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Apr 10, 2012

Effective Financial Strategy for Higher Ed: Cross-Subsidization

While recently reading the Chronicle of Higher Education, I came across an interesting research initiative. It focused on an improved understanding of what is driving the increase in higher education costs. This research initiative, called the Delta Cost Project, was founded by Jane Wellman, a provocative advocate for change. The article presented the following excerpt:

With sophisticated analyses and an often-sardonic delivery, Ms. Wellman has been a pull-no-punches critic of fiscal policies that starve the institutions educating the biggest proportion of students – “public universities are getting screwed, and the community colleges in particular are getting screwed,” she says.

The Delta Cost Project has organized its data on operating costs and revenues into aggregate measures of costs per student and costs per degree/certificate produced. Additionally, it has organized this information into Carnegie classifications – separating public and private nonprofit institutions.*

The most basic measure of college expenses is Education and Related (E&R) costs. As a quick reference, below is a break down of what contributes to E&R costs:

All spending for instruction/student services

+ a portion of spending on academic/institutional support

+ a portion of spending for operations/maintenance of buildings

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E&R costs

Sometimes called a “full cost of education” measure, it includes spending from all revenue sources, for all students (including undergraduates, graduates, etc.) and all courses of instruction across types of disciplines. Thus, E&R spending represents average institutional spending across these sectors. For any institution, there can be considerable variations in costs within this average. On average, lower spending correlates with the undergraduates and there is a considerable variation by discipline.**

This short report brings to light what those of us who have worked in higher education already know: higher ed is the perfect example of nonprofit cross-subsidization across activities. The key question for higher education is whether this movement of money from one area to another is consistent with the school’s perception of its priorities or if it is merely a response to the relative power relationships in the university. Here is the report’s lucid description of the typical pattern of cross-subsidization:

Cross-subsidization is endemic in higher education. For instance, revenues generated from undergraduate students who enroll in low-cost disciplines such as humanities and social sciences, help pay for high-cost disciplines – fine arts, agriculture, law, and engineering, for example. Similarly, lower division classes are less expensive than upper division classes (largely because lower division classes are larger). Since lower division students typically pay the same tuitions and fees as upper division students, the “excess” revenue from their tuitions helps underwrite the higher costs of upper division education. In most institutions, graduate education – with the exception of professional schools – is subsidized in part by revenues generated at the undergraduate level.

Cross-subsidization is indeed an effective financial tactic for higher ed institutions. However, it does require effective planning and purposeful integration with institution priorities. Best practices suggest pairing your institution with an experienced advisor. This will guarantee that your strategy and implementation are optimized, ensuring the sustainability of your organization.

*You can visit here for an overview of the data.

*See the issue brief, Who Pays for Higher Education? Changing Patterns in Cost, Price and Subsidies, for more detail on these and other measures.