Every year, tuition at American colleges and universities goes up, but no one seems to really know why. In fact, the average cost of higher education in the United States increases at double the rate of inflation, and by increasing 8% each year, the cost of tuition doubles every nine years. Moreover, these institutions claim that they are losing money and that they have to increase their reliance on large lecture classes and inexpensive part-time faculty in order to remain afloat. In other words, the cost is going up, but the expenses are going down, and once again, no one appears to offer a coherent explanation for this state of affairs.

One possible reason for the financial difficulties of universities and colleges is that since 1980, states have been cutting their funding for higher education. In fact, if you listen to higher ed administrators, they will tell you that all of the problems are due to the reduction of state funds, and if the states would just give more money, all of their financial issues would disappear. Unfortunately, when administrators make these arguments, they are misrepresenting the truth. The simple fact of the matter is that it does not matter how much money these institutions get from the government or even from tuition-paying parents and students; what matters is how universities and colleges spend their money.

To prove this point, we can simply look at the fact that even the wealthiest institutions, many with multi-billion-dollar endowments, continue to increase class size, rely on graduate student instructors, and inflate tuition costs. While an important cause for the increase in cost is the increase of administrators, this is only part of the problem. A larger issue is how universities and colleges determine what they spend on each undergraduate student in a given year. We shall see that this calculation is the key to many different issues and helps us to explain why no matter how much these institutions charge, they never have enough money.

**The Department of Creative Accounting**

A famous economics professor once said that statistics are like bikinis because what they reveal is seductive, but what they conceal is essential. In the case of the use of numbers by universities and colleges, this combination of seduction and concealment gets to the heart of the matter. For example, in 2008, the University of California (UC) declared that it cost close to $25,000 to educate a single undergraduate student for a year, and since students were paying an average of $8,000 and the state was chipping in $15,000, the university was losing $2,000 for each student. In declaring that the state was failing to fund the full cost of educating undergraduates, the university decided in 2009 that it would have to scale back enrollment by 2,300 students, raise student fees (tuition) by 42% (9.3%, then 32%), increase class size, and decrease available course offerings. Once again, students would be paying more and getting less, and yet the numbers don't add up.

As the Berkeley physicist Charles Schwartz has shown, the reasons why the numbers never add up in higher education is that universities and colleges use a false and misleading method to determine the cost of undergraduate instruction. Many institutions calculate this important figure by taking the total cost for all undergraduate and graduate instruction, research, and administration, and dividing that cost by the total number of students. Schwartz argues that this common method for determining cost is misguided because it assumes that all students will be taught by professors and that there is no difference between the cost of undergraduate and graduate education. In other words, when a university or state calculates how much it has to spend to educate each additional student, it includes in the costs, the full salary of a professor, but everyone knows that at research institutions, professors only spend a small percentage of their time teaching undergraduate students. According to Schwartz, parents are really paying for the cost of undergraduate instruction plus graduate instruction plus research plus administration. To be precise, undergraduates are subsidizing the cost of research and graduate education, and no one admits this fact.

The reason why this calculation of how much it actually costs to educate an undergraduate is so important is that it determines the amount universities and colleges charge for tuition, how much these institutions get from the state, and how these institutions can claim poverty. This calculation also hides the fact that most students in higher ed are now being taught by non-tenured faculty and graduate students and not by professors. Meanwhile by making students and their parents pay for faculty research, the quality of education is reduced; for the simple truth is that the more professors are rewarded for their research, the less they often value teaching. In fact, one of the greatest rewards a faculty member can get is a course reduction or sabbatical, and this incentive structure sends out the message that teaching undergraduates is something one should avoid.

This perverse incentive system at research universities also trickles down to other schools, and one of the reason for this application of research priorities at non-research institutions is that so many of the professors and administrators are trained at doctoral research universities. Moreover, once research becomes the priority at a college or university, the cost of administration and facilities skyrockets, and this increase in bureaucracy and buildings is paid by undergraduate student tuition and state and federal taxes. Undergraduate students and their parents are therefore paying for the replacement of teaching with research and administration, and what makes this situation even more appalling is that these institutions still claim that they are providing a public good and that their mission is to serve the community. However, the point here is not to say that parents and tax payers should not support university research or that university research is not important; rather, people should know what they are paying for, and false statistics allow for a lot of hiding and mismanagement.

The Actual Cost of Instruction

One way of determining the actual costs of educating undergraduates is to look at who does the teaching and how much they are paid for each course. For instance, we know that in 2008, the average number of primary courses taught per year by a UC professor over three quarters was five classes and that the faculty course load was evenly divided between undergraduate and graduate courses. We also know that the average pay for associate professors was about $100,000, and so the average cost per class was $20,000 (this average is very close to the national average for research universities). Of course, professors teach less than half of the undergraduate student credit hours in the UC and other research universities, and so we must also determine the cost per class for non-tenure-track faculty and graduate student assistants. In 2008, the average salary for a full-time lecturer in the UC system was $54,000, and the average number of courses taught per full-time non-tenured faculty member over three quarters was 9 courses, which turns out to be $6,000 per course.

If we now look at the two most dominant types of undergraduate classes in the university structure, we find small classes averaging twenty students and large classes averaging two hundred students. When a research professor teaches a small class, we can divide the per class earnings of $20,000 by the number of students (20), and we find that the per student cost is $1,000, and if this same class is taught by a non-tenured faculty member, the cost for each student goes down to $300. Now, when we turn to large classes, it costs $100 per student for a professor to teach a class of 200 students, and $30 per student to take a large class taught by a lecturer.

To get the total instructional cost of educating an undergraduate student for a year, we can calculate that a typical university student in the quarter system takes eight large classes and two small classes, and half of all of those classes are taught by non-tenured faculty. The total cost then is arrived at by adding four large classes taught by a professor (4 x $100 = $400) to the four large classes taught by a non-tenured teacher (4 x $30 = $120), and then by adding one small class by a professor ($1,000) and one small class by a non-professor ($300), we get $1,820. So why does the UC claim it is losing money when students pay $8,000 and the state chips in another $15,000 per student?

The first response by university officials is that we have not included the cost of the rooms, the heating, the staff, the equipment, and the central administration, but before we get to this calculation, let's just stick with the direct instructional costs. For there is something that I have left out, and at research universities, it is very important: the graduate student instructors. Most of the large lecture classes in the UC and other research universities are coupled with small sections taught by graduate students, and these sections usually hold twenty students. Therefore, a large class of 200 students will have 10 sections, and this is where the instructional cost starts to go up. In fact, due to the need to pay graduate students to teach the small sections, large lecture classes often end up being more expansive than small classes. For example, UCLA pays graduate students around $4,000 per section (this includes part of their tuition remission), and if the average number of students in a section is 20, it costs an additional $200 per student, and with eight large classes, this adds $1,600. The total instructional cost per student has now gone up to $3,420, and if we now add an additional 20% to cover health benefits, the cost is just over $4,000.

**Other Ways of Calculating the Real Cost of Instruction**

In response to the calculations, many university administrators will say that we need to factor in the cost of administration, utilities, and construction. However, by first concentrating on the instructional cost, we see how most of student tuition and state funding does not go to education. If we now start to look at the other associated costs, we shall see that they still do not justify the amount that these institutions charge. To help us work on the non-instructional calculation, we can examine Schwartz's analysis of the cost of educating undergraduate students. The first thing to point out that by using a different method of calculation, Schwartz comes to a very similar set of conclusions. Instead of using my averaged estimates, Schwartz looked at the actual expense reports of the different UC campuses, and by taking out the cost of the graduate schools, and only looking at the part (23%) of the professors' salaries that goes to undergraduate instruction, Schwartz found that in 2003, the UC spent $497 Million ($3,330 per student) on undergraduate education. Schwartz then added in the cost of libraries, student services, and administration dedicated to undergraduate education. He also added in the cost of utilities and overhead, and he came to a cost of $6,817 per student for a year. According to Schwartz's accounting system, students pay for the full cost of their education, and the schools make a huge profit from keeping all of the money from the state.

In another study, "What does a College Degree Cost?," Nate Johnson used a similar method to look at the actual costs of universities in Florida. While Johnson did not calculate the amount of time professors actually do spend teaching undergraduates, he found that the direct instructional cost per credit hour was $158, and therefore if a student graduates in four years and takes the required 120 credits, the cost per year is $4,720. Johnson then added in the cost of student services, administration, facilities, and overhead and came to a total cost of $288 per credit, which almost doubles the instructional cost. Even this calculation is highly inflated because it includes in the salary portion, the cost of research and graduate instruction for professors. However, even without subtracting the time professor spends outside of the classroom, his figure is close to Schwartz's calculation.

**The Inflated Costs of Privates**

If we now turn to private universities, we find that the costs go up because the faculty and administrators make so much more money than at public schools. However, even if we take into account these higher levels of compensation, Schwartz's analysis shows that it actually costs elite private institutions much less than they claim to educate an undergraduate student for a year. For example, looking at data provided by U.S. Department of Education's Integrated Postsecondary Education Data System, Schwartz found in 2005 that Harvard was charging students $32,000 a year, but it actually cost them closer to $18,000. Likewise, Stanford charged $31,000, but the cost was estimated to be $16,000. If we look down Schwartz's list of the comparison between the tuition price and the actual cost, virtually the same ratio, where private universities charge about twice as much as the actual cost. Moreover, private universities claim they spend millions from their endowment funds to subsidize the cost of undergraduate education, but the reality is that students are subsidizing the high salaries of administrators and faculty not involved in undergraduate instruction. Likewise, in his analysis of public institutions, Schwartz found that the price of tuition matched the actual cost, but states also pay the full cost, and so public universities are actually being paid twice for every student.

**The Prestige Economy**

In response to this analysis, many people will argue that people go to prestigious institutions because these schools have great reputations, which, in turn, allows students to go to the best graduate schools and get the best jobs. In other words, students who go to elite institutions want the faculty to concentrate on research and raising funds because that is how universities get the best reputations. Therefore, what students are purchasing is not an education or a credential; rather, students are buying prestige and reputation. Against this argument, I claim that parents, students, and taxpayers should know where their money is actually going, and everyone should be concerned about the quality of undergraduate education. If students at elite institutions do not get an effective education, but they do get to purchase prestige, our country will produce leaders, workers, and citizens who lack the basic skills and knowledge to be effective inside and outside of the workplace.