New York University deliberately doubled the size of many classes in the 1970s. The reason: With 10 students, a college course barely collects enough tuition to pay the professor; with 20, it may turn a profit.
Colleges all over the country are putting more and more stress on night school and summer school. Why? Because they can use cheap part-time teachers and run these programs at a surplus.
University administrators are also looking hard at the cost-benefit ratios of various subjects: NYU junked its costly engineering school and got rid of the faculty during a financial crisis; Duke University may wipe out its nursing school because its outlays per student are too high.
And money-hungry colleges are getting into businesses not directly related to education: George Washington University is into real estate, with two office buildings producing revenue and three others under construction; NYU owned a noodle factory, Mueller's macaroni, but sold it and put the money in securities to boost income from $2 million to $10 million a year; Duke runs summer athletic camps for youngsters at $150 a week.
Higher education today is one of the biggest businesses in the country, with operating revenues of $52 billion, about 11.5 million students and 1.8 million employes. And like some other of the nation's basic industries, it's in trouble.
The culprits are inflation and a declining market. Colleges and universities are finding that their costs are rising faster than their incomes, and it is happening at a time when the nation's population is growing older, and the number of student-age people smaller.
So where once universities thought of themselves as communities of scholars, heedless of commercial pressures, today their administrators are talking of "cost centers" and "profit centers" on campus.
The most acute problem is inflation. Although the prices paid by universities for the things they need haven't risen quite as fast as the consumer price index, the market basket of what colleges buy, ranging from teacher salaries to books, periodicals, electrictiy and fuel, has jumped 85 percent from 1971 to 1980 as measured by the higher education price index.
Colleges and universities have had to scramble to keep pace, particularly because their endowment income, which may constitute 15 or 20 percent of discretionarty income for a private institution, has lagged, returning an average of only 4.77 percent during the 1970s.
To meet the crisis, colleges have used three principal methods:
Private institutions have raised tutition dramatically, as many parents are ruefully aware. Harvard boosted tuition from $2,600 in 1970-71 to $6,000 now. rGeorge Washington went up from $1,900 to $3,400. Duke jumped from $2,000 to $4,740. Public colleges, which are financed by state appropriations instead of tuition, have had to seek substantially more money from the legislatures.
Colleges have held faculty salaries down in real terms. According to a gloomy report by the American Association of University Professors, salaries by rank rose 67 percent over the 1970s, but consumer prices rose so much faster that salaries actually dropped 18 to 19 percent in real value.
Colleges have deferred both maintenance and investment in new plant and equipment particularly investment in new "state-of-the-art" scientific instruments for the most sophisticated kinds of research. One recent study estimated that in constant dollars, annual investment of all types dropped from $8 billion in 1966-67 to $5 billion a decade later. Median age of university research instrumentation is now estimated at double that of commercial laboratories, a situation many believe is a threat to the nation's long-range well-being since universities perform most of the country's basic research.
But even these policies haven't been enough to meet the financial pressure, so colleges and universities, quietly and with little fanfare, have started doing a lot of other things to cut costs and generate "surpluses" in some of their activities (the word "profit" is rarely used).
Some of these simply involve good financial management. For example, at Duke, NYU and virtually all other institutions, administrators don't let any money sit around in a safe, even if they know they'll need it to pay bills in a week or two. They immediately plunk it into short-term commercial paper, like 10-day notes, for a fat return. Last year Duke made $7 million on such investments. They are also focusing on good investments for their endowment funds. Tulane University crowed recently that return on portfolio in 1979 was 28.9 percent, which would help it to be "extraordinarily well-positioned . . . in the lean and spare environment of the '80s."
Other policies are central to the educational process and begin with a set of shared perceptions about the costs of different university functions, outlined in a series of interviews with Duke University Chancellor Kenneth Pye and Vice Chancellor Joel Fleischman, GW's director of planning William D. Johnson, NYU vice president, for finance Allan Claxton, David Breneman of the Brookings Institution and Jerold Roschwalb of the National Association of State Universities and Land Grant Colleges. Not all agree on every point, but this is the consensus:
The university or college is "a vast system of cross-subsidization," as Breneman put it. Some functions or schools pay for themselves or even return a surplus. Others are tremendous losers and drain money from elsewhere in the institution.
Claxton's rule of thumb is that if the cost of teacher salaries of a program can be held to under 60 percent of the tuition received, the university will break even on it. The other 40 percent is needed to pay for utilities, repairs to buildings, general administrative costs, libraries and other overhead.
On this basis, NYU's schools of continuing education, business and law are on the good side of the ledger but arts and science and most graduate programs are in the red.
Thus, one money-saving device is to put more students in each class. The extra tuition is pure gravy, though educational quality must be watched. At NYU, according to Claxton and Dean Jill Claster of NYU's Washington Square College, tiny classes were done away with. And instead of 15 or 18 students in some classes, the total was upped to 25 to 30. In the 1970s, Duke, which had small classes, increased undergraduate enrollment from 4,700 to 5,700 without substantially increasing faculty, producing an important net revenue gain. Only shortage of housing kept it from adding more.
The boost to revenue is obvious. If tuition at a school like NYU is $5,000 a year or $156 a credit hour, the revenue from a three-credit course with 10 students will be $468 each or a total of $4,680. If a professor teaching five courses a year is paid $30,000, then tuition income from that class won't cover one-fifth of his salary. But doubling the number of students would increase revenue to $9,360, well over a quarter of his salary.
Another money-saving device is to use more low-paid, part-time or non-tenured faculty, often graduate students, instead of replacing high-paid tenured faculty when they retire. This is being done in many places, according to the American Association of University Professors.
In general, off-campus and continuing education courses, both degree and nondegree programs, are a strong possibility to make money. They use low-rent or no-rent facilities, meeting in places like the Pentagon, an office building, or the university's own empty classrooms at night. They often use relatively low-paid, part-time teachers who get no fringe benefits and much smaller salaries per course than regular professors.
Claxton and Johnson say a well-run program can net as much as one-third of gross tuition. NYU, during its financial crisis of the 1970s, deliberately set about to expand these programs and doubled gross revenue over the past four years to $16 million annually. Its nondegree enrollment is 13,000. GW, with 6,000 students a term, nets $1.5 million on a $5 million gross. Nationwide, as many as 800,000 students on military bases alone enroll in off-campus programs given by colleges and universities.
Schools also make money by using campus space that would otherwise be empty during the three summer months. The rent is "free" and anything realized above teaching costs is essentially a net-gain. Activities range from regular summer classes to special programs, like the Institute for Educational Management given by Harvard's school of education. For $3,600 each, including room and board, 100 administrative officers from other universities spend six weeks in Harvard dorms studying personnel and other management subjects. Dean Paul Ylvisaker said the program nets $30,000 to $40,000.
Business schools and sometimes law schools can also make money, since they require little heavy equipment, may have large classes and may use a higher percent of part-time or nontenured faculty than some other disciplines.
Undergraduates liberal arts can break even if classes are large and are in subjects that don't require a lot of equipment. But if classes are small, use lots of tenured professors and include a lot of science and engineering the university can lose money.
A medical school is a champion money-loser. It has a huge amount of expensive equipment, high-paid faculty and a tiny ratio of students per teacher. Some states pay fees of $5,000 or $6,000 per student to each medical school. But in the District of Columbia this isn't true. That's why Georgetown Medical School, according to its dean, Dr. John Bernard Henry, has to change the highest tuition in the country, $14,750 a year, with GW at $11,800. Johnson estimated that tuition covers just under half the real cost per student.
Some 93 medical schools, three-quarters of those in the nation, including GU and GW, however, have set up "medical practice plans" in which a faculty member receives a modest salary from the school, carries on a medical practice in the university's hospital and, in effect, splits the fees with the school. Last year Duke took in $17 million from such a plan, Yale $14 million. Nationally, medical schools realized $737 million from these plans last year. Part of this goes back in added salaries and bonuses to the same doctors who earned the money, but the rest is net gain. "Without it we would not be able to carry a large faculty with many specialties," said Yale Vice President Jerald Stevens.
Science and engineering schools with a lot of heavy equipment are usually losers, and so are liberal arts graduate schools, which usually have small classes, a lot of specialized courses, students who require a lot of faculty time and a heavily tenured faculty that can't be fired even if nobody wants to take their course. "In the liberal arts, tenured professors in recondite subjects can be a costly waste," said Roschwalls of the National Association of State Universities and Land Grant Colleges."A place like Harvard [with an endowment of $1.4 billion] might pride itself on having an expert in 'the left-handed comma in Anglo-Saxon poetry,' even if almost no one takes his course." Others, in a financial crunch, would try to kill that course and get the professor to teach a big section of freshman English.
U.S. funds for student aid, now amounting to billions a year, are important for the lean years ahead, which for many colleges have already started. Colleges that lack endowments or state subsidies and must survive on tuition alone will be guaranteed at least some pool of paying students.
The role of tuition for private colleges is crucial; it covers most of the basic instructional and "core costs" of the university. At Duke, $38 million in tuition may not appear large when compared with the overall $306 million university budget, but that's the wrong way to look at it, said Pye, the school's chancellor. Out of the $306 million, over $124 million was gross revenue at the hospitals and didn't figure very much in the rest of the university; $60 million or so was direct income from research and just paid for its own costs, and $24 million was primarily student room and board fees which just covered the expenses of these services. Take away a few other earmarked items of this type and you are down to the "core costs," about $66 million. Now you can see how crucial the $38 million in tuition really is: it provides well over half the entire core budget and covers the bulk of teacher salaries.
Federal regulation can significantly increase university costs. "We had to start an equal opportunity office, four people," said Pye. He said other federal paperwork has required three additional staffers. He pointed to a smooth ramp leading to the Duke chapel."That cost us $40,000, and other modifications we may have to do under regulations for the handicapped may make it $500,000." Occupational safety and health modifications could take another $400,000.
Musing, he asked, "What the hell do you do if you don't have enough endowment to take care of it?" And he laughed wryly. "You study it for four or five years until you retire."
Pye and many others said that the most crucial problem of the lean 1980s, when enrollments could fall and money may be scarce for many institutions, will be to maintain academic excellence in the face of possible academic adversity.
Finding new ways to make and save money and cutting marginal outlays to the bone can help enormously to keep institutions good and viable, but if you go too far and cross the line, then you can dump academic standards down the tube in your effort to balance the books. The goal is to improve efficiency without crossing the line.