The Wealth and Prices in Modern Higher Education: How We Got Here

American higher education in the twenty-first century is experiencing a myriad of new challenges. Recent surveys indicate a decrease of public confidence in the ability of higher education to guide the population in the right direction for a better future. While colleges and universities and their faculties did well to create better hybrid and online learning models during the pandemic, we have seen a lack of public trust in our institutions. These concerns, coupled with the burgeoning costs of tuition leading to student debt, have turned higher education into a partisan issue in the United States. How and why did this happen, and what can be done about it?

In “Wealth, Cost, and Price in American Higher Education: A Brief History,” Kimball and Iler provide a thorough history and theory of American higher education by incorporating related economic and financial data to provide the reader a scholarly reference point, which they describe as the “upward-spiraling wealth-cost double helix” and its impact on the American economy and the prestige of its higher education institutions. They divide the history into two parts as follows:

Part 1 The Formative Era (1870 – 1930) traces the first endowment in America to Harvard College in 1637. Harvard became the bellwether in amassing funds to grow its institution while keeping annual records of sources and uses of funds. Initially, land, buildings, cash, and trusts were types of early donations. Eventually, other colleges would follow.

The surge in endowments came in 1870, when the U.S. economy experienced expansive industrial growth. Industrial capitalism created increased competition and a “survival of the fittest” corporate mindset. Wealthy industrialists used their fortunes to fund existing and new institutions. Again, Harvard, under Charles Eliot, set the standard for endowment funding. Eliot’s business strategy of building permanent productive funds was adopted by many institutions, including HBCUs and women’s colleges. The primary focus was to solicit “free money” through restrictive and non-restrictive funding, since a strong endowment would provide the institution with greater autonomy, flexibility, prestige, and growth within this more competitive environment. Also, financial records showing the per-student cost and overall costs of higher education substantiated the need for continuous fundraising initiatives.

As fundraising evolved, newer concepts emerged. Yale created an alumni fund (YAF) that elevated the concept of “mass giving” from “begging” to a “democratic” way for anyone to donate to their alma mater. With its own endowment fund (HEF), Harvard touted its own version of democratized fundraising. Thus, the major source of funds came from three sources — appeals to wealthy donors, alumni donations, and major campaigns. As wealth growth-cost growth helix formed in the U.S., more institutions realized the importance of permanent, productive endowment funds to maintain their stability, autonomy, and flexibility.

Part 2 The Golden Ages (1930 – 2020s) explains how fundraising and financial account management turned into major industries during the twentieth century reflecting the insatiable need for money to fund the increasing costs. The Depression led to a decrease in donations impacting endowment size for all institutions. The operation costs fell while the per-student costs rose. The wealthier, “fittest” institutions survived while others, such as women’s colleges and HBCUs, faced deficits and closures. This gave rise to new creative fundraising initiatives like the United Negro College Fund to provide support and develop an HBCU fundraising alliance.

During this golden age, higher education pursued new sources of “free money” and revenue. Modern portfolio management concepts provided aggressive strategies to build institutional wealth. Other institutions followed with their own methods, such as the 60/40 rule, total return investing, and alternative assets investing. Major institutions were experiencing greater economical returns, yet the per-student education costs were rising tenfold as compared to the consumer price index. Economists sought to explain this anomaly, and two theories emerged.

The first was the cost-disease (CD) theory which suggested that higher education is a service industry that experiences rising costs that will always exceed the cost of living and national income. This premise was accepted by higher education, since it deflected blame from the institution and directed it to faculty compensation. It also mathematically justified the increased hiring of adjuncts. The second theory was the revenue-cost (RC) theory that accepted aspects of CD as it related to student costs and faculty/staff salaries, but with reservations such as:

• Evidence of labor productivity increases in “professional services” using alternative delivery systems/education technology, and
• Non-educational costs grew faster than educational costs over the years and created taller organizations.

In conclusion, Kimball and Iler show us that the wealth-cost helix did not provide all higher education institutions the ability to grow and thrive together. They show us that American higher education is not much different than American society, except the rich schools get richer and the poor ones, eventually, close. They cite Plato’s Republic to explain the true aim of higher education — love of wisdom over love of gain. Unfortunately, when they compared proportion of endowment funds owned by the richest 1% of schools to the proportion of household income owned by the richest 1% of households, the results were 54% to 53% respectively. Therefore, in today’s society, love of gain wins over the quest for wisdom and honor. This mindset is evident in most American industries, including healthcare, travel, and entertainment. One can only hope that one of these industries can help solve this problem with “effective altruism” and concern for equity. Hopefully, higher education will be the first to show some wisdom in proposing a viable solution.