The economics of higher education are quite complicated. College leaders struggle with these issues every day, including by trying to make them understandable to students and families. "Are you the next contestant on 'The Price is Right?' " (May 13) touched on these important and complicated issues but in ways that were ultimately misleading.
The article focused on private, nonprofit schools in Minnesota. As an economist by training and president of St. John's University in Collegeville, an institution typical of hundreds of small, private, liberal arts colleges around the country, I hope to bring some clarity to this confusing topic.
At St. John's, we are selective, but not elite. Our students generally come from the upper quarter academically of their high school classes. We have 1,700 students and a very typical campus with dormitories, classrooms, laboratories, athletic facilities, administrative buildings and, atypically, a world-famous church set amid the lakes, forests and prairie of central Minnesota.
We are, alas, not particularly rich; nor are we especially poor. Our endowment is in the middle of the pack among small, private, liberal arts schools.
At one level, our economic story is very simple. Our revenues come from tuition, alumni gifts and endowment income. Our economic costs are, foremost, compensation for faculty and staff; annual operating costs such as energy, books, journals, copying, etc.; and capital expenses including the costs associated with buildings, land, equipment and technology.
Comparing revenues and costs results in an important, possibly surprising, and little understood fact about our economic model. If every single one of our Johnnies paid our full tuition of $43,000 a year, which almost none do, we would still not have enough revenue to cover the full cost of providing our students the exceptional education they receive.
The economic reality is that every one of our students receives a subsidy, regardless of what they pay. That subsidy comes from St. John's alumni and friends, past and present. It does not, as some believe, come from higher-paying classmates.
At St. John's, as is true of virtually every higher education institution I know, there is no "cross subsidization" between students. Every additional dollar necessary to cover the true cost of the students' education beyond the sticker price comes from nonstudents: either from many decades of investment in our campus facilities and endowment or annual fund gifts in the current year or through future fundraising that will cover wear and tear on facilities used by current students.
This fact may be hard to believe, but the compensation of highly educated faculty and staff and the capital embodied in extremely expensive and high-tech buildings that makes the American model of higher education so exceptional also explains the high per-student cost of America's best-in-the-world education.
The second part of the economic model for schools like St. John's is much harder to navigate and understand. The reality is, of course, that most of our students cannot pay our full tuition without financial aid. Then the question becomes how to use our limited financial-aid resources and discounts to further subsidize the tuition costs for our students.
There are two basic choices. If the school is what might be called an elite institution, enjoying excess demand for the limited number of seats in its entering class, it is very likely to provide only need-based financial aid. Families submit financial-aid forms and then, using federal government formulas, an expected family contribution is calculated. Those students whose families have the economic resources to pay the full sticker price are asked to do so and those families who demonstrate financial need in order to cover tuition receive financial-aid packages commensurate with their need. These elite schools are very limited in number but include the usual suspects such as Harvard and Stanford.
The second financial aid model is the one St. John's and the vast majority of private schools use. When we package financial aid for each of our students, we consider both financial need, as described above, and student merit, which is based on the applicant's academic record.
Why would we choose to use some of our precious financial-aid dollars and limited discounts to reward students from well-off families who could pay our sticker price? Because, for nonelite institutions like St. John's, it is valuable to all of our students to maintain a certain academic standard. By attracting a stronger overall academic class through the use of merit aid, the educational experience for all of our students is enhanced.
This is what economists refer to as a positive externality. Stronger students will raise the overall academic level for their peers and improve the performance of the whole cohort.
It is certainly true that every dollar we spend on merit aid is a dollar we cannot spend on need-based aid, so there is most definitely a trade-off. A further complexity is that many students get both kinds of aid.
Because of this trade-off, one can debate the equity of a financial-aid system that includes both need-based and merit-based aid. Yet for nonelite schools — like the vast majority of Minnesota private colleges — that don't have multiple equally qualified applicants vying for every spot in an entering class, it is certainly a defensible choice to offer somewhat less need-based financial aid in exchange for the benefits to all students of attracting a stronger overall academic class.
This difficult balancing act, however, does not result in a subsidy from financially needy students to academically strong students — neither of those students pays the full cost of their education, as described above, but the amount of subsidy each individual student receives does depend on how a school chooses to allocate need-based and merit-based financial-aid dollars, both of which discount the cost of tuition.
It would be great if every school had the financial resources and applicant pool that elite schools have, but that, of course, is why they are elite.
At St. John's, as a selective but not elite school, we work hard every day to provide an exceptional and affordable education for students from a full range of economic circumstances, subject to our resource constraints. We also strive to honestly educate students and families about the complex economics of higher education that are understandably confusing.
I can also say with complete confidence from having worked with and competed with my Minnesota private college peers for years, every Minnesota private, nonprofit college does the same.
Michael Hemesath is president of St. John's University in Collegeville, Minn.
