practical information about how public universities should and do function in an era of diminishing public funding. Indeed, a subtitle could be, "Everything You Didn't Know You Needed To Know About Running a University." Throughout, and especially in the final summary chapters, implications for students and their families is a recurrent if not always dominant theme.

Divided into four thematic sections that focus primarily on large universities, the book's introduction and 13 chapters are adroitly edited by Douglas M. Priest and Edward P. St. John, who are well-published professors of education at Indiana University and the University of Michigan, respectively. The 14 contributors from a variety of largely public but some private settings cover a broad range of experience in university management and operation. The chapters are based on extensively referenced research largely published through 2004, with some excursions into 2005.

The book defines privatization as the transformation of "low-tuition institutions that are largely dependent on state funding to provide mass enrollment opportunities at low prices into institutions dependent on tuition revenues and other types of earned income as central sources of operating revenue." Stated at the outset, the book's underlying premise is that "it is no longer a question of whether privatization of public higher education will occur, but rather of how well government, universities, and the public will adapt to the changes that are now under way."

Whether this premise must remain unquestioned is beside the point; it does reflect a hard reality. The authors argue that the origins of this shift lie in changes in public policy toward higher education, especially declines in state funding and in federal grants, accompanied by the emergence of federal loans. As public support for public institutions decreases, they are driven to rely more on other sources of revenue, especially tuition, to pay for the direct costs of educating students. All of these alternative sources of revenue have implications for the institutions' educational mission.

Cost-reduction approaches presented in the book can make the operation of an academic institution more efficient yet have little impact on the cost of education itself. Alternative revenue sources needed to offset reductions in state funding "do not replace the need for educational revenue to support instruction," for which tuition remains the most direct contribution. Grants and scholarships do not adequately offset rapid tuition increases; thus, universities rely increasingly on federally subsidized loans. These in turn disproportionately and negatively affect low-income students by increasing their postgraduate debt. As the authors strongly imply, while the tactics of financing public higher education present a challenge, ensuring equitable access and minimizing financial barriers to completing degrees—the traditional mission of public institutions serving the public interest—is the underlying policy issue that really needs to be addressed.

The three chapters of the first section, "Public Policy and Privatization," lay out the topic's historical policy-related underpinnings. A slow decrease in public support for public universities starting in the 1980s, both in an absolute sense and relative to increasing costs, began to accelerate in the early 1990s. The corresponding rapid rise in tuition costs for students and their families, intended to replace declining public support, is not adequately offset by grants, scholarships, and, to some extent, tax credits; the last primarily benefit more-affluent families. These conditions result in increasing reliance on federally subsidized loans, accompanied in many states by a shift from a longstanding policy of need-based grants and scholarships to merit-based entitlements. The serious negative debt-related implications for low-income students noted above are repeatedly documented throughout the book.

The policy implications of both private and federal funding of higher education comprise the theme of the next chapter, which follows how financial aid practices have shifted from need-based awards in the middle of the previous century to more recent emphasis on student loans. Often overlooked is that most loans are provided by private lending organizations and thus represent a significant fraction of the total private support of public institutions. The section ends with an admittedly ideological, almost neo-Marxist, analysis of the global trend toward privatization of public institutions.

The opening chapter of the next section, "Generating Revenue from Alternative Sources," discusses criteria for institutions to consider when exploring alternative sources of income. A useful road map, the chapter also urges caution, especially because of concerns that public authorities may "come to believe that higher education can obtain enough new revenue to take care of itself without substantial additional societal investment." Equally important is the risk that the core institutional identities and missions can be compromised as reliance on external funds redistributes costs, academic power, and academic priorities.

Another chapter details the implications of privatization for equity and access. Exploitation of intellectual property to generate royalties is discussed in the section's third chapter, which also addresses the risks, ethics, and social responsibility of this endeavor. The fourth chapter in the section gives a fascinating capsule history of philanthropy in public institutions and argues convincingly that public universities can build their fund-raising efforts to make up for reductions in public funding, much in the manner of private institutions, and in ways that are consistent with their missions.

Indeed, many public universities have created substantial endowments and attracted large gifts, although the aggregate levels do not even begin to approach those of their private counterparts. Readers will not be surprised to learn that each of these potential sources presents far more complex implications for the academic mission of the university than might be expected or desired.

Called "Modernizing Public Universities," the third section of the book pertains to all academic institutions, public and private. The four chapters tackle incentive-based budgeting systems, in which individual academic units of the university such as divisions or schools generate and manage their own budgets; privatization of business and auxiliary functions (food service, laundry, on-campus housing, bookstores); opportunities and limitations of "enterprise" computer systems (large-scale systems that serve the entire institution); and application of computers to learning ("e-learning"), respectively. The section is an excellent handbook for university administrators—and faculty members—who need or want to know more about how these services operate in a complex university environment. Most of these approaches, which authors stress have to be viewed as investments with attendant risks, may make some of the operations more effective or efficient, but they do not necessarily result in lower overall costs. Most important, they have hardly any impact on the direct costs of student education.

Written by the editors themselves, the two chapters of the last section, "Making Sense of Change," does indeed do that. One summarizes the essential points of the earlier chapters and discusses steps that states can take to ensure that, while they expand their enrollments at lower cost to taxpayers, they do not further erode access to their public institutions by underserved populations. The final chapter brings the entire topic full circle. Cogent summaries of the policy and education implications of increased privatization are followed by specific recommendations that recognize the reality that public institutions need private support, but in ways that minimize the threat to their larger educational and societal missions.

If reservations about the book were to be identified, they would focus more on what the book doesn't do rather than what it does, because, obviously, the editors had to make choices. The book's primary thrust is on undergraduate education at doctoral institutions. It points out that support of universities' scholarly goals by grants and contracts does not materially affect the cost of undergraduate education, an observation likely to remain the case even as undergraduate participation in research grows. Grants and contracts, however, are critical to doctoral education in the natural and some social sciences, as well as in engineering.

"Privatization and Public Universities" presents some limited survey results on problematic outcomes for graduate students working on industry-supported projects. However, this is only a piece of the larger picture, which includes differences in definitions of full-time-equivalent student hours (and hence funding) between undergraduate and graduate students, the role of state-funded assistantships, and university use and funding of graduate teaching assistants for meeting their undergraduate educational mission.

Finally, at the undergraduate level, support-related issues of equity and access by underserved populations play out to a much larger degree at two-year and community colleges, as well as minority-serving institutions, than they do at large universities, yet these settings are barely discussed.

These minor points, however, do not at all detract from the value of the book, which is not only well-written but, equally important, is also well-edited to minimize stylistic and rhetorical differences that can arise when different people write different chapters. Typographical errors, which can be distracting, are refreshingly rare; the index is comprehensive and usable. The book's goal is "to go beyond mere criticism [of privatization] to place these changes in a broad, understandable context." It admirably succeeds in doing so.

Robert L. Lichter is principal of Merrimack Consultants LLC and has addressed issues of university finance as a professor, academic administrator, and foundation executive.


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