Higher education is a highly profitable business. That applies not only to “for-profit” colleges like the University of Phoenix, which reported a 30% operating profit margin in the first quarter of 2011, but the so-called “nonprofits.”
How can a nonprofit have a profit? Economically speaking, as Vance H. Fried with the Cato Institute argues in a new policy analysis, “Federal Higher Education Policy and the Profitable Nonprofits,” when a nonprofit’s revenue exceeds the cost of providing a service, in this case undergraduate education, it’s a profit.That profit does not show up in the financial report of your alma mater because profits are recorded as expenses. “Nonprofit schools,” he writes, “take their profits from undergraduate education … in the form of spending on some combination of research, graduate education, low-demand majors, low faculty teaching loads, excess compensation, and featherbedding.”
Fried sees two types of profit. The first consists of payments to college insiders that do not increase college outputs: excess compensation and featherbedding primarily. The second is subsidies for missions unrelated to undergraduate education, such as graduate education and research.
How, then, does one gauge the profitability of a nonprofit university? One is the “build up” method, which starts with a blank piece of paper and creates a detailed pro forma statement of operating costs for a hypothetical institution. In one exercise, creating the fictional 3,200-student College of Entrepreneurship and Leadership in Society entailed operating costs of $6,705 per pupil.
A second approach utilizes real data reported by colleges in several states. Actual costs for an undergraduate education range from $7,080 in Florida and $7,980 in Illinois to $11,040 in Ohio. If we assume costs averaging $8,000 per student, says Fried, tuition revenues alone imply a profit of $5,500 per student at undergraduate institutions. When donations and endowment income are added, profits jump to $12,800 per student. As Fried wryly notes, “That’s more than a 60 percent profit margin per student — double the margin of for-profit Phoenix.” (By point of comparison, oil giant Exxon Mobil’s profit margin was 9.6% in the most recent quarter.)
While public institutions charge lower tuition than private colleges, they also enjoy substantial state support. Here’s a question for Virginia policy makers. What is the purpose of public support? Presumably, it’s to make an undergraduate education more affordable for Virginia residents. The objective is not supporting graduate programs or even subsidizing university R&D, as desirable as those things may be.
If Fried’s analysis is correct, and if we use $8,000 as a benchmark cost of providing an undergraduate education, then undergraduate students in public Virginia universities are a ginormous profit center. According to the State Council of Higher Education in Virginia, tuition and mandatory fees in 2010-2011 for undergraduate student amounted to $8,830 at senior institutions (and considerably less in community colleges) on average. That doesn’t include state support, which covers 55% of what universities say it costs to educate an undergrad. These rough numbers suggest that undergraduate tuition and state assistance are subsidizing salaries, administrative bloat, low faculty teaching ratios, graduate education, R&D, economic development and other extraneous missions to the tune of $9,000 a year.
Maybe Fried’s assumptions aren’t quite accurate — maybe the subsidy is less than $9,000 a year. Maybe it’s mission critical for Virginia universities to support national-caliber graduate schools and research programs. Maybe the state would support those endeavors if called upon to do so. The problem is a lack of transparency. Citizens and policy makers don’t know how much it costs to educate an undergraduate student, and we don’t know how much money is being captured for the benefit of other campus interests.
It’s time we find out. It’s time we find out how badly the sheeple are getting sheared.
