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Where is the money going to?

How can it be that interested students pay so much, but many academic salaries are so low (excluding the obvious full professor in a field where the industry pays for getting research results, like IT).

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    I can't say much as to why academic salaries are not high; however, tuition is higher than it has been due to easy access to student loans. This drives the market in such a way that easy access to money increases prices. This is true anytime the government subsidizes a sector of the economy. – nagniemerg Jan 29 '14 at 0:19
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    In what sense are academic salaries low? Low compared to what? Is college tuition high? At what schools? Community colleges here in California have nearly zero tuition and pay their full-time faculty quite well, compared to many jobs that require a high level of education but require you to work a lot more hours per year. – Ben Crowell Jan 29 '14 at 5:06
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    Note that in many parts of the world, tuition is not high. – gerrit Jan 29 '14 at 10:21
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    For US state universities, tuition is decided by the state legislature — This varies wildly by state. In Illinois, tuition rates are set directly by the Board of Trustees, under some restrictions imposed by the state legislature. – JeffE Jan 29 '14 at 15:28
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    @MHH: it is my impression that full time positions at community colleges don't exist anymore That's not true -- certainly not here in California, where there are state laws mandating that a specified fraction of the teaching be done by full-time faculty. – Ben Crowell Jan 30 '14 at 0:46
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Supply and demand. The value of something is what people are willing to pay for it.

Why is college tuition so high?

Because students will pay it anyway. If you headed the committee to decide how much tuition to charge, what would you base your decision on? You would probably want to charge as high as possible, since you're trying to bring in money for your school. And you would find (as many current committees do) that you can go pretty high and still have millions of students crawl over each other for the privilege of giving you piles of money.

Why would universities lower tuition? Top schools already dismiss 20 applicants for every one they accept, despite the insane tuition cost. Clearly, either education is an inelastic service, or there is a ridiculous shortage - either way, HYP could probably charge 10 times what they do now and still have no trouble finding students. I would say that the main reason they don't is a combination of concern for their reputation and a fear of being sued.

You may ask why the students are willing to pay so much; but that's an involved matter which is outside of the scope of this question.

Why are academic salaries so low?

Because professors will take the job anyway. If you headed the committee to decide how much salary to pay, what would you base your decision on? You would pay as little as possible.

In many areas, money is the prime motivator. So, at least the top companies will pay top dollar for the best employees, because the best employees have a string of job offers lined up and you have to give them something extra to take up your offer over all the other. Unfortunately, it so happens that in academia, money is not a good motivator:

  • Most eminent professors are old and content and they couldn't care less if their professorship made them $75k or $85k - they'll still want to work at that one school that they like for the reputation and the work environment (like colleagues and quality of graduate students). The ones that do care about money probably have a side business that brings in huge sums of money which makes their salary look like peanuts in any case.
  • Small time professors are either terrified of being fired (if not tenured) or can't get over the conflict between their ego and their lack of recognition, so they will readily take a pay hit to work at a more desirable institution if it means they can increase their own prestige.
  • Post-docs and other grunts will take pennies to work for a slightly more famous institution, because they think the association is vital to getting a faculty job after their post-doc. I'm sure many of them would pay (if they can afford it) to work like crazy for a guy who is famous enough.
  • Grad students are... Well... Grad students. The typical PhD candidate, when told that his job is essentially slavery, smiles and acts like it's a hilarious joke (even though he acknowledges that it's true). Many grad students already do pay to work like crazy, and not even for famous people.

How do you convince a thrice Nobel prize winner to be professor at your institution and not Next Door U? Pay him an extra grand every month? He's got three Nobel prizes, he doesn't care. And since he doesn't care, you might as well pay him a pittance - and as a nice bonus, you can tell all the other wannabes "Look, even he gets paid so little! Be content with your salary!".

If you ask why professors don't care, the answer is easy: Most people who care about money realize by the time they leave college that becoming a professor is not an optimal strategy for making money. To be a "greedy" professor, one must essentially wake up on their 30th birthday, and suddenly decide that even though all their life they haven't cared about money at all, from now on, money will be their chief concern. People who are old enough to have earned a PhD rarely have their worldviews change overnight so drastically.

Where is the money going?

Short answer: Admin staff, marketing, sports. Things such as cleaning staff and building maintenance are also factors, but crucially they are less dependent on the school budget. Whereas those three mentioned areas will benefit the most from budget increases (but perversely, academic salaries will be harmed the most by budget decreases).

For details: Depends on the university, and may be determined by consulting the annual financial report of the university.

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    Outside of the US, it is quite hard for professors to get a side activity. – BlueTrin Jan 29 '14 at 9:14
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    Is there no money going to teaching and science infrastructure? Am I naïve, is your last answer somewhat cynical, or is the situation more complex than I understand? – gerrit Jan 29 '14 at 10:22
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    @gerrit It's not cynical, it's my objective impression. It depends on how you define "teaching and science infrastructure", but I think with science professors at least, what actually happens is that the professor brings in a large amount of grant money on his own, and the university not only doesn't pay them, but also takes a large cut (50-80%) of the grant money on top of it. In some places, the contract literally says that researchers get no salary and they should arrange grants to cover their own salary. – Superbest Jan 29 '14 at 19:28
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    You haven't mention that being a professor is a job desired by a larger group of people than there are positions for. As such outside of the rockstars candidates for the job have only so much ability to demand high pay. The employer could always ask someone else. – dmckee Jan 30 '14 at 5:03
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    @dmckee Because that's actually irrelevant beyond the supply/demand angle. There are also many more people who would like to be CEO than there are companies, but CEOs make far more than professors (see also NBA players, movie stars, etc). The question is, how do the elite job seekers decide which job offer is better? CEOs pick whichever one pays most. Professors pick whichever one is "coolest", and money is very rarely a factor in their definition of cool. The selective pressures under which the respective job markets evolve are distinct. – Superbest Jan 31 '14 at 16:55
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There are a few false-assumptions that must be clarified, I feel, to answer this question properly.

Why are academic salaries low?

Well, in the US, if you compare them to most citizens of the country they simply are not. Naturally if you compare them only to Hollywood Stars they are paid a pittance, but let's get clear on the facts by the numbers:

In the US the lowest ranking full-time faculty professors receive salaries that are in the top 70% of all wage earners in the US. A full professor pulls in a salary that is in the 86% to 97% percentile of all wage earners over the age of 25 in the US. It also does not hurt that "professor" is consistently found to have some of the highest job satisfaction ratings across all jobs in the country, which certainly makes the job all the more desirable.

This has led to there being more people who want to be a Professor than there are positions available both nationally and internationally.

Why is college tuition high?

Here's the thing, and it isn't always easy to remember this: college education is a durable, long-term investment. And for many - though not all degrees from all institutions - it is still an incredibly lucrative one.

Indeed, college is perhaps the single most amazing investment pathway available to many Americans; it is one of very, very few that does not require you already possess wealth to take advantage of it.

As one nice survey points out rather thoroughly, even a bachelor's degree, on average, cuts your relative risk of unemployment in half (8% to 4%), raises the median earnings over 40 years of work to 65% higher than those who only have a high-school diploma, and many other pleasant benefits. In the worst of economic downturns a person has never, to date, been better off (at least statistically) to not have a college degree.

Further, only 1% of college students take out more than $75,000 in student loans. Now if you are one of those (and one of my friends racked up over $200k)...I'm very sorry, that is one hell of a debt service. But no one suggests that's necessarily financially wise, or at least everyone knows it will be unpleasant.

Fancy Words: Price Discrimination

Most Universities in the US publish reports on this, but for most places I've considered the percentage stated is that 70% of students receive financial aid, and for 40% of students this aid covers all costs to attend (and often extra which is given back to the student to assist in general living expenses). This includes federal student loans, which are provided by the government at artificially low guaranteed rates - and service on the debt is deferable if you are unable to obtain gainful employment.

Bottom line here: this is price discrimination, where some people pay more than others. But just as with the sticker price on a car lot here, most people do not pay as much as the official tuition posted. Endowment Universities, which often have the highest posted tuitions in the whole world (think Harvard, Yale, MIT, etc) regularly cover 80% or more of costs to attend for selected applicants who do not come from a wealthy family.

Some Universities are just still crazy expensive though, but that's a different subject!

College Isn't Just For Academics

It's probably just a minor artifact of wording, but let's be clear: most people who go through college, even through graduate school, do not become employed as academics. Academics are the minority of the population, even for the graduate population. Therefore there are many, many more market factors at play in between the price of tuition and the salary of a full-time academic.

So Where Does The Money Go?

Um...well, everything else, basically. A standard metric of business is 20-30% of a budget is salaries/labor, and the rest is...all the other stuff! Buildings, campuses, food, insurance, chemicals, equipment, computers, various and sundry apparatuses for science and art folks. Then add in advertising/marketing, travel and reimbursable expenses, college libraries, IT infrastructure, maintenance, custodial, utilities, "community involvement"...and we still haven't mentioned the other costs of "research" activities not otherwise included. Then there's the extra-curricular, like sports, clubs, and other supported campus organizations, "student life" and entertainment, "campus development" like building yet more buildings and parking lots to allow expanded enrollment, etc etc etc...

For most public institutions the actual charged cost of tuition to students is less than a quarter of the income required to balance a yearly budget. I must admit to ignorance about private institutions, largely because I have never been involved with them and because their budgets aren't usually made public.

  • I asked a similar question, and one of the comments was this chart: vpcomm.umich.edu/pa/key/images/chart3.jpg which is specific to U-Mich. I think it adds something to the last part of your answer. – S Hubble Apr 4 '14 at 15:45
  • While discussing the survey, you appear to be conflating correlation and causation. I'm not sure if it has been adequately demonstrated that a college degree will increase your quality of life in the ways you have cited. – Superbest Apr 7 '14 at 17:39
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    Just as a comment on your last sentence: the vast majority of public universities are nonprofit organizations and as such are required to release public financial reports. In the cases I tried, a Google search for "[Institution] financial report" takes me right to it. I know this is not the same as a detailed budget but it does show how income and spending are distributed across broad categories. – Nate Eldredge May 1 '14 at 15:16
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    "A full professor pulls in a salary that is in the 86% to 97% percentile of all wage earners over the age of 25 in the US." The statistics in this sentence is misleading. Very few people become professor at age 25. You need to compare the salaries of professors with the average earner at the average age for professors, or better, compare the salaries of professor vs average wage earner at each age range separately. – Siyuan Ren May 24 '15 at 1:28
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I believe the answer is a combination of a few things.

  1. Easy student loans (as mentioned by nagniemerg in a comment)
  2. More demand from employers for higher ed degrees (because of the large, underutilized labor pool)
  3. Increasing use of adjuncts, which are paid very little (see related question)

So, it's really a combination of more customers being able to afford the product, limited competition due to high barriers of entry, along with teaching labor being cheap because it is abundant.

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An increasing fraction of college budgets is being spent on things other than instruction. Administration is a big part, including management and special programs like various tutor/counseling centers, compliance officers, legal, IT, etc. Also soaking up money are sports programs, construction costs, scholarships (to raise prestige), advertising, etc.

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    In theory, the sports programs are supposed to bring in money. Theories are quite nice, aren't they? – asteri Jan 29 '14 at 0:21
  • Sports programs use reverse Hollywood accounting to appear to turn a profit despite huge losses every year. – vadim123 Jan 29 '14 at 0:27
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    @Jeff - Not all sports do this equally. At a larger school, the basketball team may be a moneymaker, but I wouldn't expect the swim team, the lacrosse team, the baseball team, the ice hockey team, or the polo team to be in the black. – J.R. Jan 29 '14 at 2:32
  • @JR Nice point. I was thinking mostly about football and basketball, it's true. – asteri Jan 29 '14 at 2:34
  • Even football and basketball do not pay for themselves. The sole exception is for top-20 schools, in good years. – vadim123 Jan 29 '14 at 2:43
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Focusing just on "why is tuition so high", remember that not all schools are the same.

It is true that elite private schools have so many candidates that, if they are willing to just admit anyone qualified who can pay, they can set tuition rates very high and still attract students.

The situation is very different for non-elite public schools in the U.S., e.g. the "regional universities" and "directional schools". These schools are controlled by states and have a primary mission to educate students from that state. These institutions do need to worry about raising tuition, because their student body is not able to absorb price increases so easily.

Since the 1970s-1980s, there has been a significant reduction in state funding for higher education in the U.S. This is true even for elite public universities; here is a quote from the University of Michigan:

However in the 1960s, state funding made up 80 percent of the U-M’s general fund budget – the budget that pays for the university’s core academic programs. In the coming year, the state appropriation will be around 16 percent of the general fund budget.

The first link above shows that quite a few states are on track, if the current pattern of funding cuts were to continue, to have no funding for public education by 2030-2040.

Non-elite public school are usually not in a position to obtain large amounts of grant funding, compared to elite public schools. Other sources of income are also difficult.

This does not mean that schools must raise tuition - they could (and do) try to cut costs elsewhere. But at least one factor in rising tuition has been this reduction in state funds. And the state legislators, who must budget for the entire state, are perfectly aware that the schools can raise tuition, which is sometimes mentioned to the universities as a partial justification for the budget cuts.

  • Having asked around, it seems that many/typical "top-30 state universities" have only about 11 percent of their budget derived from state funds currently. – paul garrett Sep 9 '14 at 14:03
  • Indeed. Besides state funding, federal research grant funding is also much more tight now than (I am told) it was in the 1960s and 1970s - and more schools are competing for it, rather than just research-intensive institutions. – Oswald Veblen Sep 10 '14 at 1:37
  • And some top 30 institutions are in the low single figures in terms of percentage of state support. – Corvus May 23 '15 at 19:12
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One reason tuition is so high is so that the institution can charge a variable rate. Many people (in absolute terms, though not as a percentage) are able and willing to pay full tuition, and lower tuition loses those dollars. At the same time, many institutions advertise how large their financial aid awards are, which is essentially providing a discount. Variable pricing strategies of this form are quite common. It's not all that different from a lot of fashion companies: set a seemingly outrageous price because the smart shopper won't pay retail.

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