NCPA - National Center for Policy Analysis

How Much Higher Education Costs Taxpayers

October 10, 2011

The price of public universities is underwritten by subsidies received through direct government appropriations, but information on the distribution of those subsidies across schools is usually buried in obscure reports.  A new study by Mark Schneider, a visiting scholar at the American Enterprise Institute, and Jorge Klor de Alva, president of the Nexus Research and Policy Center, approximates the taxpayer subsidy for any given school, correlating this amount with the selectivity of the institution and its classification as public, for-profit private or not-for-profit private.  Finally, the study compares these subsidy amounts, what might be called public cost, with the expected return in higher income taxes paid by diploma-earning students.  This two-step approach allows for comprehensive analysis of the types of schools that create a net financial benefit or loss to the public

The researchers first break down college selectivity into five broad classifications and make adjustments for the fact that for-profit private colleges fall exclusively into the low-selectivity group.  When arranged into categories and statistically analyzed for financial cost, several trends emerge.

  • First, for-profit private colleges technically churn a net public profit as their graduates pay more in income taxes than non-college educated workers but receive nothing in the form of taxpayer money.
  • Secondly, public schools receive more funding per pupil for all selectivity classes than do not-for-profit private schools.
  • Lastly, as the selectivity of the school increases, public or private, the amount that it receives in subsidies also increases (drastically in the case of public schools).
  • When a similar study uses subsidies per degree as opposed to subsidies per student, the cost of the least selective public schools increases substantially.

When the public costs of each of these schools are compared with their corresponding returns in the form of income tax receipts, 9 of the 11 examined show a net financial gain.  Of the two that do not, low-competition public schools were plagued by high dropout rates, and the most selective public colleges on the other end of the spectrum proved to be a net financial drain because they receive so much public funding to begin with.  Also, this study makes clear that subsidies to private universities yield significantly higher returns per dollar of public money than do their public counterparts.

Source: Mark Schneider and Jorge Klor de Alva, "Cheap for Whom? How Much Higher Education Costs Taxpayers," American Enterprise Institute, October 2011.

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