Universities as Engines of Income Redistribution

The College of William & Mary: setting the standard for using tuition policy as an engine of income redistribution

An article in the Wall Street Journal today explains how middle-class American families are finding themselves swamped with debt. Consumer debt (not including mortgages) has climbed to $4 trillion, higher than it has ever been, even counting for inflation. The major sources of that debt: credit cards, car loans and… student loans, which now exceed $1.5 trillion.

Against this backdrop, the timing couldn’t be better for just-published book by James V. Koch, “The Impoverishment of the American College Student.” Steve Haner has written a broad overview of the book, but the volume contains such a wealth of research, much of which applies to Virginia higher-ed policy, that I feel compelled to go into greater detail.

The starting point of Koch’s work is that the cost of college attendance has been escalating far more rapidly than median American incomes. He acknowledges that there are many reasons why: administrative, bloat, mission creep, and lagging support from state governments, among others. In Chapter Five he examines a reason that gets little attention outside academic scholarship: how universities use tuition-setting as an engine of wealth redistribution from wealthy families to poorer families, and how they take a rake-off to fund their own priorities.

Koch, a former president of Old Dominion University, has first-hand experience with tuition setting, although with only one institution. He supplements that background with in-depth analysis of the nation’s Top 28 public universities (which includes the University of Virginia, the College of William & Mary, and Virginia Tech) and a cohort of middling institutions referred to as the Typical 49.

University budgets conceal all manner of subsidies and cross-subsidies that are ill understood and are rarely made explicit. One subsidy is the high tuition charged out-of-state students that helps cover the cost of lower tuition for in-state students. Another is the high tuition paid by affluent families that helps cover the discounted prices charged lower-income families.

Brand-name public universities such as the University of Michigan and the University of Virginia have enough cache in the marketplace that they can charge a premium tuition, and affluent families, whether in-state or out-of-state, are willing to pay the full freight. Under the high tuition/high aid tuition model, brand-name universities provide generous financial aid packages to students from lower-income families. Ironically, it costs students from lower-income households less to attend a UM, a UVa, or a W&M than it does to attend a middling institution or even an HBCU (Historically Black College and University) that cannot command the same tuition premium and, therefore, cannot afford the steep discounts for lower-income students.

Critical variables in tuition-setting policy are the percentage of out-of-state students admitted into the student body and the percentage of lower-income students admitted. W&M provides the steepest tuition discounts of any public university covered in Koch’s analysis — but it also admits among the fewest low-income students. Likewise, institutions that admit more out-of-state students — often creating political blowback in the process from state legislators responding to complaints whose in-state children are denied admittance — generate more revenue to pay for financial aid.

The evidence suggests that universities skim the take from affluent students for purposes other than providing financial aid. Koch uses UVa as an example:

Substantial portions of these semi-discretionary dollars are used for purposes other than reducing the tuition and fees paid by resident students. At the University of Virginia (UVA), for example, I estimate that UVA’s nonresident tuition premium generated more than $141.3 million in 2016-17. Despite this revenue, the National Center for Education Statistics College Navigator reports that UVA’s undergraduate tuition for Virginia residents in the same year was a lofty $16,412 (the fourth highest among flagship institutions in the country). Further, UVA increased its published tuition and fee charges for Virginia residents by 8.0 percent, 11.3 percent, and 4.3 percent over the previous three years, and its average net price increased by 12.4 percent over the span of the two previous years for which College Navigator data are available.

It seems very likely that some considerable portion of UVA’s additional revenues from nonresident students (and those at many other Top 29 institutions) are being used for purposes such as maintaining its physical plant, paying its administrators, subsidizing faculty salaries and research, and the like.

A consequence of the high tuition/high aid model, says Koch, is that the student bodies of elite public universities are dominated increasingly by students from well-to-do families. He doesn’t say this explicitly, but I will: The high tuition/high aid model squeezes out the middle class. Tuition-setting policy at elite institutions favor elites and the poor over middle-class families.

But he does say this: “Most flagship state universities have used their distinctive roles and positions to implement tuition and fee structures that generate net revenues far greater than what they utilize to meet the financial needs of their lower-income students. Similar pricing behavior is present at many Typical 49 institutions, though to a reduced degree.”

More to come in future posts on Koch’s analysis.

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20 responses to “Universities as Engines of Income Redistribution

  1. Tuition and cars. Virginians have no right to a college education. They also have no right to own a car. However, the state owns UVA and the DMV to facilitate the option of college attendance and car ownership in Virginia. In the case of both attendance at UVA and ownership of a car the state assesses a fee / tax to help pay for the optional service provided. So far, so good?

    The administration and unelected Board of Vistors at UVA have decided to over-charge certain students in order to undercharge other students. They do this out of a sense of fairness since they somehow believe that students attending UVA will not be able to pay off loans after they graduate – even though those students are going to one of the best universities in the country.

    What would happen if Richard Holcomb, the unelected Commissioner of the Virginia DMV, decided to practice a little social justice with automobile licensing fees? People registering expensive cars would pay the statutory fee plus and extra fee to be used to subsidize the fees of people registering inexpensive fees. Remember, none of this would be passed by the legislature and approved or vetoed by the governor. It would just be a personal social justice decision by the people that run the DMV and VDOT.

    Would that be considered OK?

    Where’s the difference?

    The Constitution of Virginia contains the following sentence:

    “All taxes shall be levied and collected under general laws and shall be uniform upon the same class of subjects within the territorial limits of the authority levying the tax, except that the General Assembly may provide for differences in the rate of taxation to be imposed upon real estate by a city or town within all or parts of areas added to its territorial limits, or by a new unit of general government, within its area, created by or encompassing two or more, or parts of two or more, existing units of general government.”

    The UVA tuition swindle is a tax. It is a tax levied by the unelected representatives of UVA and their equally unelected Board of Visitors. It is not coded in general law (that I can see) and is not uniform upon the same class of subjects.

    I have less of an issue with a university tuition based tax (and resultant wealth transfer) than I have with the manner in which it is implemented. If the General Assembly wants to tax tuitions to facilitate wealth transfer to soon-to-be-wealthy UVA graduates then it should proffer such legislation and vote on it.

    • There are only two categories of tuition–in-state and out-of-state. These are not based on wealth, but on the residency of the student. Out-of-state students are charged higher tuition because their parents did not pay state taxes that help finance the Virginia college or university.

      The General Assembly has decided that it would be a public benefit to provide financial assistance to the students (both in-state and out-of-state) whose parents have incomes that would otherwise render higher education unaffordable. Each higher ed institution is provided funding for student financial assistance. Also, many higher ed institutions have endowments (private money) which they can also use to provide financial assistance.

      I don’t see how this is a tax or a swindle. Boards of Visitors are authorized by law to set tuition and to provide financial aid. I really don’t think you would want the General Assembly to get into the business of setting tuition and financial aid policies for each individual institution of higher education.

      It is a fair question as to whether the tuition for in-state students may be set higher than is needed to meet the operating costs of the institution, with that “additional” charge being used to provide financial assistance. Should those state taxpayers, some of whose tax money is going for financial assistance, also have to subsidize, through their tuition payments, the educational costs of other students from lower income families?

      • “It is a fair question as to whether the tuition for in-state students may be set higher than is needed to meet the operating costs of the institution, with that “additional” charge being used to provide financial assistance.”

        That is the swindle, that is the tax.

        “Boards of Visitors are authorized by law to set tuition and to provide financial aid.”

        And the Commissioner of the DMV is authorized to set and collect fees for vehicle registrations, license renewals, etc. Should the Commissioner of the DMV be able to implement his or her own brand of social justice and wealth redistribution based on the unelected commissioner’s sense of what’s fair?

        Taxes should be assessed by elected officials and only by elected officials.

        Finally, a poor young adult admitted to UVA is not likely to be a poor adult after he or she graduates. Why wouldn’t the government loan money to these students rather than just hand it out? Should the son of an auto mechanic subsidize the daughter of an inner city single mother when they are both going to graduate with chemical engineering degrees?

        • The DMV Commissioner is not authorized to set fees for vehicle registrations, licenses to drive, etc. Those fees are set out explicitly in the Code of Virginia; for example Sec. 46.2-332 for driver’s license; Sec. 46.2-627, vehicle title; and Sec. 46.2-694, vehicle registration. The Code also sets out specifically how the revenue is to be distributed. The DMV Commissioner is told by law (the General Assembly) what fees to collect and is authorized to spend that portion allotted to DMV.

        • The Circuit court case of Fairfax Water v. City of Falls Church concluded that any charge for a service above its costs constituted a tax, which requires authorization from the Commonwealth. The state supreme court refused to review the lower court’s decision.

          The case of Marshall v. NVTA held that an unelected body cannot impose a tax.

          Put the two together and we have a very good argument that unelected individuals raising tuition above costs to pay for the education of other students have acted unconstitutionally.

          • Reed Fawell 3rd

            Yes, university administrators who run public and private (to extent they take public funds) universities are running wild in America. These rogue administrators engage in activities that far exceed their mandates and charters while they also ignore their duties under those mandates and charters. In so doing, these administrators do great and long term harm to students, society and America’s political system.

            We need to reign in, and break up, these higher education cartels, their arrogance and special privilege, and so put an end to their chronic abuse of the nation and its students.

            For example, we need to break apart their corrupt admissions practices. We need to sever their research elements from their teaching elements. We need to demand that professors who feed off tuition funds actually teach students, and truthfully grade the performance of students, as their primary duty. We need to demand that these teaching universities exit their many unrelated businesses that interfere with the nations political system, and erase the nation’s history, its heritage and culture, and very foundations.

          • Fascinating argument.

    • Dick, I am confused. You say, “I don’t see how this is a tax or a swindle.” But then your last paragraph seems to say it is both, by another name: “additional charge.” What’s the difference?

      • Good question. This is one reason I like this blog–we challenge each other.

        A tax is a charge that citizens are required to pay as part of a certain category–resident with income, owner of real property, etc. Tuition is a charge for a service that a resident chooses to use.

        Swindle means “to use deception to deprive someone of his money”. I think it is a stretch to say that using part of one’s tuition payment to provide a scholarship is a swindle. One could make the argument that one of the benefits of going to college is to be exposed to people and perspectives from many walks of life, including those from an income level lower than your own. Part of your tuition payment is the cost of making it possible to provide this benefit. Higher ed packs a lot into its tuition and fees. Few people take the time and trouble to find out what it all goes for.

        • “Few people take the time and trouble to find out what it all goes for.”

          Because the financial reporting is extremely opaque. As Jim writes, “University budgets conceal all manner of subsidies and cross-subsidies that are ill understood and are rarely made explicit.”

          Why should public universities be able to hide what they are doing?

          • Dick Hall-Sizemore

            They should not be able to. The problem is that no one (General Assembly, State Council on Higher Education, etc.) makes them give a full, understandable accounting.

        • I would argue that taxation occurs at the statewide level; that is approved by GA. Tuition and its spending is NOT approved by GA, but rather by Boards of Visitors which have no authority nor particular expertise for wealth redistribution. It is not within their sworn oaths to bear this responsibility. And in practicality, Boards simply pass the budgets presented to them by administration. As I see it, the flaw is that the inmates fund the asylum.

  2. “The administration and unelected Board of Visitors at UVA have decided to over-charge certain students in order to undercharge other students. ” Agreed, but sadly it is worse than that, with the excess revenue also paying for lavish salaries and benefits, overpopulated administrative suites sending memos and holding meetings with each other, and a dozen other ways to waste money that do not prepare young people for careers or for deeper educations.

    • When I heard that Theresa Sullivan took a private plane from Charlottesville to a meeting in Manassas I knew the depth of the BS going on at UVA.

      • I did not hear of this. Granted, I was not paying too much attention, then. It seems it would depend on whose plane it was and who was paying the freight.

      • Given that the Manassas airport is used primarily (exclusively?) for civil aviation, it makes sense to me that someone owning a plane stored in Charlottesville and attending the same meeting offered to fly TS there. Now of course you don’t say this was a free ride, but do we know that it wasn’t?

      • You might be interested to know that UVA owns the plane. Used to have 2, down to one since about 2009. VT has 2, I believe.

  3. So the real question here is what would folks advocate as a remedy? Would you have government step in and “fix” it?

    Otherwise – this sounds like a never-ending complaint without any real ideas about how to fix it.

  4. None of these findings in Jim’s post are new. They’ve been revealed in great detail here on Bacon’s Rebellion, and also in numerous books, reports and articles published over the years.

    What is significant is that it took so long for a single university president in Virginia to admit to all the unnecessary damage his university was doing to its students. Why has only one president told the truth to date? Why do all the others presidents hide this ongoing damage their universities to doing to their students, cloak it in silence?

    Another words, must university presidents have to retire before they tell the truth about how their university is doing so much long term damage to the students they claim to serve?

  5. None of these findings in Jim’s post are new. They have been revealed in great detail here on Bacon’s Rebellion, and also in numerous books, reports and articles, published over the years.

    What is significant is that it took so long for a single university president in Virginia to admit to all the unnecessary damage his university was doing to its students. Why has only one president told the truth to date? Why do all the other presidents hide this ongoing damage their universities do year after year to their students, cloak it in silence?

    Must university presidents have to retire before they will tell the truth about how their university is doing so much long term damage to the students they claim to serve?

    How can we get sitting presidents of Virginia’s universities to tell the truth of what is going on? Only then can we fix it.

    In short, how can we all be responsible when no one in position of responsibility will take responsibility for the problem?

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