Should the housing/ economic downturn motivate MIT to reduce its sticker price?

Colleges and Universities A-Z Massachusetts Institute of Technology
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<p>Many families that do not benefit from MIT's existing financial aid policies (essentially families with incomes of more than 75K) have been relying on home equity loans and 529 plans to finance the 50K+ cost of MIT.
And, by extension, MIT has been relying on these same family "assets" to increase fees and costs annually. Some of the problems that these families are increasingly encountering (and some MIT commentary) are reflected in:</p>

<p>Credit</a> squeeze hits college students, families - Personal finance - MSNBC.com</p>

<p>This situation is impacting those who were already hit hardest by the existing system, the self-financing lower middle and middle income families. Isn't it time to throw out the existing system and roll back tuition to a number which is not artificially inflated by individual subsidies to some and more appropriately utilizes the endowment? Cooper Union and Olin actually offer free tuition for all with a fraction of MIT's endowment.</p>

<p>Here's a particularly prescient article written by an MIT Prof some ten years ago.</p>

<p><a href="http://philip.greenspun.com/school/tuition-free-mit.html%5B/url%5D"&gt;http://philip.greenspun.com/school/tuition-free-mit.html&lt;/a&gt;&lt;/p>

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<p>I was wondering if Cooper Union and Olin do a fraction of the research
that is undertaken at MIT?</p>

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<p>No. Undergraduate education, not research, is the focus at Olin.</p>

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<p>I've been reading for awhile about the dozens of schools with $1 billion and greater endowments (MIT is supposedly 10th on the list with about $10 billion) being subpoenaed by Congress in their investigation of University spending habits (perhaps to require a 5% minimum annual expenditure, as is legally required of nonprofits other than educational institutions). Certainly, many schools could afford to make tuition free. However, the only arguments I've heard against this are: 1. It would not be fair to those who've paid in years past, and 2. Wealthy parents should have to contribute. Well, tuition is only a portion of the annual costs, and the $50000+ MIT estimates is this year's cost is ridiculously high and unaffordable for the vast, vast majority. Furthermore, in the schools' rush to accept students who qualify for aid (to avoid a Congressional mandate), there's an insidious bias against kids from better-off families. Just like colleges shouldn't be havens for the privileged classes, we shouldn't swing too far in the other direction. It seems to me that a fair middle ground would be free tuition, with other expenses (which can be more than $10000 annually) covered by families or by need-based aid, allowing for an admissions process which truly takes financial considerations out of the calculation.</p>

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<p>Actually families earning well over $100,000 still get need based aid at MIT. There is no tuition for those below 75K and it only gradually increases from there. MIT has also eliminated home equity in the aid calculation for most middle income applicants. As of 2007, over 65% of students received some form of need based grant from MIT, the highest percentage of any top 50 private university. That number certainly increased since then under the new policies. </p>

<p>There is certainly no bias against full pay students at MIT. They still provide substantial revenue which pays for many of the services MIT offers. Eliminating tuition altogether would affect funding of other projects as much of the funds from the endowment are restricted funds which can only be used for specific projects and can't just be allocated for operating expenses. Tuition still funds nearly 25% of the total MIT operating budget.</p>

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<p>
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Tuition still funds nearly 25% of the total MIT operating budget.

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<p>Where are you getting that from? Last I saw (which was in early 2006, so it could be out of date), it was 15%.</p>

<p>MIT does fairly well as finaid goes for a top university, as cellardweller pointed out. I'd like to see it reduce tuition as much as it possibly can. This is not because I don't think it does a pretty good job now, but because I'm sick of seeing students from well-off families blackmailed and manipulated by crazy parents - I've seen some pretty horrible cases of this - and would like to see it become easier for students to be financially independent at MIT (for those whose way is mostly paid by finaid anyway, they have an easier time escaping from these situations). It may not be possible, though, for the reasons that cellardweller pointed out, to actually eliminate tuition costs.</p>

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<p>If families with well over 100,000 still get financial aid then why do only 65% get it? Are there that many rich pp going to MIT? I get the feeling that you have to be poor in order to benefit from the financial aid and that the middle class is left in the dust.</p>

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<p>As a measure of comparison consider that only 54% of Harvard students, 43% of Yale and Stanford students and only 38% of Penn or Duke students are on financial aid. So, MIT has a larger proportion of middle class students than any its peers and has to spend signficantly more in financial aid as a consequence. </p>

<p>Under the new financial aid policies, the spread between the number of students who request financial aid at MIT and those who actually get it will shrink. In 2007, from its published CDS, 79% of MIT enrolled applicants requested aid and 64% received aid, a 15% difference.</p>

<p>In 2008, although the numbers are not released yet, that number will shrink significantly, certainly to less than 10%. As MIT is being forced to align itself with the more generous policies at Harvard, it may opt for something like the 10% of income rule which would cover students with family incomes up to $200,000. The high returns from its endowment may allow it to fund such an increase in financial aid. </p>

<p>MIT is also currently looking at all types of creative options such as deferring tuition and making repayment based on future income. </p>

<p>Editorial:</a> Financing Undergraduate Education</p>

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<p>From the Grassley submissions it appears that a substantial portion of the financial aid that MIT and others have paid out has not been paid from the endowment but rather has been paid from "other" revenue sources. Clearly, money is fungible; however, apart from the endowment, the only significant revenue stream available to pay that finaid is the tuition and fees that the colleges are collecting from paying students. In short, the high sticker-price paid by the full-pay students (or any student who is paying more than the average net charge) is used in part to make finaid grants to other students. It’s a form of forced income redistribution over and above that provided for in the tax code. It’s legitimate to question the wisdom or equity of imposing this 50k burden on a family with 75-100k in income, when there is a 10B endowment, generating tax free income of 1.5B a year, that is vastly under-utilized. IMO, at the very least, colleges should cut tuition to what it would be without the forced subsidies and transfer payments; and should use their own endowments to pay whatever finaid they deem desirable. If the tuition is less, the amount of aid necessarily will also be less.</p>

<p>Also, any college’s statement that only x percent of the "total cost" is covered by tuition is likely self-serving and definitely too vague to be meaningful. Much of the problem here is that the "cost" includes "operating expenses" and other programmes, the details of which are hard to come by. By most accounts, administrative expenses (as well as the costs of collateral social programmes that have little to do with education) are out of control and unlike a for-profit company, there is a disincentive for a not-for-profit to control these and no requirement that the details be reported. See College</a> Financial Aid: Going Broke by Degree</p>

<p>Additionally, the admirable research being conducted by MIT and others isn’t a justification for high undergrad tuition. Research is largely funded by public and private grants (including specific, restricted contributions to the endowment) and in many cases generates an income stream of its own.</p>

<p>Finally, comments from those who no doubt are the beneficiaries of this forced largesse, to the effect that these are just empty, selfish protests of “rich” parents intent on punishing their children are sadly uninformed and callow.</p>

<p>Hopefully, all colleges will act to reform this system, which IMO is broken and not sustainable.</p>

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<p>
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If families with well over 100,000 still get financial aid then why do only 65% get it?

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<p>One reason is that a surprising number of families assume incorrectly that they are too wealthy to qualify for finaid, and don't bother to apply.</p>

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I get the feeling that you have to be poor in order to benefit from the financial aid and that the middle class is left in the dust.

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<p>While I realize that in a few select areas of the country, an income of 75K (or 100K, for that matter) might be considered lower-income, I simply don't accept the idea, apparently common around here, that anything under a 75K household income makes you a poor person. In most areas of the country a typical-sized family can live quite reasonably on that salary.</p>

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<p>One thing that scares me is that if MIT makes tuition free, then a lot of people will want to come to MIT not because they want a stellar science/math education, but rather because it's a shiny degree for free. It'll significantly raise the competition for admissions, and while some degree of competition is necessary, too much puts a choke on students that is completely unproductive.</p>

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<p>
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In short, the high sticker-price paid by the full-pay students (or any student who is paying more than the average net charge) is used in part to make finaid grants to other students.

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<p>Upper income student do not subsidize lower income students. Detailed studies have shown that education of a typical undergraduate student at a place like MIT costs far more than what the university can charge in tuition. At MIT the true cost is well over $75,000 per year or more than twice the tuition charged. Graduate students are much cheaper as their cost is typically funded through research grants in each department. </p>

<p>
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Also, any college’s statement that only x percent of the "total cost" is covered by tuition is likely self-serving and definitely too vague to be meaningful. Much of the problem here is that the "cost" includes "operating expenses" and other programmes, the details of which are hard to come by.

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<p>Not at all! Universities such as MIT maintain detailed operating budgets that are actually much more transparent than those of private industry. You can find out to the penny what each department spends, what the salaries of the top professors and administrators are, what it cost to build a new dorm or laboratory. There is no incentive to add unnecessary administrative expenses to the operating expenses as the government caps what universities can charge back as overhead. </p>

<p>A 2000 RAND study [Goldman, C. Williams, T., Paying for University Research Facilities, RAND, 2000] concluded that university overhead is lower than that of industry and that research was more cost effective than at government run labs or in private industry. Universities don’t pay their administrators the high salaries and bonuses of their counterparts in industry, do not have fancy headquarters or need to spend on brand marketing to the extent of private industry. So even though universities are non-profit does not mean they are not efficiently run. Another myth!</p>

<p>
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It’s legitimate to question the wisdom or equity of imposing this 50k burden on a family with 75-100k in income, when there is a 10B endowment, generating tax free income of 1.5B a year, that is vastly under-utilized.

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<p>That is a nice sound bite but it does not withstand scrutiny.
First, one needs to understand how endowments work and what their spending policies are:</p>

<p>MIT endowment spending policy is summarized as:

[quote]
In managing the Endowment, MIT keeps two primary goals in mind: providing a significant and stable flow of funds to the operating budget, and maintaining the long-term purchasing power of the principal. The first provides resources for today’s generation of scholars, while the second ensures that MIT will be able to deliver adequate resources to future generations of scholars.

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<p>This balance between the needs of current scholars and future scholars is key. If universities spent money like state governments for instance, there would be a constant ebb and flow between high spending in years with high tax revenues and cutbacks in years of deficit. Endowment returns do go up and down just like any type of fund. Increasingly, endowments of schools like MIT and Harvard are heavily tied into risky vehicles including hedge funds, international stock funds and real estate. US stocks and bonds represent less than 20% of the endowment of MIT. Most of the endowment is therefore highly illiquid. When universities tout the 20% + returns of investment from their endowments, most of that is paper profit that simply cannot be realized in the short term.<br>
Endowment</a> Spending Policy at MIT</p>

<p>The balance MIT strikes between keeping the gains in the endowment for future generations of students and spending it all at once is actually based on a very sophisticated financial model developed by a former Nobel Prize laureate, James Tobin. Under that complex rule, actually called the Tobin rule, a portion of the endowment gains, averaged over a 3 year period are added to the annual operating budget. This mechanism provides a shock absorber for the university to operate without major year to year changes in budgets. Just imagine if MIT was run like GM. It would probably be forced to close entire departments, cancel construction, raise tuition, all at one whenever the value of the endowment fell. </p>

<p>This whole idea that endowments are just sitting there underutilized is simply nonsense, peddled by local politicians in desperate need of additional tax revenues after they have run the state government to near bankruptcy. Hardly a credible bunch!</p>

<p>Could universities like MIT and Harvard do more? Sure and they are! Under the current policy some of the gains are being added back to the operating budget annually and a portion of these funds are put into financial aid to a wider and wider applicant base. Will they ever go tuition fee? Probably not, because it does not make sense to give away a product of value to somebody who can afford it. More than likely you will see programs where tuition reimbursement may be tied to future income, so that students can pursue graduate school or careers in lower earning fields without heavy debt burden.</p>

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<p>cellardwellar: Instead of promoting the official explanations put out by the vested interests, try a little critical thinking First, there is indeed a subsidy from the high tuition payors to the financial aid recipients. Only about 2/3 of the financial aid budget is paid from the endowment. The balance has to come from somewhere. And it does. It comes from the only other readily available source of unrestricted revenue.....TUITION receipts. Second, since the endowment is 10 billion and earns 1.5 billion a year tax free, how difficult do you think it would be to afford free tuition for all 4000 undergrads. My math indicates free tuition would "cost" 150 million, which is only 10 percent of the annual earnings on the endowment, and would not require dipping into the corpus in anyway shape measure or form. Third, you are completely wrong on the fullsomeness of the reporting required of not-for profits. It is general and non-specific and doesn't come remotely close to what is required of public corps and the colleges like it that way. Finally, you are wrong about the willingness of colleges to control admin expenses. In a public corp., there is an incentive to reduce these types of expenses since the savings drop right to the bottom line. Reduction of these expenses was a sine qua non of the old merger and acquisition boom. Since colleges have no bottom line and no profit motive there is absolutely no incentive for them to reduce admin expenses and the number of admin employees has mushroomed and their workloads have dramatically decreased. Schools are understandably reluctant to discuss these expenses. There are now administrators and associates and assistants in charge of all manner of minutia. They pay for this by increasing tuition. There is a good summary of this problem on CC, College</a> Financial Aid: Going Broke by Degree</p>

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<p>One last comment. I am highly critical of Congress in most instances, but not this one. Contray to cellardwellar's invective , Grassley's objective is not to raise money by taxing the endowments.. Rather he wants the colleges to use their endowments for purposes of reducing tuition or risk forfeiting the tax breaks that they were granted to accomplish that purpose. If a college wants to hoard its endowment and not spend it, it can do so. The government rightly should not not subsidize hoarding as opposed to spending.</p>

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Only about 2/3 of the financial aid budget is paid from the endowment.

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<p>Did you just make that up? Actually, ALL of the financial aid comes from the endowment. Every single scholarship award is matched to a specific fund in the endowment. How do I know? My D. gets such a scholarship and fills in a review form that matches her to a donor fund. So does every other recipient. It is not her roomate that cuts her check for part of the tuition. </p>

<p>Not only does the endowment pay for the financial aid, it also covers the shortfall from the all the other students whose tuition does not even come close to covering the cost. So, my D's roommate also gets a subsidy from the endowment and pledges from alumni. </p>

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My math indicates free tuition would "cost" 150 million, which is only 10 percent of the annual earnings on the endowment, and would not require dipping into the corpus in anyway shape measure or form.

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<p>Actually, your math is faulty, because you simply don't understand how endowments work. You have an overly simplistic belief that there is some pool of cash sitting in an account that can be tapped on demand. </p>

<p>The vast majority of the return from endowment is either restricted for long term investment (where the donor required investment gains to be retained permanently) or temporarily restricted (they require a certain lapse of time, generally a number of years before gains can be made available as unrestricted funds).</p>

<p>Last year, unrestricted net assets at MIT increased only by $637 million. All of that gain was on paper, not in cash. If you had cared to look up the link provided earlier you would have seen that 80% was invested in long term, higher risk financial instruments. MIT could never liquidate large portions of their holdings in the current economic environment without taking a huge loss on many of these investments. Try to liquidate your 401k right now and tell me how you make out! </p>

<p>In the end, only $250 million was available to MIT as investment income that could be spent in the fiscal year, with $185 million applied to tuition support. At the end of the year, MIT had only $90 million in cash left. Hardly enough to cover over $200 million in tuition revenues. </p>

<p>if you want to analyze the endowment yourself and want to see a financial statement it is all right here.MIT</a> General Ledger Operations & Reporting - Reports/Publications</p>

<p>If anything, MIT could show a loss next year on much of their endowment! That is nor far fetched as you only need to go back to 2002. Under your scenario, MIT should have taken cash they did not have to pay for additional tuition support, only to have to raise tuition the following year, when there would be no gain to be distributed. Do you see the problem? If you don't, MIT has a great introductory economics class for you. </p>

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Since colleges have no bottom line and no profit motive there is absolutely no incentive for them to reduce admin expenses

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<p>Last year, MIT administrative expenses increased a miserly 1.7 %, hardly out orf control. </p>

<p>You just have spewing rethoric, none of which is relevant to MIT. Of the top 50 private universities in the US, MIT is the one that provides financial aid to the largest percentage of students. if you don't believe me, look up the latest copy of USNWR. It is right there on page 68. </p>

<p>Next time do some fact checking! I don't know a single economist who believes Chuck Grassley's proposal makes sense. Now this is a senator that has earmarked over $50 million for a rain forest in Iowa! There are enough financial scandals in this guy's backyard to make Ted Stevens of Alaska look like an amateur.</p>

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<p>
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cellardwellar: Instead of promoting the official explanations put out by the vested interests, try a little critical thinking

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</p>

<p>What's with the ad hominem attacks? I've had arguments on various issues with cellardweller in the past, but I've been impressed in this thread by her (?) explanations, and they are in line with what I know of MIT's finances and expenses.</p>

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There are now administrators and associates and assistants in charge of all manner of minutia. They pay for this by increasing tuition.

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<p>This bit, I might be willing to agree with. As cellardweller points out, MIT's admin expenses have plateaued, only increasing 1.7% last year, but it's certainly my impression from what I saw while I was there and from reading back issues of the Tech that the number of admins has spiked in the last decade. I'm not immediately finding the numbers for past years, but I'd be interested to see them and see if they back up my impressions.</p>