Notre Dame magazine

Published Winter 1998-99

Why does Notre Dame cost so much?

In 1998, a major study of the economics of higher education in this country was undertaken by the National Commission on the Cost of Higher Education, an 11-member, blue-ribbon committee established by an act of Congress. Acknowledging that tuition at all colleges and universities tends to produce "sticker shock" among consumers, the commission urged institutions to let their constituencies know what's caused this "price crisis" and what they're doing to alleviate it.

Parents of Notre Dame students have learned to dread the month of March. That's when the bad news from campus arrives. "Our budget calls for an increase in tuition and room and board of 5.5 percent," read a key sentence in the tuition letter for 1997, when inflation was running close to 3 percent. Ouch.

The bottom line in raw numbers is this: A year's tuition at Notre Dame climbed from $8,626 in 1987 to $18,810 in 1997, a jump of 118 percent. If you prefer to look at total price instead of tuition, start with a 1987 figure of $12,900 and compare it to a 1997 figure of $25,900 -- still better than a 100 percent increase. In percentage terms, tuition and fees grew at a rate of 8.1 percent a year from '87 to '97 while inflation grew an average of 3.5 percent.

Notre Dame administrators are anything but insensitive to the pain parents feel when they're writing out tuition checks. They realize it's not enough to point out that similar levels of price increase can be documented at every college and university in the nation, although that's true. They also understand it's small comfort that the magnitude of Notre Dame's price increases has been dropping, although that, too, is true and reflects some tough decision-making at budget time.

Administrators acknowledge the frustration of parents who see belt tightening and downsizing going on everywhere in the business world but not, so far as they can tell, in higher education. Why can't universities bite the bullet too?

It comes as no surprise that the lion's share goes for the University's primary mission, teaching students. And herein lies one explanation for annual tuition increases: Not only has Notre Dame's faculty population swelled over the last 10 years -- from 486 to 760 -- but compensation improvements have pushed faculty salaries, as ranked by the American Association of University Professors, from 39^th to 16^th among major American universities.

Another big portion of each tuition check pays for academic support, and the bulk of that is spent on libraries (a bit over 50 percent) and computers (just under 33 percent), two items intimately involved in the learning process. Both these areas reflect the University's support priorities. A decade ago Notre Dame's library collection was ranked a dismal 74^th on the Association of Research Libraries index; by last year, that ranking had climbed to 53^rd. While it takes more than an infusion of money to affect such rankings, money is an essential ingredient.

That gap between tuition increases and inflation looks a little less boggling when one examines how inflation rates are determined. A recent paper from the National Association of Independent Colleges and Universities points out, for example, that "the national Consumer Price Index measures inflation as experienced by urban consumers . . . (and) provides a way for them to compare what a fixed market basket of goods costs this month with what the same market basket cost a month or a year ago. However, colleges and universities purchase a very different >basket' of products and services."

It's no secret that Notre Dame has been doing a lot of building in the last decade (though no more, proportionately, than in many other decades throughout the school's history). A 1987 campus construction bill of $15.3 million had climbed to $92 million by 1997. Although the bulk of new buildings is underwritten by gifts, the University has increasingly turned to tax-exempt debt in recent years to pay for construction, on the grounds that it's cheaper to use borrowed money than to siphon off fund balances that have been growing at a robust 14 percent a year.

A lot more has changed at Notre Dame in the past 10 years, and most of the changes have had an impact on costs. Enrollment is one index that has changed only minimally, however, climbing from 9,461 students in 1987 to 10,145 last year. Student quality, by contrast, took a major leap: Ten years ago, SAT scores averaged just under 1,200; now they're over 1,300. Back then, 72 percent of entering freshmen were in the top 10 percent of their classes; in 1997 it was 81 percent. All this puts Notre Dame in a pretty exclusive club so far as selectivity is concerned, but it also ratchets up cost pressures B the best students expect the best faculty and facilities and the latest technology, and if they don't find them at Notre Dame they'll go elsewhere.

Not every change has put upward pressure on tuition. Indeed, the price of attending Notre Dame would be even higher if it weren't for two non-tuition sources of revenue. One is endowment: A decade ago it stood at $500 million; by last year it had tripled to $1.5 billion. Part of the increase reflects investment growth over the period, but a more significant factor has been a giant jump in contributions. In 1987, restricted and unrestricted gifts totaled just under $46 million; last year they exceeded $95 million.

Another growing source of income comes from auxiliary enterprises, which include residence hall and dining operations, the bookstore, the laundry, the Morris Inn and athletics. Throughout the decade, the University has expanded auxiliary income by entering into contracts with NBC and Adidas, establishing an affinity credit-card program, and outsourcing the operation of the Notre Dame bookstore to Follett's. Combined, these programs have enhanced auxiliary net revenue by more than $12 million since 1987.

Even though tuition numbers are high and getting higher, the amount covered by student tuition is only the price of a Notre Dame education, not its cost -- a distinction seldom stressed. At most, tuition pays only 75 percent of the real cost. The rest comes from external funding sources, gifts, auxiliary enterprises and earnings from endowment.

By some measures, the University can even be considered a more affordable place today than it was a decade ago, thanks to a dramatic increase in available student aid. Part of the increase comes from federal programs in support of higher education, although it's worth noting that federal aid had been shifting away from grants and toward loans, which means many more students leave school today with significant debts facing them.

Another change has been a hefty increase in the amount of aid Notre Dame offers students from its own coffers. While tuition was rising by 82.2 percent from 1989 to 1997, institutional aid per student was soaring by 169 percent. In raw numbers, institutional aid tripled across the decade, rising from $5 million to nearly $16 million. Most of that sum is generated by the University's endowment, but a small portion comes out of current income. The latter source represents a recent change of policy for Notre Dame, although the University uses only 3.8 percent of its operating funds for student aid, compared to 19.3 percent for peer institutions, thus minimizing the impact this item has on tuition.

AFinancial assistance is now close to full unmet need, and it will be there in three or four years,@ beams Scott Malpass, associate vice president for finance and the University's chief investment officer. "The freshman class admitted this fall had virtually its full need met, and almost all that aid was underwritten by our endowment and Sorin Society gifts. The average aid package is now close to $9,200 -- a huge jump in a few years' time."

If the endowment is so healthy, parents may wonder, why not skim off an even bigger slice to hold down tuition? It's a question the officers and trustees have wrestled with throughout the bull market of recent years. Their decision not to redirect endowment yields in major ways grows from a deep commitment to the purposes of an endowment: to provide a reliable, long-term stream of earnings for things like scholarships and professorships, thus dampening cost increases. Public institutions have public funding to serve some of these purposes; private schools depend on endowment and cannot afford to squander it on short-term necessities. Another reason is that much of the money in the endowment is directed at specific purposes and cannot be diverted to other needs.

Says Malpass, "Our spending rate from the endowment looks low because the market has been so high. But the fact is, we have increased our payout close to 75 percent compounded in the last five years while inflation has compounded around 10 percent. In spending from the endowment, we try to keep pace with market results smoothed over time."

The "cost drivers" affecting higher education, to borrow a phrase from the report of the National Commission on the Cost of Higher Education, are six in number: people, financial aid, facilities, technology, regulation and expectations. Malpass thinks expectations may be the most overlooked and under-rated of the six. "Competition for students has been intense in the last 10 years," he observes. "When high school students consider college, they look at academic reputation, financial aid, student life and the availability of technology. The last item in particular carries a huge cost but doesn't necessarily increase productivity. Notre Dame has put a lot of money into delivering education in a better way. People often ask why colleges can't be run more like a business. But we're not businesses -- unlike a business, when a university invests in technology that doesn't automatically translate into personnel savings."

What it translates into is more attractive positioning, both in the student market place and in the competition for top flight faculty. Today's college prospects expect to find a wider range of course offerings than their predecessors did. They take for granted dormitories wired for technology, state-of-the-art recreational facilities and increased contact with faculty. At the same time, the best faculty -- the kind Notre Dame is dedicated to hiring -- bring expectations about office space, laboratories and research assistants that an earlier generation of faculty did not.

As for the cost pressures imposed by regulation, Malpass believes most people are unaware that colleges are the most extensively regulated businesses in the nation today. Only two federal agencies, in fact -- the Federal Trade Commission and the Consumer Product Safety Commission -- do not have some regulatory authority in higher education.

-- Environmental, toxic material and occupational safety regulations

-- The Higher Education Act, which covers the handling of more than $30 billion annually in federal student aid, and

-- Accreditation, which is carried out by some 60 agencies overseeing more than 100 different programs in higher education.

To call complying with regulations an important cost driver is an understatement. All the reporting and record keeping requires staff time spent attending meetings and training sessions, performing extensive paperwork and huddling with compliance officials. Virtually no area of the University escapes, from the controller's office to the graduate school to the athletic department. The Americans with Disabilities Act has been especially costly for colleges and universities; over the last six years, Notre Dame spent $1.6 million to renovate existing structures to comply with federal standards. In the student aid office, 50 percent of that unit's operating budget of $441,500 is spent on federal compliance, and 60 percent of staff time is devoted to compliance tasks. In the athletics office, more than $800,000 was spent last year to comply with Title IX regulations, a sum that's expected to climb to $2.4 million by the year 2005.

Freshman surveys conducted with each entering class at Notre Dame show that students' number one reason for choosing a university is its academic reputation. In some measure that reflects the economic motive that drives students -- or their parents -- to pursue higher education. For all that it costs, a college degree can still be viewed as a bargain for both the individual and society. It has been fairly said that the only thing more expensive than going to college is not going to college. Put another way, it's hard to find a better use of investment capital than higher education

In 1996, according to U.S. Census Bureau statistics, the average annual family income of a college graduate with a bachelor's degree was $75,311; for a high school graduate the figure was $45,146. Extrapolate those numbers over a working lifetime and -- to paraphrase a famous wry comment about federal spending by the late Sen. Everett McKinley Dirksen of Illinois ("a billion here, a billion there . . . pretty soon we're talking about real money") -- we're talking about real money.

In Straight Talk about College Costs and Prices, the report issued by the National Commission on the Cost of Higher Education, there is some scary language aimed at American higher education. "What concerns this Commission is the possibility that continued inattention to issues of cost and price threatens to create a gulf of ill will between institutions of higher education and the public they serve," warns the report, adding that "such a development would be dangerous for higher education and the larger society."

Notre Dame administrators don't take these warnings lightly. The narrowing gap between tuition increases and inflation is a sign that the University is already working to eliminate the spread. No quick fix is possible, however. Continued progress will come from a variety of small measures.

For example, campus departments and administrative units now use campus-wide purchasing cards in a move to eliminate much of the paperwork and "people time" that characterized older, haphazard purchasing patterns. The University now engages in aggressive negotiating for telecommunication services, a process that has resulted in big savings. The centralization of budgeting and capital planning into a single department, and the addition to staff of new employees with expertise in tax, payroll and cash management, have led to more a more orderly budgeting process and a higher level of accountability within the University's operating units.

Some of the University's economies have been achieved by outsourcing -- a change symbolized by the startling presence of a Burger King counter in the Huddle this year. Handing the operation of the bookstore over to Follett's less than a year ago has already increased earnings by $750,000, with the potential of greater long-term revenue. Other economies have come from internalizing functions formerly contracted out to external firms. An example is the decision a few years ago to bring the licensing and fulfillment operation inside.

On the academic side, Notre Dame is constantly alert to ways of increasing academic collaboration with other research institutions and consortiums. And the impact of computer technology on the instructional mission, just beginning to make itself felt, is clearly destined to improve efficiency in the delivery of instruction. An example is "distance learning," the delivery of classroom instruction to students at remote sites, which is already being practiced in the College of Business Administration as a way of enabling the University to reach more students and generate more revenue.

Cost containment is one part of the strategy. Revenue enhancement is the other. An example is the new Irish Courtyard at the Morris Inn. This outdoor facility expands the Inn's ability to cater to football weekend crowds and is available at other seasons of the year for outdoor group functions, including weddings.

These measures barely tap the list, but they reflect a University that has moved from a confederation of cottage industries to a centralized administrative structure with a keen sense of economic realities, opportunities and responsibilities. Notre Dame set out almost half a century ago to become one of the handful of best universities in the nation, and it has largely achieved that goal. Equally urgent today is another objective: to remain one of the most affordable institutions in that group. E. William Beauchamp, CSC, the executive vice president, sums up this goal:

"If Notre Dame is to be the first-rate institution that our students and alumni both expect and deserve, significant challenges lie ahead. But we have faced such challenges in the past, and the University will continue to try to balance the twin goals of remaining as affordable as possible while continuing our quest to be one of the country's premier universities."

Winter 1998-99 contents