Education Business

The Tuition Conundrum


State colleges and universities, battered by declining endowments and state funding cutbacks, are facing a new and potentially far more troubling financial challenge. Out-of-state students, who pay a huge tuition premium to attend, are doing something no one ever thought they would: They're staying home. Hammered by the recession, they're opting in larger numbers to attend schools in their home states. In a recent study conducted by the College Board and Art & Science Group, a consultant to colleges and universities, 41% of high school seniors said they are giving much more consideration to attending a public institutions close to home in the fall because of current economic conditions. And many schools, including the University of Delaware and Ball State, are already reporting declines in out-of-state applications of as much as 40%, while in-state applications are up from 5% to 10%. "The hopes and dreams of many students and families in terms of what it means to go to college are changing," says Lauren Asher, acting president at the Institute for College Access & Success, a nonprofit research group that advocates for making higher education more available and affordable. "They are now really trying to find a good deal." Waiting Out the RecessionWith a lucrative revenue stream drying up, state schools have limited options that include slashing budgets or finding new sources of revenue. So far, some have opted to raise tuition, but most are hoping the decline in out-of-state applicants will end when the recession does, so they're doing nothing, at least for now. For the many students deciding to pursue their education a little closer to home, attending a state university in their home state is a great deal: a quality education at a fraction of the cost of elite private schools. But for the public schools themselves, it's a different story. Over the past few decades, the financial structure of public universities has changed drastically. No longer does state funding account for the majority of a school's budget. In fact, a school is lucky if state support accounts for 20% of the overall budget. At the (William & Mary Undergraduate Profile), taxpayer money made up 18% of the operating budget for the 2008-09 academic year. Thirty years ago, it was 43%. "At this point, we're a privately supported university that also gets some meaningful state aid," says W. Taylor Reveley III, president of William & Mary. To make up the difference, public universities must rely on tuition and fees to pay for the lion's share of budgetary needs. Because of this, many state schools work hard to attract nonresidents, who pay a premium—often more than three times as much as residents—to attend. Soaking the Out-of-Staters"Given the way that states are cutting back on funds, to replace an in-state student with an out-of-state student, particularly if you can capture some of that revenue for your own purposes, is a good thing financially for schools," says John Maguire, chairman and founder of Maguire Associates, a research-based consulting firm specializing in educational institutions. Just how good? At the (North Carolina Undergraduate Profile), for example, in-state residents pay $5,626 in tuition and fees. Out-of-state students pay $23,514. Similarly, at the (Virginia Undergraduate Profile), out-of-state students pay about $20,000 more in tuition and fees than Virginia residents. Considering the vast differences in cost, it would seem that the financial woes schools are experiencing could quickly be solved by simply admitting more students from beyond state lines. But with more qualified in-state applications coming in, that's difficult to rationalize. Also, with fewer out-of-state students applying to public institutions this year, it has become harder for schools to admit as many non-residents without lowering academic standards. "[Public schools] have an obligation to the states that support them," says Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars & Admissions Officers. "You can't engage in any kind of a financial analysis that ends up valuing out-of-state [students] more than in-state." Quotas and CapsOn top of the obligation to taxpayers and their families, many states also limit the number of nonresidents a public-supported university is able to enroll. In North Carolina the cap is 18% of total undergraduate enrollment. In Colorado, it's closer to 50%. In Virginia, the cap is currently 35%, but recently a state legislator proposed reducing the cap to 30% or even 20% to open up more slots for Virginia residents. For a school such as William & Mary, in Williamsburg, which already pushes the 35% limit to make ends meet, a reduction in the number of out-of-state students isn't an option. "We hit that 35% number religiously," William & Mary's Reveley says. "To reduce it would be catastrophic." Lowering the cap to 20% would eliminate more than $8 million in tuition revenue at William & Mary, or nearly 3% of its $276 million budget. But one state doesn't have to worry about nonresident caps. In fact, Daniel Fogel, president of the University of Vermont (Vermont Undergraduate Profile), welcomes as many out-of-state applications as he can get. Why? Because Fogel oversees a school located in a state where there simply aren't enough home-grown students to fill a class. So in order to keep the doors open, he must venture beyond state lines for the majority of students. "We're faring better than most of our public peers and most of our private peers, as well," Fogel says. "We're less reliant on public finance than the other publics, and we're less reliant on spendable earnings on endowment than the privates." At Vermont, 65% of undergraduates are nonresidents, accounting for 49% of the university's overall operating budget of $269.5 million. Without the large out-of-state student population, his school couldn't survive. And considering the dire financial straights many schools are currently in, Fogel expects others to follow his lead. "I'm quite sure that many of my colleagues at other research universities are going to be pushing for more non-resident students," he says. OvercrowdingThis is undoubtedly true, but unfortunately, few are in the unique position that Fogel enjoys. In fact, two states in particular—California and Texas—are having trouble finding room at their flagship public universities for their own residents, let alone applicants from out-of-state. In California, the UC System is reducing the number of seats available for Fall 2009 by 10,000 to deal with overcrowding and budget cuts. Not only does this mean that more qualified in-state applicants will be denied admittance, but it also means that those who are accepted are not guaranteed to be placed at the campus they applied to. Instead, they might be sent to another of the system's nine campuses where spots are available. As it is, less than 10% of students in the UC system are from out-of-state, and with the reduction of available spots, this number will no doubt drop, eliminating even more income from the operating budget. The state of Texas is in a similar bind, but for a different reason. Since 1997, the University of Texas system has guaranteed admittance to all Texas residents in the top 10% of their high school class. At the system's (UT Austin Undergraduate Profile), the "10% rule" accounts for more than 70% of the freshman intake each year, leaving a limited number of spots not only for other qualified Texans, but also for those applicants from outside of the Lone Star State. Critics of the 10% rule include UT Austin President William Powers Jr., who warned alumni and donors late last year that if the law isn't changed, 100% of students at his university will be admitted through the rule as soon as the 2009-10 academic year. If Powers is correct, UT-Austin would not only stand to lose a good deal of diversity in the student body, but also some $60 million in tuition funds that come from the 8% of undergrads who are from outside of Texas. Dwindling DiversityFor state universities, the economic downturn cannot right itself soon enough. It's true that out-of-state students bring in more money, but they also create a more diverse student body, which will quickly disappear if the financial troubles continue and state residents choose to remain close to home. And that isn't the only negative result. Many schools are already having to make difficult decisions like increasing enrollment, raising tuition, or eliminating programs altogether. "Everyone is getting hurt," Nassirian says. "You can always attempt to do more with less, but there comes a point where the substance of the activity begins to suffer." The question now is: how much more suffering can public universities take?
Geoff_gloeckler
Gloeckler is a staff editor for Bloomberg Businessweek in New York.

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