The Finance of Higher Education: Theory, Research, Policy, and Practice

THE FINANCE OF HIGHER EDUCATION: Theory, Research, Policy, and Practice

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THE FINANCE OF HIGHER EDUCATION: Theory, Research, Policy, and Practice Edited by

Michael B. Paulsen University of New Orleans and

John C. Smart University of Memphis

AGATHON PRESS A division of Algora Publishing New York

 2001 by Agathon Press A division of Algora Publishing All Rights Reserved www.agathonpress.com www.algora.com No portions of this book (beyond that permitted by Sections 107 or 108 of the United States Copyright Act of 1976) may be reproduced by any process, stored in a retrieval system, or transmitted in any from, or by any means, without written permission of the publisher. The principal portions of the following chapters in this book were originally published in the specified volumes of Higher Education: Handbook of Theory and Research, and were copyrighted in the year of publication by Agathon Press; the Epilogues were provided for this volume by the original authors and are covered by this copyright notice: “Costs and Productivity in Higher Education: Theory, Evidence and Policy Implications,” by Darrell R. Lewis and Halil Dundar,” Vol. XIV, 1999; “Economic Perspectives on Rising College Tuition,” by Michael B. Paulsen, Vol. XV, 2000; “The Paradox of Growth in Federal Aid for College Students, 1960-1990,” by James C Hearn, Vol. IX, 1993; “State Efforts to Keep Colleges Affordable in the Face of Fiscal Stress,” by Michael Mumper, Vol. XIII, 1998; “State Policy and Private Higher Education” by William Zumeta, Vol. XII, 1997; “College and University Budgeting: What Do We Know? What Do We Need to Know?” by William F. Lasher and Deborah L. Greene, Vol. IX, 1993. Library of Congress Cataloging in Process Information

The finance of higher education : theory, research, policy, and practice / edited by Michael B. Paulsen and John C. Smart. p. cm. Includes bibliographical references and index. ISBN 0-87586-135-0 (alk. paper) 1. Education, Higher--United States--Finance. 2. Universities and colleges--United States--Finance. I. Paulsen, Michael B. II. Smart, John C. LB2342 .F475 2001 338.4'737873--dc21 2001003740

CONTENTS viii

The Contributors Introduction Michael B. Paulsen and John C. Smart

1

Part I: THE REVENUES, EXPENDITURES, COSTS AND AFFORDABILITY OF HIGHER EDUCATION

9

1. Trends in Revenues and Expenditures for Public and Private Higher Education Robert K. Toutkoushian

11

2. College Education: Who Can Afford It? Sandy Baum

39

Part II: ECONOMIC THEORIES AND THE FINANCE OF HIGHER EDUCATION

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3. The Economics of Human Capital and Investment in Higher Education Michael B. Paulsen

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4. The Economics of the Public Sector: The Nature and Role of Public Policy in the Finance of Higher Education Michael B. Paulsen

95

5. Costs and Productivity in Higher Education: Theory, Evidence and Policy Implication Darrell R. Lewis and Halil Dundar Epilogue

133 189

v

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CONTENTS

6. Economic Perspectives on Rising College Tuition: A Theoretical and Empirical Exploration Michael B. Paulsen Epilogue

Part III: FEDERAL AND STATE POLICIES AND THE FINANCE OF HIGHER EDUCATION

193 258

265

7. The Paradox of Growth in Federal Aid for College Students, 1960-1990 James C. Hearn Epilogue

267 316

8. State Efforts to Keep Public Colleges Affordable in the Face of Fiscal Stress Michael Mumper Epilogue

321 350

9. State Policy and Private Higher Education William Zumeta Epilogue

396 412

Part IV: TOPICS IN THE FINANCE OF HIGHER EDUCATION

417

10. The Role of Finances in Student Choice: A Review of Theory and Research Edward P. St. John and Eric H. Asker

419

11. Access to Postsecondary Education: Financing Equity in an Evolving Context James C. Hearn

439

12. Financing Private Colleges and Universities: The Role of Tuition Discounting David W. Breneman, James L. Doti, and Lucie Lapovski

461

13. The Finance of Community and Technical Colleges Rick Voorhees

480

CONTENTS

14. College and University Budgeting: What Do We Know? What Do We Need to Know? William F. Lasher and Deborah L. Greene Epilogue

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501 534

Part V: THE FINANCE OF HIGHER EDUCATION IN THE TWENTY-FIRST CENTURY

543

15. The Finance of Higher Education: Implications for Theory, Research, Policy and Practice Edward P. St. John and Michael B. Paulsen

545

Author Index

569

Subject Index

578

THE CONTRIBUTORS ERIC H. ASKER is a native of Southern California. He is presently an Ed. D. candidate at Indiana University and is completing his dissertation. His research project is a study of the impact of financial aid on the persistence of graduate students from selected fields of study in Indiana’s public institutions. His business experience is in financial and business system consulting. His higher education related experience is as an analyst at Indiana Education Policy Center and for Indiana University-Purdue University Indianapolis enrollment management office. He has been a research assistant at the education policy center at the University of Dayton. He worked with the facilities department and student taught at the business school at UCLA. He has been a recruiter for West Point and an administrative assistant to a department chair at UC Davis. His education includes a M.Ed. from UC Davis, an M.B.A. from UCLA, and a B. S. from the U.S. Military Academy. SANDY BAUM is Professor of Economics at Skidmore College. Prior to joining the faculty at Skidmore, Dr. Baum taught at Northeastern University and Wellesley College. She graduated from Bryn Mawr College in 1972 with a major in sociology and received her Ph.D. in economics from Columbia University in 1981. Dr. Baum has written widely on financial aid policy, the distribution of subsidies to college students, merit aid, college savings plans, student debt and other aspects of college finance, as well as A Primer on Economics for Financial Aid Professionals. In 1996, she received the NASFAA Golden Quill Award for Outstanding Contributions to the Literature on Student Aid. She serves as consulting economist for the Financial Aid Services and Standards Committee of the College Board's College Scholarship Service and has worked with a variety of other organizations concerned with student aid. She has made numerous presentations on postsecondary education financing to a wide variety of groups. DAVID W. BRENEMAN, University Professor and Dean of the Curry School of Education at the University of Virginia, is an economist and authority on the finance and economics of higher education. His three decades of experience include service as a professor and subsequently President of Kalamazoo College in Michigan, a think-tank scholar and Senior Fellow in the Economic Studies program at the Brookings Institution, and currently, as Dean of the Curry School of Education. He teaches courses in the Center for the Study of Higher Education. In addition to numerous scholarly articles and book chapters, he is author of Liberal Arts Colleges: Thriving, Surviving, or Endangered? (Brookings, 1994) and co-author of Financing Community Colleges: An Economic Perspective (Brookings, 1981) and Public Policy and Private Higher Education (Brookings, 1978). Recently, the Council of Independent Colleges (CIC) presented Dean Breneman with the Award for Outstanding Service. This award honors Breneman's efforts toward “insuring a robust future for private higher education” and recognizes the numerous contributions he has made to higher education, specifically in the area of financial aspects of private liberal arts colleges. JAMES L. DOTI is President and Donald Bren Distinguished Professor of Business and Economics at Chapman University. He holds a bachelor's degree in economics from the University of Illinois, Chicago, and master's and doctorate degrees in economics from the University of Chicago, where he was an Edward Hilman Fellow and National Science Foundation Scholar. Dr.

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Doti's numerous articles have appeared in academic journals as well as national periodicals such as The Wall Street Journal and The Chronicle of Higher Education. He co-authored two textbooks, Econometric Analysis—An Applications Approach (1988) and The Practice of Econometrics with EViews (1998). In 1991 he co-edited a collection of readings in private enterprise, The Market Economy— A Reader, that received the Templeton Honor Award for Scholarly Excellence. HALIL DUNDAR, Ph.D. in higher education and policy studies, is an Education Economist and Project Manager at the World Bank. Dr. Dundar was previously an Assistant Professor of Educational Policy at the Middle East Technical University in Turkey and Policy Analyst at the University of Minnesota. He has authored or co-authored more than 30 monographs, journal articles and book chapters. His current research interests are in the economics of higher education and evaluation of education in developing countries. DEBORAH L. GREENE is currently Vice President for Institutional Effectiveness and Planning at the University of Texas Health Science Center in San Antonio. Prior to joining the Health Science Center, Dr. Greene served as the Director of the Division of Medical Education at the Texas Medical Association and Director of the Office of Health Affairs within the Texas Higher Education Coordinating Board. She also served as a legislative policy analyst on higher education for the Texas Senate Education Committee and as a budget analyst for higher education in the Governor’s Office of Budget and Planning. She received her doctorate in higher educational administration at The University of Texas at Austin, and her M.S.W. and baccalaureate degrees from the University of Michigan. SHOUPING HU is Assistant Professor in Educational Administration and Supervision in the College of Education and Human Services at Seton Hall University, South Orange, New Jersey. He received his M.A. degree in Economics in 1998 and Ph.D. degree in Higher Education in 2000, both from Indiana University Bloomington. His current research concentrates on college choice, persistence, financial aid policy, and college student engagement in learning and out-ofclass activities. His writings have appeared in Educational Evaluation and Policy Analysis, Journal of Student Financial Aid, Journal of College Student Development, Journal of Higher Education, Research in Higher Education, and The Review of Higher Education. JAMES C. HEARN is Professor of Higher Education, Chair of the Department of Educational Policy and Administration, and Interim Director of the Postsecondary Education Policy Studies Center at the University of Minnesota. He received his Ph.D. degree from Stanford University and an MBA from the Wharton School at the University of Pennsylvania. Prior to entering his academic career, he worked in policy research on student aid issues for the American College Testing program and for a consulting firm in Washington, DC. His research and teaching focus on policy, finance, and organization in higher education. Professor Hearn’s research on college enrollment, educational attainment, and student aid policy has appeared in sociology, economics, and education journals as well as in several books. Recently, he has been examining postsecondary access and related policy issues in Minnesota, P-16 cooperation and planning in Georgia, and the implications of the increasing use of non-tenure-line faculty in research universities. LUCIE LAPOVSKY is President of Mercy College in New York. She previously served as Vice President for Finance at Goucher College for nine years and prior to that, she worked as

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Special Assistant to the President of the University of Maryland at College Park, as Director of Finance and Facilities for the Maryland Higher Education Commission, and as a Fiscal Planner for the Maryland State Department of Budget and Fiscal Planning. She received her B.A. degree from Goucher College, and her M.A. and Ph.D. degrees in Economics from the University of Maryland at College Park. She also attended the Institute for Educational Management at Harvard. Dr. Lapovsky is the author of several articles and has been a frequent speaker on topics ranging from women's leadership to budgeting and resource management in higher education. Her most recent work and speaker presentations have been on tuition discounting. She serves on many professional boards including the Executive Board of the American Council of Education/National Network of Women Leaders and the Tuition Exchange Board, chairs the Institutional Financial Aid Task Force of the National Association of College and University Business Officers, and has served as the Treasurer of Middle States Association of Schools and Colleges. WILLIAM F. LASHER is Vice Provost for Planning and Assessment at the University of Texas at Austin. He is also professor of educational administration and has served as the director of the UT Austin graduate program in higher education administration. He teaches courses in Higher Education Finance, Higher Education Business Management, Institutional Research and Planning, and Higher Education Legislative Issues. He has also served as Associate Vice President for Budget and Institutional Studies, Director of Institutional Studies, and Associate Dean of the College of Education, all at the UT Austin. He is a Past President of the Association for Institutional Research. He holds a doctorate in higher education from the University of Michigan, a master’s degree in college student personnel from Indiana University, and a bachelor’s degree in psychology from the University of Rochester. DARRELL R. LEWIS, Ph.D. in economics, is a Professor of Educational Policy and Administration at the University of Minnesota. Professor Lewis has over 30 years’ experience in the employment of economic analysis to examine evaluation and policy questions in the fields of education and disability policy studies. He has authored or co-authored more than 150 books, monographs, journal articles and book chapters and has been a frequent consultant to international, national, state and local agencies in matters of policy, research and evaluation. His current research interests are in the economics of higher education, economic evaluation of education and training, and disability and equity policy studies. MICHAEL MUMPER is Professor of Political Science and is currently the chair of the department at Ohio University. He holds a Ph.D. from the University of Maryland-College Park in Government and Politics. His area of research specialization is American public policy. In particular his research focuses on government efforts to increase the access and affordability of higher education. He has published articles and reviews in the Journal of Higher Education, The Review of Higher Education, the Journal of Education Finance, the Journal of Student Financial Aid, Urban Education, Educational Policy, Polity, and the Social Science Journal. His 1996 book, Removing College Price Barriers: What Government Has Done and Why It Hasn't Worked, was published by the State University of New York Press as a part of the "Social Context of Education" series. MICHAEL B. PAULSEN is Professor of Education and Coordinator of Graduate Studies in Higher Education in the Department of Educational Leadership, Counseling and Foundations at

THE CONTRIBUTORS

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the University of New Orleans. He earned his Ph.D. in higher education and economics from the University of Iowa and his M.A. degree in economics from the University of Wisconsin-Milwaukee. His scholarly work in the economics and finance of higher education has been published in both economics and education journals, including Economics of Education Review, Journal of Education Finance, The Journal of Higher Education, Research in Higher Education, The Review of Higher Education, Educational Evaluation and Policy Analysis, and other research journals, as well as in his book, College Choice. Previously, he held faculty appointments in economics at Coe College and St. Ambrose University and subsequently joined the faculties in higher education at the University of Illinois and the University of Alabama. He is consulting editor for Research in Higher Education, associate editor for economics and finance of Higher Education: Handbook of Theory and Research, and Chair of the Budget Committee for the Association for the Study of Higher Education. EDWARD P. ST. JOHN is a Professor in the Department of Educational Leadership and Policy Studies at Indiana University, where he also serves as Director of the Indiana Education Policy Center and Chair of the Higher Education Program. Dr. St. John has also published numerous studies of the impact of student financial aid on college choice and persistence, which have been published in Research in Higher Education, The Journal of Higher Education and other research journals. He authored Prices, Productivity, and Investment (an ASHE/ERIC Higher Education Report, 1994) and edited Rethinking Tuition and Student Aid Strategies (Jossey-Bass, 1995). He is currently working on his latest book, Refinancing the College Dream, forthcoming from Johns Hopkins University Press. Previously he has been a professor at the University of Dayton and the University of New Orleans. He also held policy analyst positions with the U. S. Department of Education and the Missouri Department of Education and served as a senior manager in the consulting industry. He holds an Ed. D. from Harvard University and M. Ed. and B. S. degrees from the University of California-Davis. JOHN C. SMART is Professor of Higher Education at The University of Memphis and formerly was a member of the faculties at the University of Kentucky, Virginia Tech, and the University of Illinois at Chicago. He has served as the editor of Research in Higher Education since 1990 and formerly was the editor of The Review of Higher Education (1980-86). Professor Smart founded Higher Education: Handbook of Theory and Research and has served as editor of the annual volumes since its inception in 1985. He is the recipient of the Distinguished Service Award from the Association for the Study of Higher Education (1993), the Distinguished Career Research Award from the American Educational Research Association (Division J, 1997), and the Sydney Suslow Award from the Association for Institutional Research (1998). ROBERT K. TOUTKOUSHIAN is the Executive Director of the Office of Policy Analysis for the University System of New Hampshire. He received his Ph.D. in economics from Indiana University in 1991, where he specialized in Finance and Econometrics. Dr. Toutkoushian has published research on the following topics: gender equity for faculty and professional staff in higher education, the determinants of graduate program ratings, an analysis of state appropriations for higher education, the effects of marital status and race/ethnicity on faculty compensation, the use of cost functions for policymaking in higher education, the effects of time allocation on the research productivity of faculty, and an analysis of whether family income and educational attainment affect the initial postsecondary education choices of students in New Hampshire.

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RICHARD A. VOORHEES is Associate Vice President for Instruction and Student Services for the Community Colleges of Colorado. His administrative and faculty careers span a variety of institutions including tribal, suburban, and urban community colleges, a research university and a comprehensive four-year institution. His colleagues recently recognized his contributions to community colleges when he was awarded the Practitioners Award by the National Council for Planning and Research. He has served as an academic dean, chief student affairs officer, and campus director of institutional research. Previous work in the area of higher education finance includes a Jossey-Bass sourcebook entitled, Researching Student Financial Aid. He also has contributed to the literature of student retention, assessment, and marketing research. WILLIAM ZUMETA is Professor in the Daniel J. Evans School of Public Affairs and College of Education at the University of Washington. He has also taught at UCLA, the University of British Columbia, and Claremont Graduate University. Professor Zumeta has written extensively on public policy and private higher education, higher education finance and accountability, and policies related to graduate education and the PhD labor market. His work has been sponsored by such agencies as the National Science Foundation, Spencer Foundation, Pew Charitable Trusts, Lilly Endowment, and Alfred P. Sloan Foundation, as well as various national associations and government agencies. He is the author of two books and numerous articles and chapters in the higher education, economics and public policy literatures.

Introduction1 Michael B. Paulsen and John C. Smart

W

e believe that higher education finance is reemerging as a matter of tremendous importance, and as a field of study with the potential to both inform and forearm decision makers as they grapple with the wide range of challenges that characterize the rapidly changing, uncertain and complex environment of the higher education enterprise. However, as we venture into the 21st century, we join others in expressing our impression and concern that federal, state and institutional policies and practices appear to be in a period in which substantial changes in policies and practices are taking place, but without the benefit of a thorough analytic approach and foundation for insightful policy formation, implementation and evaluation. For example, in the Preface to their recent book, Public and Private Financing of Higher Education, Callan and Finney (1997), assert that “it would be difficult to identify a public policy area that has undergone as much change with as little public discussion or explicit policy direction as the financing of American higher education in recent years” (p. xi). It is easy to identify examples of such change. The federal devolution has shifted obligations for various social programs from Washington to state capitols, and thereby has intensified the competition between higher education and other powerful claims on state budgets (Roherty, 1997). As the shares of institutional revenues derived from state appropriations to public institutions and federal grants and contracts to both private and public institutions have decreased (Breneman and Finney, 1997), tuition growth at public and private four-year colleges and universities has outpaced inflation every year since 1980 (College Board, 1999; Lewis, 1989; Paulsen, 2000). The responsibility for financing higher education continues to shift away from government or public sources and toward students and their families; institutions in both private and public sectors continue to derive an expanding share of their resources from tuition revenue paid by students (Kane, 1999; McPherson and Schapiro, 1998). And federal financial aid to students continues its shift away from grants toward loans (Hearn, 1998). Responses of both public and private institutions have included expanded use of institutional aid or tuition discounting to attract students (McPherson and Schapiro, 1998) and expanded efforts to increase private giving (U.S. Department of Education, 1999, Tables 332, 333). 1 We would like to express our appreciation to Jim Hearn for his thoughtful contribution of ideas toward

the preparation of this essay. 1

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In an insightful, if somewhat overstated, view of recent developments, Bruce Johnstone (1999) has heightened our awareness of the fundamental nature and extent of recent changes by pointing out that “the fabric of the American ‘system’ of financial assistance and tuition policy seems to be unraveling” (p. 3). For example, the overarching goals of our financial aid system appear to be shifting from “access” to “affordability” (King, 1999), as evidenced by the substantial increase in the proportion of merit- versus need-based grants to students from both state and institutional sources (Kane, 1999; McPherson and Schapiro, 1998). These shifts in roles, responsibilities and resources are unlikely to moderate. Instead, they are more likely to persist, and perhaps even accelerate. As explained by Kane (1999), “the next fifteen years will offer little respite as demographic forces increase the pressure on higher education budgets with a rebound in the number of college-age youth of all income levels” (p. 3). Policy analysts Callan and Finney (1997) have also observed that the “respective responsibilities of students, families, colleges and universities, and government have altered significantly, but with little debate and without any public policy consensus” (p. xi). In the absence of careful discussion and debate, the relative shares of educational costs covered by students compared with government or public sources have been altered without adequate attention to, and analysis of, the social benefits and the social rates of return to investment in higher education, or the social efficiency of such a reallocation of our nation’s resources (Paulsen, 1996). Tuition has increased relentlessly, but apparently without adequate attention to the shifting patterns of potential inequities in access or choice in higher education (McPherson and Schapiro, 1998), or to the latest research on how students respond differently to such increases according to income level, race, and type of institution attended (Heller, 1997). And with the apparent aim of enhancing access and choice, loans have come to dominate federal financial aid to students while the purchasing power of Pell grants has been allowed to diminish, even though price-response research indicates that students are significantly more sensitive to the availability of grants than to loans in their enrollment decisions (Heller, 1997). Moreover, while states have experienced consistent increases in tuition at their public and private institutions, they have not been as consistent in their coordination of tuition and financial aid policies (Griswold and Marine, 1996). As a result, the marketmodel hypothesis about the high-tuition, high-aid approach to public finance has not been meaningfully tested in states where tuition increases have not been offset by commensurate, need-based increases in state grants to students (Hossler, et al., 1997). Finally, the combination of tuition growth and tighter limits on state budgets has led state agencies to conduct studies of faculty workload (Meyer, 1998) and require that institutions provide adequate educational services with fewer resources (St. John, 1994). However, such actions appear to have been taken with only minimal attention to the underlying economic theories of costs and productivity that can inform such policies and strategies (Hoenack and Collins, 1990).

Paulsen and Smart/Introduction

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OVERVIEW OF THE BOOK The central purpose of this book is to provide a set of rigorous, but accessible and workable, frameworks within which to build strong analytic foundations to better inform the development, implementation and evaluation of policies related to the finance of higher education. There are five distinct parts of the book, each contributing to the purpose in a special way. Part I presents the fundamental facts about where institutions get their funds to cover the costs of educating their students and where students get their funds to pay the out-of-pocket expenses of their college education. Part II provides readers with opportunities to study, learn and apply a range of economic perspectives, theories and models that serve as important and relevant foundations for the study of higher education finance. Part III examines the nature and development of financial policies at the federal and state levels and the special challenges posed by the interplay between rational-empirical perspectives and politicalcontextual influences in the development, nature, implementation, effectiveness, and evaluation of financial policies. Part IV of this book addresses special topics and issues that are important but rarely receive substantial attention in books on the subject of higher education finance. Finally, Part V provides a critical examination of the field of higher education finance, both synthesizing and critiquing implicit and explicit themes in the book and in the field, and raises challenges for future inquiry, policy analysis and advancement of knowledge in the field. The chapters in Part I present the most fundamental facts and issues from the perspectives of institutions and students in the finance of higher education. Ultimately, two of the most important sets of financial facts to know about an institution relate to where it gets its funds and how it spends them. And from the perspective of most students and their families, the most important issues relate to how “affordable” college really is and where students get their funds to pay for their college education. Of course, society— either through government or private agencies and individuals—is an important source of funds or “subsidies” for both institutions and students (Winston, 1999). The first requirement of any substantial analysis of financial policies in higher education is a prior and comprehensive knowledge and understanding of the answers to the two most fundamental and revealing financial questions about the higher education enterprise: “Where does the money come from?” and “Where does the money go?” In Chapter 1, Rob Toutkoushian provides the reader with a comprehensive presentation and analysis of the primary sources of revenues and expenditures for public and private institutions of higher education. Numerous tables and figures serve to thoroughly document and highlight notable trends—from 1975 to 1995—in the sources of revenues and the functional uses of expenditures, illustrating differences in such trends between the private and public sectors. The analysis also features an examination of the relative shares of the expenses an institution incurs in educating its students paid by students and society. An appendix presents clear definitions for all measures of different types of revenues and expenditures examined in the chapter. In combination, these resources provide a rich reference for policy analysts, administrators, researchers and students interested in the financial aspects of the higher education enterprise.

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In chapter 2, Sandy Baum examines a wide range of issues related to the affordability of a college education. Written in a very accessible, even conversational style, this chapter begins with an insightful investigation of the meaning of “affordability,” presents data on changes in tuition and other costs of college at different types of institutions, and examines where students get funds to pay for college. Changes in the costs of college are related to various indicators of the ability of students and their families to pay; such as trends in family income, saving, and borrowing. Special attention is paid to the types and amounts of financial aid available in the form of loans and grants from federal, state and institutional sources. In addition, this chapter examines a cross-cutting theme regarding the differences in the affordability of college for students from low-, middle-, and upper-income backgrounds. Higher education is a professional field of study in which inquiry has been well informed by the strong and familiar presence of the many useful concepts and theories drawn from disciplines such as political science, sociology, psychology, history and philosophy. To date, higher education researchers and policy analysts have drawn remarkably less on the concepts and theories of economics, one of the prominent policy sciences. We believe that the study of higher education finance could be substantially enriched by building appropriate concepts and theories from the discipline of economics into the mainstream literature in forms that are more explicit and elaborate. In particular, this “would give higher education scholars a greater range of foundations and perspectives from which to do theoretical and empirical work that would expand our understanding of higher education finance and associated policies” (Paulsen, 2000, p. 40). These perspectives from economics are intended to encourage and inform discussion, debate, and analysis of important issues such as those discussed above, as well as better inform the development, implementation, and evaluation of related financial policies and practices. Therefore, the chapters in Part II are intended to address this gap in the literature and we view them as foundational to an enriched study of the chapters in Parts I, III and IV of the book. To establish this conceptual and analytic foundation, the chapters in Part II cover the following economic perspectives on higher education finance: theories of investment in human capital (Paulsen, Chapter 3); equity, efficiency and the economics of the public sector (Paulsen, Chapter 4); economic theories of costs and productivity (Lewis and Dundar, Chapter 5); and the marketplace economics of college tuition (Paulsen, Chapter 6). Chapters 3 and 4 were written especially for this volume, while chapters 5 and 6 were previously published in Higher Education: Handbook of Theory and Research, in 1999 and 2000, respectively. Even though chapters 5 and 6 were first published very recently, the author of each chapter has written a new epilogue to update, reexamine and elaborate on the themes of their recent analyses in light of the very latest developments in the field. An additional role of the chapters in Part II is to provide the volume with some of the features of a textbook, rather than only a collection of reviews of the research literature. Toward this end, each chapter provides detailed explanations, examples, and applications—for example, of the analysis of contemporary financial policies in higher education—using the economic concepts and theories to make them more accessible and meaningful for non-economists with interests in higher education finance. Chapter

Paulsen and Smart/Introduction

5

authors have not avoided or downplayed the terminology and jargon of economics. Instead, they have emphasized clarity and thoroughness of explanation, as well as the use of examples and applications to higher education, in presenting many of the most relevant and useful of economic concepts for the study of higher education finance. We view the nature and development of financial policy as characterized not only by what is straightforward and explicit, or what appears to be rational and empirically supported, but also by what is implicit, indeterminate, and complex. Consistent with this theme, the chapters in Part III examine the nature and development of financial policies at the federal and state levels. However, the chapters in Part III also examine the special challenges posed by the ever-present interplay between rational-empirical perspectives and politicalcontextual-personal influences in the development, nature, implementation, effectiveness, and evaluation of financial policies. In chapter 7, Jim Hearn examines in detail the political history and the palpable paradox of growth in federal student aid programs from 1960 to 1990. Chapters 8 and 9 examine the nature and effects of state-level policies on institutions and students in the public and private sectors, as articulated by Michael Mumper and Bill Zumeta, respectively. These three chapters were previously published in Higher Education: Handbook of Theory and Research, in 1993, 1998, and 1997, respectively. Therefore, the authors of each of these chapters have written new epilogues for their chapters that both update and reexamine, with fresh, contemporary perspectives, the themes of their earlier analyses in light of the latest developments in the field. Part IV includes five chapters that address special topics and issues that are important but rarely receive substantial attention in general books on the subject of higher education finance. In chapter 10, St. John, Asker and Hu articulate the “student choice” construct as a way of expanding our thinking about student decision-making and to provide a framework within which to examine the roles of financial policies in students’ college choice and persistence decisions. The student-choice construct serves to focus attention on those student decision-making processes that are responsive to both socioeconomic forces such as employment opportunities, and educational trends and policies such as prices and subsidies. Students make decisions in unique, situated contexts, based on their perceptions of opportunities for education and employment, all of which, in combination, lead to diverse individual outcomes of development and attainment. In chapter 11, Jim Hearn examines issues of equity in access to higher education. In particular, he examines the differences by socioeconomic status in the effects of financial and other policies on access to postsecondary education in terms of both aspirations and participation. This chapter takes the reader to the forefront of thought about equity and access in higher education, asserting that both the meaning of “access” and the appropriate equity-enhancing policies to pursue will have to be reconsidered in light of a series of changes in the form of new kinds of students (e.g., adult learners as consumers), enrollments (e.g., on-line distance enrollment), providers (e.g., profit-oriented virtual universities), faculty (e.g., part-time and virtual faculty), markets (e.g., global and fluid), and outcomes (e.g., practical knowledge and certificates instead of prestigious degrees). In chapter 12, Breneman, Doti and Lapovsky examine the analytics of tuition discounting as the predominant means by which many private colleges and universities achieve enrollment targets for their freshmen classes. This chapter presents a micro-

6

THE FINANCE OF HIGHER EDUCATION

economic theory of the behavior of private colleges to examine college decision-making behavior in terms of the key relationships between tuition, enrollment, composition of the student body, and tuition discounting practices. The analysis addresses the changing roles of merit-based and need-based institutional aid in achieving enrollment goals. The presentation of recent data on current tuition-discounting practices highlights the similarities and differences between highly selective and less selective private colleges and the changing meaning and importance of the published price relative to the availability of price discounts. This chapter clearly redefines the current boundaries of the field and advances our understanding of tuition discounting in both theory and practice. The finance of community and technical colleges is often overlooked in research and writing on the finance of higher education. In chapter 13, Rick Voorhees addresses the important and practical issues associated with the finance of such institutions, including the special role of state and local sources of revenue for such institutions and the importance of the tuition charged by such institutions—the tuition which is often viewed as the cost that ultimately enables access to the least-costly or most-affordable postsecondary education alternative. These issues are examined relative to the wellknown multifarious mission of such institutions. In chapter 14, Bill Lasher and Debbi Greene cover the traditional topics about budgeting in higher education, including the budget process, factors that influence budgets, the various types of budgeting (e.g., incremental, formula, program, zerobased, performance, incentive, and cost center budgeting) in the main text of their chapter. Their chapter was previously published in Higher Education: Handbook of Theory and Research, in 1993; therefore, the authors have written an extensive new epilogue for their chapter that updates and reexamines the themes of their earlier analyses, but also expands the scope of their chapter in light of the latest developments in the field. In particular, they offer an in-depth analysis of the impact on budgeting practices due to new students, new conceptions of delivery systems, changes in attention to accreditation and accountability, and most notably, the growing and more central importance of performance funding and responsibility center budgeting in higher education. Finally, in chapter 15 of Part V, St. John and Paulsen critically examine the field of higher education finance, synthesize and critique the overt and covert themes in the previous chapters in the book and in the field, and raise challenges for future inquiry and advancement of knowledge in the field. In addition, this chapter addresses the unique relationship between the pure-hard discipline and policy science of economics and the applied-soft field of higher education finance and policy analysis, as well as the interesting and sustained tension that has evolved between them. The chapter examines the productivity of that tension for the advancement of knowledge in the field of higher education finance.

AUDIENCES FOR THE BOOK This book is intended to provide a new and substantial resource that will be useful to a variety of groups or audiences who want to become better informed about the economic

Paulsen and Smart/Introduction

7

theories and models, and the federal, state and institutional policies and practices that constitute the primary subject matter and tools of policy analysis in the area of higher education finance. More specifically, we intend our book to serve as a text for faculty and students in graduate courses in higher education finance, as a scholarly foundation for future research among scholars in the field, and as a reference and resource targeted for interested faculty, administrators, business officers, financial aid officials, institutional researchers, and policy analysts at a variety of different types of institutions and agencies at the state, regional and national levels. In other words, we see the audience for the new reader as including faculty and students in the Association for the Study of Higher Education (ASHE) and Division J of the American Educational Research Association (AERA-J), but extending well beyond those groups to audiences comprising members in the national, regional and state (as appropriate) divisions of the Association for Institutional Research (AIR), the National Association of Student Financial Aid Administrators (NASFAA), the National Association of College and University Business Officers (NACUBO), the National Association of State Budget Officers (NASBO), the Society for College and University Planning (SCUP), the State Higher Education Executive Officers (SHEEO), the American Association of State Colleges and Universities (AASCU), the National Association of Independent Colleges and Universities (NAICU), the American Association of Community Colleges (AACC), the National Association of State Universities and Land Grant Colleges (NASULG), the American Association of University Administrators (AAUA), the American Council on Education (ACE), and other groups with interests in the finance of higher education.

ACKNOWLEDGMENTS It takes many dedicated people to complete a project of this scope, and we recognize that our own contributions to this volume would have been inadequate without the invaluable efforts and support of many others. We are especially grateful to the authors who have written the chapters for this volume. They have labored to produce chapters of the highest quality in terms of both their standards of scholarship and their thorough attention to the very latest work in the field. We believe that this volume has been strengthened by the valuable contributions of economists Dave Breneman, Sandy Baum, Jim Doti, Halil Dundar, Lucie Lapovsky, Darrell Lewis, and Rob Toutkoushian; as well as by the fine scholarly work of a talented set of social scientists and higher education policy analysts, including Debbi Greene, Jim Hearn, Bill Lasher, Michael Mumper, Ed St. John, Rick Voorhees, Bill Zumeta, Shouping Hu, and Erik Asker. We also wish to express our appreciation to quite a list of talented scholars who served as reviewers of earlier versions of the chapters, enhancing the quality of the chapters in the process. We offer a special thanks to Jim Hearn and Ed St. John, each of whom contributed two chapters to this volume, and we would like to express our gratitude for the valuable contributions of Nasrin Fatima, research assistant and doctoral candidate at the University of New Orleans. Finally, we express our deepest appreciation and gratitude to our immediate family members—Laurey, Emily and Bunty—for their ever-present support and understanding throughout this undertaking and completion of this project.

8

THE FINANCE OF HIGHER EDUCATION

References Breneman, D.W., and Finney, J.E. (1997). The changing landscape: Higher education finance in the 1990s. In P.M. Callan and J.E. Finney (eds.), Public And Private Financing Of Higher Education: Shaping Public Policy For The Future (pp. 30-59). Phoenix, AZ: The American Council on Education and The Oryx Press. Callan, P.M., and Finney, J.E. (1997). Preface. In P.M. Callan and J.E. Finney (eds.), Public And Private Financing Of Higher Education: Shaping Public Policy For The Future (pp. xi-xiii). Phoenix, AZ: The American Council on Education and The Oryx Press. College Board. (1999). Trends In Student Aid: 1989 To 1999. New York: College Entrance Examination Board. Griswold, C.P., and Marine, G.M. (1996). Political influences on state policy: Higher-tuition, higher-aid, and the real world. The Review of Higher Education 19 (4): 361-389. Hearn, J.C. (1998). The growing loan orientation in federal financial aid policies: A historical perspective. In R. Fossey and M. Bateman (eds.), Condemning Students To Debt: College Loans And Public Policy (pp. 47-75). New York: Teachers College Press. Heller, D.E. (1997). Student price response in higher education: An update to Leslie and Brinkman. Journal of Higher Education 68 (6): 624-659. Hoenack, S.A., and Collins, E.L. (1990). The Economics Of American Universities. Albany: State University of New York Press. Hossler, D., et al., (1997). State funding for higher education: The Sisyphean task. Journal of Higher Education 68 (2): 160-190. Johnstone, D.B. (1999). Introduction. In J.E. King (ed.). Financing a College Education: How it Works, How it’s Changing. Phoenix, AZ: The American Council on Education and The Oryx Press. Kane, T.J. (1999). The Price of Admission: Rethinking How Americans Pay for College. Washington, DC: Brookings. King, J.E. (1999). Conclusion. In J.E. King (ed.). Financing a College Education: How it Works, How it’s Changing. Phoenix, AZ: The American Council on Education and The Oryx Press. Lewis, G.L. (1989). Trends in student aid: 1963-64 to 1988-89. Research in Higher Education 30 (6): 547561. McPherson, M.S., and Schapiro, M.O. (1998). The Student Aid Game. Princeton, NJ: Princeton University Press. Meyer, K.A. (1998). Faculty Workload Studies: Perspectives, Needs, And Future Directions. ASHE-ERIC Higher Education Report Volume 26, No. 1. Washington, DC: The George Washington University, Graduate School of Education and Human Development. Paulsen, M.B. (1996). Higher education and state workforce productivity. Thought and Action: NEA Higher Education Journal 12(1): 55-77. Paulsen, M.B. (2000). Economic perspectives on rising college tuition: A theoretical and empirical analysis. In J.C. Smart (ed.). Higher Education: Handbook of Theory and Research Volume XV (pp. 39-104). New York: Agathon Press. Roherty, B.M. (1997). The price of passive resistance in financing higher education. In P. M. Callan and J. E. Finney (eds.), Public And Private Financing Of Higher Education: Shaping Public Policy For The Future (pp. 3-29). Phoenix, AZ: The American Council on Education and The Oryx Press. St. John, E.P. (1994). Prices, Productivity, And Investment: Assessing Financial Strategies In Higher Education, ASHE-ERIC Higher Education Report No. 3. Washington, DC: The George Washington University, School of Education and Human Development. U.S. Department of Education, National Center for Education Statistics. (1999). The Digest of Education Statistics 1999. Washington, DC: U.S. Government Printing Office. Winston, G.C. (1999). College costs: Who pays and why it matters so. In J.E. King (ed.). Financing a College Education: How it Works, How it’s Changing. Phoenix, AZ: The American Council on Education and The Oryx Press.

PART I

The Revenues, Expenditures, Costs, and Affordability of Higher Education

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Chapter 1

TRENDS IN REVENUES AND EXPENDITURES FOR PUBLIC AND PRIVATE HIGHER EDUCATION1 Robert K. Toutkoushian ,1752'8&7,21

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