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Food for Thought as Colleges Set Tuition and Trim Expenses

When it comes to setting tuition prices, just how do policymakers decide what to charge? A new guide gives some behind-the-scenes insight about how colleges can manage costs and improve productivity.

With the cost of college rising faster than the rate of inflation and students taking on increasingly more debt, many question what's driving the ever-increasing tuition hikes. Many chief financial officers are poised to raise tuition and fees again this year as they face dwindling state education funds.

That backdrop makes this new paper released Friday,"Linking Costs and Postsecondary Degrees: Key Issues for Policymakers" published by the American Enterprise Institute's Future of American Education Project so timely. It is written by Nate Johnson, a former executive director of planning and analysis for the State University System of Florida. He advocates using data and reviewing performance to encourage higher education leaders to make thoughtful financial decisions—rather than just make across-the-board cuts or knee-jerk price hikes..

Johnson offers five "rules of the road" that policymakers should consider when calculating education costs:

1. Recognize that not all certificates and degree are equal. For instance, a doctoral engineering program does not cost the same to operate as an undergraduate marketing or certificate program. Decision makers should keep the variability in program and degree cost in mind as they seek to reduce spending and balance budgets.

2. Look to the private sector for lessons in financial management. The growth in private-sector colleges is evidence that enrollment can increase even without massive state subsidies. They often have been successful in meeting a particular demand that public institutions have been unable to address.

3. Seek economies of scale where appropriate. Small institutions are costly, and not necessarily better. Since college presidents' salaries and athletics programs are expensive, try not to have too many of them. Some institutions might be able to share facilities, administrative functions, or even merge entirely.

4. Do not confuse enrollments with degrees. Colleges that take in a lot of students and offer low-cost instruction might seem like a good deal, but if students aren't learning, or aren't finishing the courses and programs they start, it may be a false bargain.

5. Past performance may not indicate future results. The historically lowest-cost institutions may be near their maximum capacity and have made cuts for efficiency. They may not be able to graduate more students without more funding. High-cost institutions, on the other hand, may have unused capacity or be able to find new savings. As a result, they may be able to enroll and graduate more students with little or no new investment.

The paper suggests there are complex trade-offs in cost and benefits in higher education, which need to be presented with transparency. "There is not a magic formula to arrive at a cost of education that will serve every possible need. Yet with a few key concepts in mind, and access to accurate and timely information, it is possible for policymakers to make good use of cost data in setting goals, allocating resources, and asking tough questions of higher education leaders," the paper states.
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