By Richard Vedder and Jonathan Leirer
The commonly cited government statistics usually show that "instruction" absorbs about 30 percent (give or take a little) of a typical university budget, and many say: where is the rest of the money going? Yet this self-reported statistic may actually overstate the actual importance of instruction in the budgets of medium to large sized universities with some research emphasis.
We took the total amount of money spent on professor salaries and divided it by the stated tuition at three rather different type schools. We calculated the average of this statistic for the eight Ivy League schools, the elite private schools that are widely acknowledged to be amongst the best in America. We did the same for the 11 public schools in the Big Ten athletic conference, a group of high quality flagship state universities. Finally, we did the same for the dozen schools belonging to the Mid-American athletic conference, a group of medium-sized and generally perceived to be medium-quality state institutions with somewhat less of a research emphasis than the Big Ten schools.
We learned a lot of fascinating things, one of which we will preview for you today. In the Ivy League, professorial costs were on average less than 20 percent of stated tuition levels. In the Big Ten, the figure was much higher, close to 70 percent, whereas the Mid-American conference schools average was somewhat below 50 percent. Moreover, these statistics were calculated including graduate and professional students in the enrollment figures. These students absorb a relatively higher portion of faculty resources than undergraduates, suggesting our little ratio may overstate faculty salaries of those actually teaching undergraduates as a percent of tuition.
Assume that universities need facilities and support personnel that cost as much as faculty costs in order to permit instruction. Call that the 100 percent overhead cost assumption. Ignore the overstatement of salaries bias mentioned in the previous paragraph. Then at the average Ivy League school stated tuition rates are well over twice as great as the actual cost of educating students. These schools make a massive profit off undergraduates that is used to subsidize other activities (and also pay themselves handsomely; counting fringe benefits, the average total compensation of a full professor at Harvard now approximates $200,000 a year). And note that, as Jim Heckman so candidly admitted on the Fox News special on college costs last week, professors spend little of their time actually teaching -- so we are counting the entire salary of professors as instructional cost, when in fact on average they spend at most half of their time doing things relating to instruction.
It is rare for professorial costs per student to reach, say, $12,000 a year even in the Ivy League. Yet, assuming a 5 percent spending rate out of endowment, schools like Harvard and Princeton earn in investment income at least five times the amount as they spend on professor salaries -- yet they also charge sky high tuition rates!!! Why do we give tax exemptions to allow people to make donations to these fabulously rich schools that use those donations primarily for purposes other than educating students, including providing huge salaries for personnel?
In the Big Ten schools, tuition may not even fully cover the average cost of educating students if we use the 100 percent overhead figure. But remember, the cost of educating undergrads is much lower than graduate and professional students and, adjusting for that, our guess is that tuition charges in the Big Ten roughly on average cover the cost of educating undergraduates. Then the question is: why do taxpayers provide subsidies for these schools, since tuition covers undergraduate instructional costs and the federal government provides them with vast amounts for graduate instruction and research?
In the Mid-America conference schools, professor salaries, even with 100 percent overhead costs, on average are slighly less than tuition. For undergraduate students, these schools may well make a modest surplus. State government subsdies do not appear to support undergraduate instruction. Again, the question is: why do taxpayers permit this to happen?
Our guess is the picture is rather different for community colleges, and maybe even for private liberal arts colleges where there are no graduate programs to subsidize from "profits" derived from undergraduate instruction. Also, the colleges self-report "instruction" costs that are typically several times larger than the professor salaries cited above, although there are exceptions (e.g., the University of Illinois). Our guess is that a lot of things are listed under instruction that do not directly impact on what goes on in the classroom. If we are right, the official statistics overstate university commitments to instruction, already pretty low to begin with.
To be sure, there are a lot of qualifications to this analysis that we are not discussing here in this already over long blog. For example, "net tuition fees" (after scholarships) are lower than stated "sticker prices." More needs to be said. Therefore,watch for more on this topic in the days, weeks, and months ahead.