The “Quadratic Equation” of Educational Costs

In this month’s letter, ADEA President and CEO Dr. Rick Valachovic shares the latest news on dental school application trends and other indicators confirming that the profession remains an attractive one.

It seems as though a day doesn’t pass without our hearing another story—often alarmist—about the skyrocketing cost of higher education. Even when the news is more measured, critics and supporters alike are increasingly asking hard questions about what students and taxpayers are getting in return for their tuition dollars.

While dental education has some unique strengths that should sustain it in the midst of this turmoil, our community is still part of the larger world of higher education and shares many of the same vulnerabilities. That’s why we asked Jane Wellman to speak at the 2014 ADEA Deans’ Conference last November about what is driving educational costs and shaping public perceptions of the value provided by our institutions. Jane is the Executive Director of the National Association of System Heads and Founding Director of the Delta Dental Project on Postsecondary Costs, Productivity and Accountability. A leader with experience in both government and nonprofit spheres, Jane has long immersed herself in public policy discussions surrounding postsecondary education. As expected, she was able to give us a nuanced and multi-dimensional explanation of how higher education is financed and some of the challenges we face. I am sharing that with you now.

While there appears to be consensus that the business model for higher education is broken, few critics truly understand that business model or appreciate the need to balance the four factors that make up what Jane called the “quadratic equation” for business success: value, resources, cost and processes. As a result, there is a lot of confusion and misinformation about what factors drive educational cost.

Jane argued that the public’s perception of the value of higher education is seriously “out of whack.” Until the 1980s, we associated the quality of higher education with the prestige of the institution, the money it attracted and the selectivity of its admissions. Jane called this an “input notion of quality” that conflates the business model elements of value (as perceived by consumers and investors) and resources (such as money, prestige, demand and personnel). In the 1980s and ‘90s, public opinion shifted to a notion of quality that focused on learning and outcomes. In this more practical, consumer-oriented view, value and resources were separated and a new mission emerged for colleges: to impart measurable skills.

This shift in how we measure value has coincided with a significant expansion in the portion of the U.S. population attending college and a parallel shift in how the public views the mission of this particular educational institution. Only 39% of Americans currently believe the purpose of college is to help people grow personally and intellectually. A majority of Americans now hold a more utilitarian view—college should be about getting a career and increasing earnings. While a college degree will still increase a person’s earning power in the long run, that value hasn’t increased at the same rate as tuition, and personal income is in decline. As a result, the benefit of getting a college degree relative to its cost is diminishing, and price has become a flashpoint for criticism. Many in the public are convinced that our schools are spending money on the wrong things—or at least on things that don’t tangibly contribute to the public’s new expectations regarding higher education output.

Jane took issue with this analysis, arguing that there are a variety of factors responsible for the rise in tuition prices that go well beyond the perceived spending problem that dominates public opinion. First, she directly attributed rising tuition rates to falling state appropriations to public universities even though, on their surface, some of the basic facts appear to contradict this assertion.

• Nationwide, state appropriations for higher education more than tripled between 1987 and 2011.
• Yet, when adjusted for inflation and enrollment, this tripling represented an increase of only 21%.
• The result: When looking only at state general fund appropriations, adjusted for enrollments and spending, state funding for higher education declined between 1987 and 2011 by 20%—far higher than declines in funding for any other state function.

It’s no wonder there’s confusion. As Jane pointed out, all these statements are true.

I discussed state disinvestment in higher education in the February 2012 issue of Charting Progress, pointing out the inverse relationship that exists between state and local funding and student and family spending on tuition. In 2009, state and local governments were contributing only 38% of the cost of higher education, down from a high of 60% in 1975, and families were picking up more than half of the cost.

This phenomenon also affects our community. With fewer state dollars available, more of the burden of paying for dental education has shifted to the individual, leading to rises in both tuition and student debt.

Jane also provided data on the substantial increase in demand for higher education. While K-12 education grew by 21% between 1985 and 2010, postsecondary public education grew by 60%, private education grew by 102% and graduate education grew by 85%. Not only are more students seeking out higher education, Jane explained, they are doing so in more expensive fields. Thirty years ago, the majority of students sought degrees in the lower-cost humanities or social sciences. Now students flock to degrees such as business and engineering, which cost more to deliver.

Meanwhile, as prices have gone up, the growing practice of tuition discounting has driven college revenue down. Current CFOs find this practice, in particular, unsustainable. While universities have a variety of other revenue sources such as private gifts, endowment income, or revenue from auxiliary enterprises, most of the funds from these sources are not fungible. In other words, money from the building fund cannot be used to reduce tuition, meaning higher education institutions can’t always control how they spend their own money.

In the face of these challenges, Jane explained, higher education must also manage the use of cross subsidies instead of profit to cover the cost of varied programs. Because we lack transparency in pricing in education overall, the disconnect between cost and price becomes lost on the public. The typical consumer doesn’t see the way revenues from low-cost programs subsidize higher cost programs, or the way undergraduate programs subsidize graduate programs. This is especially true now that state subsidies have all but disappeared.

When looking for a culprit to explain increased price and cost, the public often looks to faculty salaries. In reality, spending on faculty amounts to less than half of spending in higher education. In fact, with the shift from tenured and tenure-line faculty to contract or adjunct positions, such significant cuts have been made that we should have concerns about how they affect quality. Faculty, meanwhile, blame increased costs on bloated administrations. While Jane acknowledged that some institutions have overhead costs that can’t be explained, she pointed to the cost of benefits—a cost outside institutional control—as the “smoking gun,” if indeed one exists.

Finally, Jane believes that the fourth element in her equation—processes for conducting business in higher education—is failing us. Jane asserted that traditions of shared governance, boards, accreditation, licensure and a budget-making process that cycles from year-to-year are not suited to resolving the complex challenges facing higher education. Among the evidence she cited: the fact that even the Association of Governing Boards acknowledges the need to address governance problems.

Despite this bleak outlook, Jane ended on a positive note. She believes we can find solutions to these problems if we remember the four components of our business model: value, resources, cost and process. Approaching it this way, she says, is “like solving a quadratic equation.” She doesn’t advocate for simply persuading the public that things are okay when clearly they are not. Rather, she urged us to address the accuracy of public perceptions while developing better processes, gathering more data, improving governance, examining cost structures and, of course, never giving up on revenue.

As promised at the outset of her talk, Jane’s presentation did a great deal to arm us with the concepts, language and data we will need to lead a more constructive conversation about our community’s financial future. You can find additional detail about her various points here.

We are fortunate in dental education that demand for our programs and our graduates’ earnings remain strong. Nevertheless, these strengths must be measured against a continuing rise in dental student debt and our relentless battle to ensure that economically disadvantaged students are not discouraged from entering our professions. Last year, ADEA conducted a survey of dental school deans’ perceptions of cost and borrowing, the results of which will appear later this year in the Journal of Dental Education. It revealed that our institutional members are taking an impressive range of measures to keep costs down and lower student borrowing.

One underappreciated cost driver in our community is the need to build and maintain clinical facilities in which to train our students. The pace of technological change in recent decades has only added to the costs associated with this enterprise. Next month, I will write about emerging practices that are helping schools maximize clinic revenues to improve this portion of the economic picture.