Also appears in EconJournal
Have you ever wondered where do the money from your tuition go? How do the universities spend their money? Why does the cost of tuition grow 2X more than the inflation rate? Why are the US universities extremely inefficient and uneconomical? I didn’t find any other study and workable stats on university spending in the net, so I just made a small exploratory study on how universities spend money.
Organization of this essay:
Part 1 concerns endowments, Part 2 contains analysis on a private University (Harvard) and Part 3 contains analysis on a public university (UW) and Part 4 is the initial conclusion. If there is enough audience interest, I will go deeper into this problem in further posts.
I started from this chart from my earlier post and started digging where the universities spend their money in.
1. Endowments in US Universities
A lot of universities have billions in endowments that they really don’t need to go for any tuition (I think Yale is doing this partly for its undergrads). 78 universities have $1 billion+ in their reserves and 1b is a lot of money [that is 10% more than the entire money spent by Indian government in higher education per year, for instance] and Harvard alone has more money than the GDP of 100 nations. The endowment pool of top 10 universities (after the current downturn) is more than $150b combined. And by law they have to spend 5% of it every year. But, it amazes me that they collect the tuition and other than the endowment interest part they are not able to run the universities in an economical way and have to constantly jack up the tuition. Look at Harvard’s endowment growth in second chart, for instance.
2. Spending at Harvard
Let’s look at Harvard. Audited statement: http://vpf-web.harvard.edu/annualfinancial/pdfs/2007fullreport.pdf
· It spent 3.2b per year, of which 1.2b is from its investments.
· Tacked in its footnote of its financial statement is a $680m expenditure [wow… most nations in the world cannot spend 680m on their entire nation’s education program and Harvard puts that amount in footnote].
· They incur a deficit of 2m even after the endowment money.
Where did your money go?
3. How University of Washington spends its money
Tuition contributes less than a sixth of its sources and instruction forms a fourth of its expenditures.
In facts and figures.
The instruction part of the expenses has grown a whopping 14% in last 2 years, while general inflation was less than 4% in that period.
It has a pretty good endowment growth, with the current fund worth $2.2b.
I think US education system should go in for a major overhaul. It is extremely good at graduate level with unbeatable teaching and lab quality. It has huge requirements (Assistant professors, Doctors etc spend 10+ years in school) and strict quality control. But, I think such great quality has a huge cost penalty particularly when you go for lower levels. A lot of times you just need a nail and hammer, and having a $10000 driller doesn’t satisfy any more efficiently. They should shift most of their courses online, let students really think, reason and question, and use the university’s facilities when they need to. They should cut their substantial overhead (more than 2/3 of their expense) and achieve very high throughput. Universities (like automakers) spend a huge amount on benefits (500m for a mid-sized university like UW).
Header Image of Harvard – courtesy of http://www.flickr.com/photos/bunkosquad/29703357/