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Running Head: GIVE ME YOUR MONEY

Finance Final: Give Me Your Money


Tyler Bauer
University at Buffalo

Finance Final: Give Me Your Money

GIVE ME YOUR MONEY

The world of higher education is complex. Institutions have been of popular debate in the
past couple years due to the increase of tuition during the times of the recession. How an
individual views higher education greatly effects the changes of tuition (Archibald & Feldman,
2011). Institutions vary in multiple ways such as public and private institutions. Public
institutions aim to educate citizens, are owned by taxpayers and the state, and receive funding
from taxes. Private institutions are owned by the board of trustees and receive funding from
tuition. This is why it is common that private institutions have higher tuition rates than public
institutions. In this paper, I will discuss why students should attend higher education. Second, I
discuss the financial aspects of cost and paying for higher education. Lastly, I propose some
suggestions for future of higher education.
Why Attend
The decision to attend a higher education institution mostly relies on the student.
Recently, the meaning of attending college has changed (Baum, Kurose & McPherson, 2013).
Primarily, the term college has been used to describe a four-year postsecondary education. Now
the term refers to any school (public or private, for-profit or non-profit, academic or
occupational) that provides a certification or a degree (Baum, Kurose & McPherson, 2013). With
the rising increase of cost in higher education, students are beginning to believe that investments
in higher education would not pay off. The increase of tuition makes students believe that college
is not as much as a return on investment as the system has in the past (Baum, Kurose &
McPherson, 2013). Although students do not believe that higher education pays off financially,
individuals with a four year degree do see pay offs in a longer time such as decades in
comparison to years (Kitroeff, 2015). Students paying for higher education might not see the
financial impact that education has on their careers in the future.

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Not only does higher education pay off financial but also in aspects of economic, social
and human capital (Institute for Higher Education Policy, 1998; Becker, 1975). Federal and state
government officials, as well as the general public, have been concerned about the benefits of
higher education since after World War II (Institute for Higher Education Policy, 1998). With the
increase of tuition, even more scrutiny has been made against the benefits of higher education
(Institute for Higher Education Policy, 1998). Initially, higher education institutions were seen as
producing strong democratic citizens as a public role in society. Today, institutions are
highlighted for the private economic benefits that come with an education (Institute for Higher
Education Policy, 1998). This helps by putting an individualized stamp on the importance of
receiving an education. The benefits of attending college (economic, social and human capital)
can each be viewed as a private or public benefit.
Economic
By looking at the economic, fiscal and labor market effects on the individual and the
individuals participation in the overall economy, researchers can find a relationship between the
economic benefits of individuals attending a higher education institution in their own private
interests as well as the interests of the public (Institute for Higher Education Policy, 1998).
Private. As mentioned above, the most discussed benefit, currently, is the private
economic benefits of attending a higher education institution. Individuals who attend an
institution have higher salaries and benefits over a lifetime as well as annually in comparison to
those that do not attend an institution (Institute for Higher Education Policy, 1998). With this
increase in salaries, college educated individuals also have higher savings levels with interests in
long term financial stability, such as retirement plans (Institute for Higher Education Policy,

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1998). Consistency of employment after graduation and in relocation was also apparent in
individuals who received a college education (Institute for Higher Education Policy, 1998).
Public. The economic impact on the public from individuals who attend higher education
institutions are seen in multiple ways. Individuals pay more tax revenues for state and federal
governments. Some of those taxes pay for financial support programs for those that need
assistance financially. College educated individuals have a decreased likelihood of utilizing these
programs (Institute for Higher Education Policy, 1998). College educated individuals in society
also leads to an increase in productivity, consumption and flexibility due to the increase of
generalizable skills (Institute for Higher Education Policy, 1998).
Social
The social benefits of attending college can be measured as anything that does not apply
to the economic, fiscal or labor markets. These can be general but have an impact on the
individual or the society as a whole (Institute for Higher Education Policy, 1998).
Private. The private social benefits of attending college are seen as an improved quality
of life in terms of life expectancy, personal status and leisure activities (Institute for Higher
Education Policy, 1998). Also, college educated individuals have an improved quality of life for
their children in terms of cognitive, educational and personal development (Institute for Higher
Education Policy, 1998). Even in the consumer decision making, college educated individuals
show the capability of having more informed decisions when it comes to utilized services such as
healthcare, businesses and investments (Institute for Higher Education Policy, 1998).
Public. College educated individuals have an increase in civic duties towards their
society. Individuals are more likely to vote in elections and embrace cultural diversity (Institute
for Higher Education Policy, 1998). Reduced crime rates, increased philanthropy and community

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service, and the ability to adapt to and use technology are also public social benefits of attending
college (Institute for Higher Education Policy, 1998).
Human Capital
Knowledge, skills and characteristics are qualities that individuals have that can impact
productivity in society as well as individual (Becker, 1975). These qualities are part of the capital
that an individual has towards society or as an individual. Institutions do not have complete
control over human capital due to many extraneous variables such as ability, non-schooling
investments and training (Acemoglu, n.d). By looking at theories of human capital, one can
assume the priorities that an institution would have on the private and public benefits on the
individual and society.
Private. The Becker view of human capital states that a company should pay for specific
training for a specific task which makes the individual better at that task only making it
unidimensional (Acemoglu, n.d). Similar to for-profit and occupational institutions, the
individual is training for mastery of a certain occupation. The skills will only benefit the
individual and the group that the individual works for.
Public. The Gardener view sees human capital as multidimensional with individuals have
different strengths in different areas (Acemoglu, n.d). Institutions that develop individuals in
multiple areas will have benefit society but creating more educated and skills citizens. Public,
four year institutions have general curriculums to develop an individual holistically. Human
capital will benefit the society.
The benefits of attending higher education can be seen as both a private and public good
(Baum & McPherson, 2011). Since the creation of higher education, the development of a
student as an active citizen has been a prominent focus through their education (Institute for

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Higher Education Policy, 1998). Active and educated citizens will have a positive impact on
society. The more people that attend institutions, the better society will become. Therefore,
higher education officials should strive to enroll as many individuals as possible. Due by all the
public and private benefits, college is an important and useful experience that individuals should
utilize.
Financial Inquiry
With tuition of higher education increasing, the benefits of college prompt the debate of
who should pay for higher education. The private benefit of attending college shows that college
should be paid for by the individual students. The public benefits of attending college show that
the federal and state governments should focus on subsidizing tuition for students. First, I will
discuss basic economic principles for higher education. Second, I will discuss the increasing
costs of higher education. Finally, I will discuss the funding opportunities of the federal and state
governments.
Fundamental Economics Terms
With the recent recession and media exposure of higher education institutions, the price
of higher education has been a trending topic. Unfortunately, some terms have been misused in
the media to describe the financial aspects of higher education. In economics, the overall
measure of the nations output is called the Gross Domestic Product or GDP (College Board,
2014). When looking at the GDP and comparing the increase of prices of the average product,
the Consumer Price Index or CPI of the market can be assessed. The measure of the increase is
also called inflation (College Board, 2014). Prices of products can increase or decrease each year
but the majority of the time items increase each year.

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Because of inflation, the prices of the various items and services appear to increase in
order to receive more money. The real price is the actual amount of increase a product charges
after adjusting for inflation (College Board, 2014). Within the higher education sector, the terms
cost and price has very different meanings. Cost is the amount of money that the university needs
to keep the services running. Price is the money that institutions charge students to attend a
university. The costs are always higher than the price for higher education institutions which are
a non-profit industry (College Board, 2014). The increase of costs on a college campus can lead
to an increase in price to attend an institution. When the media mentions college tuition, the
figures that the media uses is a price that does not accurately reflect what students pay for
college. The number that the media uses is known as the sticker price (College Board, 2014). The
media falls to mention the grants, scholarships and aid that students receive to help pay for
tuition.
Rising Cost of Higher Education
Higher education institutions have been increasing in cost for the past decades. While the
cost can be seen as normal, the public sees in the increase in cost as a measure of greed of higher
education administrators (Johnstone, 2001). In reality, many factors go into the rising of costs to
higher education. With institutions constantly striving to create better academic opportunities for
students, the increase of cost would seem obvious in response to constantly trying to better the
institution. By analyzing cost, one can make claims about the different ways that institutions
spend money services. Four ways to analyze cost are in the production cost, tuition, total expense
costs and net or discounted costs (Johnstone, 2001).
The production cost of an institution is the cost that it requires for the students to learn
from instructors. Some of the variables that are in production cost are the average salaries and

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benefits for faculty, faculty to student ratios for better learning, course loads and the amount of
full-time or adjunct faculty that the institution permits (Johnstone, 2001). If an institution hires
more adjunct faculty, the cost would decline but the potential for research opportunities as well
as distinguished professors decreases which can cause a decrease in learning for students.
Production costs also lie in the cost of amenities for students, financial assistance programs and
research (Johnstone, 2001). The second cost of an institution lies in its tuition. The tuition of an
institution typically gets the most attention. Annually, the sticker price for both public and private
institutions increases. This increase, after adjusting for the real cost, is a reflection of the
inflation that occurs nationwide (Johnstone, 2001). The third construct is the total expenses. The
total expenses encompass all parent and student expenses such as tuition, lodging, food,
transportation, books and other fees. These are not under the control of the institution (Johnstone,
2001). These are expenses that are typical for a young adult living whether in school or not. This
is the sticker price that parents and students see when applying for college which might give
college cost anxiety (Johnstone, 2001). The total expenses are typically less at a private
institution over a public institution (Johnstone, 2001). The fourth and final construct is the real
impact that college has on the cost for higher education, net expenses. This is the total amount
that parents and students pay for college (Johnstone, 2001). Financial aid and assistance
discounts the actual price that individuals pay for college. Financial assistance makes higher
education more accessible but the issue of debt for college students raises the issues of
affordability (Johnstone, 2001).
When it comes to the increase of costs in higher education, two different sources can be
highlights. The first is the unit costs of the institution. Due to the increase of general CPI and the
products that are unique to higher education, the increase of cost is directly related to the costs to

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keep an institution functioning (Archibald & Feldman, 2008). The other source is in revenue.
The revenue that an institution receives from the state and federal government has been
decreasing over time (Archibald & Feldman, 2008). Even if tuition for an institution is
increasing, the revenue does not mean that it is increasing. The institution might be trying to
compensate for the loss of revenue from austerity. Two theories, perpetuating from the two
different sources, give insight into the reason behind the rising cost of higher education: the cost
disease theory and revenue theory of costs (Archibald & Feldman, 2008).
Cost Disease Theory. For this theory, higher education is seen as similar to other service
industries that produce goods. If a company progresses which leads to an increase in labor
productivity, the cost would be reduced due to creation of more product. In turn, the increase of
productivity leads to more product and gains. The company invests more into labor by increasing
wages. Due to this increase of employee wages in the market, competition begins between the
wages of one company to the other. If workers in another company notice a higher wages exist,
the workers are more inclined to work for the company that offers a higher wage. Because of the
rising of wages from one company by increased productivity, other companies need to stay
competitive by increasing their own wages even when the productivity has not increased. Thus
the companies have an issue with costs due to the increase of wages and no change of
productivity which would lower costs. The quality of services does not accurately reflect the cost
of the services to employers which causes a deterioration of quality (Archibald & Feldman,
2008).
In relation to higher education, the cost disease theory can be attributed to class size. At
one institution, cost can be reduced by a professor teaching more classes than the typical faculty
member. This professor increases their productivity to match the amount of research and

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teaching previously accomplished. Due to the success of this institution to cut cost, another
institution increases the amount of classes a professor teaches. Unlike the previous professor, this
professor does not increase work productivity. The students do not learn the material as well as
they would have before and the professor does not produce as much research as they would have
if they have not taught more classes. The overall quality of the research and teaching has
decreased due to the decreasing of cost.
Revenue Theory of Cost. This theory counteracts the Cost Disease Theory by focusing
more on the revenue that an institution receives rather than the cost (Archibald & Feldman,
2008). The theory sees institutions as separate from the different from service industries. The
institutions have a goal of educational excellence, prestige and influence (Archibald & Feldman,
2008). Due to these goals, the amount of money that an institution spends on these endeavors is
limitless. The institution, in turn, raises money through philanthropy, research and aids to further
enhance the goals of the institution. All the money that the institution raises is spent on fulfilling
those goals. Because institutions can constantly strive to become better, the institution continues
this cycle (Archibald & Feldman, 2008). One of the major motivators for this theory was looking
at the different cost-per student averages throughout the United States. Each institution had
different rates. Since all institutions are striving for the same goals, the revenues will raise the
cost of higher education (Archibald & Feldman, 2008).
Both theories have attributes that can describe the increase of cost for higher education.
Cost disease theory holds the most weight in terms of representing the increase of costs but
higher education is different from all industries. Higher educations outputs are held to a higher
standard because the institutions provide the inputs for industries (Archibald & Feldman, 2008).
Other theorists attribute the increase of cost to the increase of federal grants, such as Pell Grants,

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to students (Wolfram, 2005). With the increase of federal grants, institutions understand that the
increase of tuition will not deter students from applying as much as if the students had not
received aid. Even the state can decrease the appropriations that are given to the institutions. The
state governments can choose to not give as much revenue in response to the federal government
giving revenue in terms of grants Wolfram, 2005). The theory holds true for out-of-state and
private institutions but not for in-state tuition (Wolfram, 2005).
With the rising costs of higher education, institutions need to find ways of cutting costs or
increasing revenue. The most prominent way has been increasing tuition. With the increase of
tuition, affordability is an issue with students and families regardless of family income. In the
past, state appropriations have been a source of receiving revenue. Unfortunately, those resources
will never return to their previous states due to the competing demands of other industries such
as the K-12 and healthcare system. Another way institutions can compact the increase of cost is
by using cost containment. This requires productivity improvements without decreasing quality
which is tough to complete. With the tuition of higher education increasing, the ways that
students pay for college need to become more abundant or clearer.
Paying for Higher Education
The increasing costs of higher education play an important part in the rising tuition to
attend colleges (Archibald & Feldman, 2011). When the first higher education institutions were
created, subsidies were an important offset to cost (Archibald & Feldman, 2011). Subsidies come
in many forms such as endowments, gifts, grants and government appropriations. Due to these
subsidies, students do not pay the actual cost of attending institutions. The students instead pay
only a part of the cost while the subsidies cover the other costs (Archibald & Feldman, 2011).
But over time, the amount from the state and local governments has decreased over a 50 year

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period (Archibald & Feldman, 2011). Although appropriations have decreased, the state and
federal governments do help fund higher education institutions to help pay for costs as well as
help students pay for tuition (Archibald & Feldman, 2011).
Federal Role in Higher Education Cost. Since the times of colonialism in the United
States, the federal government has had a role in the expansion of educational opportunities by
providing various finance grants to institutions (Mullin, 2013). After World War I, the federal
government had a more active role in the support of students due to disabled veterans returning
back from war (Mullin, 2013). The programs created for students were extended after more
soldiers returned from World War II with the Servicemens Readjustment Act of 1944. This
program not only supported disabled veterans but all veterans by providing vouchers to attend
colleges (Mullin, 2013). By 1958, the federal government created a national student aid system
as a loan program to make low-interest loans available for students (Mullin, 2013). Over time,
multiple revisions had been placed on this aid system which increased the amount that students
received such as the addition of Title IV. Pell Grants were establish which allowed students to
apply for funds from the government which did not require a repayment which allowed more
access to low-income families (Mullin, 2013). With the cost to keep the Pell Grant program
established increasing, the federal government consolidated the appropriations by creating
different eligibility rules that applied to certain students (Mullin, 2013).
The Higher Education Opportunity Act of 2008 provided more revisions to the federal
governments role in financing higher education. The Act has 11 Titles. Title IVs primary
purpose is to provide funds to students that do not have the financial backing to attend higher
education (Mullin, 2013). Financial aid is provided through loans, grants, institutional aid and
work-study programs. Title III provides financial aid for specific institutions. These institutions

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can be historically black colleges and universities or can be in the form of grants towards
research in the STEM fields. Title VIII allows institutions funding to create programs that help
the community such as Teach for America. The Act allows funding to both students and the
institution. When looking at the funds disbursed through the program between students and
institutions, 95% of the funding has been given to students.
The role of the federal government in the higher education system can be seen as
allowing students that do not have the required funds to attend a private or public institution
(Mullin, 2013). When it comes to funding institutions, the federal governments have tried to push
the burden of cost of higher education institutions on the states through a shared expense on
taxpayers, parents, students and philanthropists. One of the ways that the federal government has
pushed the burden to state governments is through earmarks. Earmarks are specified funds
provided by congressman in the federal government (Delaney, 2011). The congressman can
allocate a specified budget to be spent on higher education within the state. Earmarks have been
increasing and can be seen as slightly controversial (Delaney, 2011). Programs like these show
the development of institution funding between the federal and state governments.
State Role in Higher Education Cost. State funding for higher education is drastically
different from the federal government funding. For instance, only one federal government exists
while 50 individual states are lead by different politicians. This leads to different policies that
each state can have regarding the funds given to a higher education institution or students. The
politics and characteristics of a state matter when it comes to higher education funding (Tandberg
& Ness, 2011). The amount of money that higher education receives from the state impacts the
tuition of the college. The state also can choose the tuition for public education. The difference in

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public and private institutions is also important when addressing the funds received from the
state with the public institutions receiving significantly more than private institutions.
The tuition of public institutions varies from each state but the trends of the tuition price
do not (Cheslock & Hughes, 2011). All states have increased the tuition for public institutions as
well as the amount of aid that the state gives to students (Cheslock & Hughes, 2011). Typically,
whenever the tuition rises within public higher education, the amount of aid also increases
(Cheslock & Hughes, 2011). The type of aid that has been offered to students has reflected the
increasing competition between institutions. Merit-based aid has increased much more than
need-based aid (Cheslock & Hughes, 2011). Although the states have started at different tuition
levels, all tuition has increased across the state with the lower states increasing at a significantly
higher rate which has allowed the lower tuition schools to catch up to the higher tuition schools
(Cheslock & Hughes, 2011). Since the tuition rates a rising faster for lower tuition schools, all
states are starting to become more similar in the aspects of tuition and aid (Cheslock & Hughes,
2011).
State governments receive money from taxpayers to fund programs within the state.
Thus, the state governments need to decide which programs should be more funded than others
that will benefit taxpayers. In a time of financial hardship, higher education is a program that
receives decreased funding (Delaney & Doyle, 2007). When financial prosperity exists within
the state, higher education is funded at higher levels (Delaney & Doyle, 2007). Higher education
is considered a good balance wheel due to the alternate funding sources from tuition, fundraising,
spending and salaries for workers (Delaney & Doyle, 2007). In times of financial difficulty,
higher education can find a way to decrease cost and increase revenue (Delaney & Doyle, 2007).
As mentioned earlier, earmarks specified for higher education are funds received from the federal

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government (Delaney, 2011). Since the funds are present, state governments are more likely to
spend money on higher education because they have a matching of funds (Tandberg & Ness,
2011). Overall, state governments have decreased the amount of funds given to higher education
institutions.
State governments are created more merit-based financial aid programs to students rather
than need-based financial aid programs (Cheslock & Hughes, 2011). The merit-based financial
aid programs are to increase the amount of selectivity to public institutions which would increase
the rankings among other institutions (Cheslock & Hughes, 2011). State financial aid programs
that are merit-based attempt to retain academic talent and increase the educated workforce within
the state (Cornwell, Mustard & Sridhar, 2006). Unfortunately, these types of programs benefit
students that would normally attend higher education and widen the income gap in college
attendance (Dynarski, 2000). Other state governments have attempted to create need-based aid
for low income students. Programs that are need-based within state governments look to increase
enrollments of diverse students who have increased levels of high school dropout rates. These
programs have shown an increase in high school retention and future aspirations to attend college
(Bartik & Lachowska, 2012; St. John et al, 2004)
Endowments. Institutions receive funding from the federal government, state
governments and tuition but also through endowments. Endowments are funds that are composed
of bequests and gifts that are placed in accounts which cannot be used for any purpose other than
what the endowment was specified in the beginning. If an alumnus donates $100,000 to be
placed in an endowment for a student scholarship, the institution cannot use those funds. The
funds are placed in an account and the interest accumulated from the fund is used to provide a
scholarship for a student. A largely endowed institution is seen as a wealthy and successful

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institution. Institutions with high endowments can provide financial opportunities for students
that necessarily might not have been able to attend.
These funds can be used to help students pay for their education through the means of
scholarships. Unfortunately, the funds for endowments are restricted. Therefore, the institution
cannot use these endowed funds to create new programs or help students that do not fit under the
restrictions of the endowment. An assumption would be that institutions would rather have
unrestricted funds but some of the reasons institutions would rather have endowments would be
to keep reputation and tradition, protect the institution and follow the conservatism of current
faculty and administration (Hansmann, 1990).
Suggestions and Conclusion
Higher education has many layers that need to be uncovered before suggesting any form
of change. The solution to one problem opens a door to another. To say that I have a solution that
will solve the financial crisis of higher education would be nave. Higher education is a public
and private good with benefits in the economy, socially and in human capital (Institute for
Higher Education Policy, 1998; Acemoglu, n.d). In turn, the only way higher education can
provide better access to all students is to allow all sectors to work together. Federal and state
governments should create a unified program that allows more matched spending that would be a
more centralized earmark program. For this program, the governments should also seek to boast
the smaller businesses by creating benefits of hiring college students to participate in a form of
experiential learning. Students would not only learn from classes but by working in the real
world in businesses that would receive some funding from the governments. The competition
between institutions is causing the increase of merit-based scholarships instead of promoting a
nation of educated citizens. Although this is virtually impossible to combat, the governments can

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possibly intervene with merit-based scholarships that hinder access to all students. Unfortunately,
the financial crisis of higher education will not end anytime in the near future. It is up to the next
generation of higher education professionals to enforce new programs that can help.

References

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Acemoglu, D. (n.d.) The Basic Theory of Human Capital.


Archibald & Feldman (2008). Explaining Increases in Higher Education Costs. Journal of Higher
Education
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Student Outcomes
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Evidence from Georgias HOPE Program
Delaney (2011). Earmarks and State Appropriations for Higher Education
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College Attendance
Hansmann, H. (1990). Why Do Universities Have Endowments?
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Kitroeff, N. (February 10, 2015). College Graduates Dont Think Their Degree Pays Off.
Theyre Wrong. Bloomberg Business.
Johnstone, B. (2001) Higher Education and Those Out of Control Costs
Mullin (2013). Past, Past, Present and Possibilities for the Future of the Pell Grant Program
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