Financial Aspects/Budget aspects Research Paper Starter

Financial Aspects/Budget aspects

(Research Starters)

This article presents a general overview of higher education financing in the United States. Nationally there has been a growing debate over higher education financing. Specifically, some are concerned that college costs are increasing to the extent that affordability, and in turn, accessibility, of a college or university education is threatened. As a result, there have been calls to increase efficiency and productivity in higher education. This article reviews both sides of the debate on college and university financing and also provides the reader with technical knowledge about higher education financing and budgeting to frame the discussion.

Keywords Accessibility; Affordability; Budgeting; College Costs; Expenses; Financing; Grants; Higher Education; Productivity; Tuition

Higher Education: Financial Aspects / Budget Processes


Importance of the Financing of Higher Education

There is growing concern nationally about affordability, and related, accessibility in higher education (MacDowell, 2007). Related, there is an ongoing tension regarding the financing of higher education (Johnstone, 2001). While parents, politicians, and others have often voiced concern that the costs of college are too high, administrators and faculty at many higher education institutions feel that a great deal has been done to control costs even to the point of sacrificing academic quality (e.g., via the loss of full-time faculty, program cuts, and downsizing) (Johnstone, 2001). Some have called for a new policy framework to ensure that higher education is affordable to students and their families (Finney & Kelly, 2004). According to researchers, affordability is important to ensuring a highly educated population that will be able to manage "the needs of a globally competitive economy and a democracy that faces increasing complexity on many domestic issues" (Finney & Kelly, 2004, p 6). Likewise, in talking about the origins of American higher education Rudolph (1990) clarified, "The college was not to be an institution of narrow privilege. Society required the use of all its best talents," (p. 178).

Historical Dimensions of Higher Education Financing

The early American higher education institutions, or colonial colleges, were not state universities. While they accepted state support, they considered themselves private foundations and did not surrender control over policy formation (Brubacher & Rudy, 1997). While some American colleges, such as Stanford and Wellesley, burgeoned under generous gifts from wealthy benefactors, others had to find different means of financial support and state aid was actually quite important to the survival of many of the colonial colleges (Rudolph, 1990). Favorite forms of state assistance were the permission of colleges to operate lotteries and grants of lands to the colleges from the state (Rudolph, 1990). For instance, Princeton was allowed to operate lotteries in New Jersey, Pennsylvania, and Connecticut (Rudolph, 1990). All of the colonial colleges in New England were also supported by lottery funds (Rudolph, 1990). Meanwhile, colleges like Dartmouth received grants of lands (Rudolph, 1990). Several other colleges also were recipients of state gifts of funds and might not have survived without them. In fact, Harvard, Yale, and Columbia could not have survived the colonial period without the support they received from the state (Rudolph, 1990). Another form of state support of the colonial colleges was tax exemption (Brubacher & Rudy, 1997). Additionally, some colleges received rather unique forms of public assistance. For example, Massachusetts even granted Harvard the income from the ferry across the Charles River and, when a bridge later replaced the ferry, toll income (Brubacher & Rudy, 1997).

Regardless of the various forms of state assistance available to the colonial colleges, the colleges' need for funds was not fully satisfied by public assistance (Brubacher & Rudy, 1997). As a result, they also sought solicitations or subscriptions (Brubacher & Rudy, 1997). However, those who made pledges to the colleges, while supporting the idea behind them, were often not particularly wealthy and could not fulfill their pledges (Rudolph, 1990). Revenue from tuition fees was also a good source of funds for the colonial colleges (Brubacher & Rudy, 1997). Yet, tuition fee revenue was unpredictable as well. Sometimes tuition was not paid in currency but rather in kind with certain goods, such as grain or cotton (Brubacher & Rudy, 1997). Some students also paid in promissory notes, which Brubacher and Rudy (1997) offered essentially acted as a student loan fund long before any formal such system was in place.

The precarious revenue situation of the colonial colleges affected the colleges' management of their funds. For example, the main expense of the early colleges was faculty salaries (Brubacher & Rudy, 1997). However, likely due to the continual financial straits of the colonial colleges, faculty salaries were quite low (Brubacher & Rudy, 1997). As a result, it was hard for the colleges to recruit those capable for college teaching (Brubacher & Rudy, 1997). With the need to spend whatever income they acquired on current expenses, the colonial colleges also were not able to form much in the way of permanent endowments (Brubacher & Rudy, 1997).

As the colonial period drew to a close, several factors changed the nature of state support of the colleges toward the end of that time and in the years after the Civil War. First was the absolute increase in the number of colleges because state governments could not offer support to them all (Rudolph, 1990). A growing number of colleges also chose to align themselves with certain religious denominations and lost favor as institutions to receive public support (Rudolph, 1990). Additionally, as colleges moved to recruit students on a national rather than a state-basis they also lost public support (Rudolph, 1990). In general, states abandoned support of "private" colleges in favor of state universities and agricultural and mechanical colleges (Rudolph, 1990). Private colleges turned to their alumni as well as wealthy benefactors to support themselves (Rudolph, 1990). The period of college expansion towards the end of the 19th century also meant that a college president alone could no longer run an institution (Duryea, 2000). Yet, the move to more complex administrative structures was in part fueled by the need of higher education institutions to secure financial support from both public and private sources (Duryea, 2000).

The history of American higher education institutions and their financing can be observed in the current system today. Specifically, there are several aspects that are unique to the financing of contemporary American higher education (Johnstone, 1999). One is the vast size of the higher education system – something which also underlies its accessibility. Another unique aspect is the multitude of private institutions in the system. Finally, the reliance of institutions in the system on nongovernmental revenue (e.g., tuition, private gifts, and endowment earnings) is also a novel aspect.

Further Insights

General Management of Higher Education Finances

While the sector of for-profit higher education has received increased attention, traditional colleges and universities today operate as not-for-profit entities (Massy, 2003). Essentially, unlike for-profits, nonprofits can not distribute profits to shareholders. Rather, when surpluses accumulate they are saved and reinvested in the work of the institution (Massy, 2003).

Higher education has multiple sources of revenue and multiple outputs (Johnstone, 1999). Additionally, revenue and expenditure patterns in higher education vary substantially by the type of institution (e.g., community college or research university), institutional control (i.e., public or private) and the state in which institutions are located (Johnstone, 1999). In terms of the management of revenues and expenditures, there has been a long tradition of fund accounting in higher education institutions (Massy, 2003). In fund accounting, donor and other special purpose accounts must legally be separated out in the institution's financial statements (Massy, 2003).

Institutional Revenues, Expenditures

Revenues and expenditures at higher education institutions reflect both fixed (i.e., fixed revenues and fixed costs) and variable (i.e., variable revenues and variable costs) components (Massy, 2003). Fixed components do not vary greatly. The many types and sources of college and university revenues include the following (Walton & Bell, 2003):

• Tuition from students and families

• Appropriations, grants, and student financial aid from state and local governments

• Research and other grants from the federal government

• Donations and gifts from private benefactors

As such, revenue for higher education institutions is essentially provided by four groups of individuals: parents, students, taxpayers, and philanthropists (Johnstone, 1999). Parents take on debt or use current income and savings to pay for their children's higher education. Students themselves may also take on debt or use earnings or savings to pay for their education. Meanwhile, local, state, and federal taxpayers help to finance higher education from the taxes they pay on income, sales, property, and assets, for example. Finally, philanthropists contribute to higher education through endowments or gifts. In general, when the revenue burden is lessened on one group it must be reassigned to another group. For instance, reductions in contributions from taxpayers have tended to be replaced by higher tuition costs for students and parents. Cross subsidies are also common occurrences in colleges and universities (Massy, 2003). For instance, revenue generated from one particular academic program may be used to subsidize the costs associated with administering a different academic program.

Regarding higher education expenditures, the efficiency and productivity of higher education institutions are generally viewed in terms of the cost per full-time equivalent student (Johnstone, 1999). Cost per student varies greatly across institutions and the assumption is that such cost will be higher at research universities than undergraduate colleges because of factors like higher salaries and additional academic support costs (e.g., for libraries and lab facilities) (Johnstone, 1999). At similar types of higher education...

(The entire section is 4670 words.)