Published by the MIT News Office at the Massachusetts Institute of Technology, Cambridge, Mass.
Published by the MIT News Office at the Massachusetts Institute of
Technology, Cambridge, Mass.
This memorandum describes the financial elements at MIT that bear on tuition and affect financial aid. The numbers illustrating these matters are for the 1988Ð1989 academic year, which is described in full financial detail in the most recently published Report of the Treasurer. While these numbers are, in some sense, out of date, they illustrate the essential features of the relation between educational costs, tuition and financial aid. The Institute has a dual missionÑeducation and researchÑthe expenses of which are illustrated in Figure 1, which displays the principal components of the operating expenses for 1988Ð1989. The direct expenses of instruction and unsponsored research ($165Êmillion) are comprised principally of the appropriate fractions of salaries and benefits of faculty, other academic staff, teaching assistants, and support and service staff directly engaged in the educational programs of the Institute. Also included are the costs of equipment, materials, and supplies used in the educational programs. Similarly, the direct expenses of sponsored research reflect the costs of faculty, research staff, research administrative staff, and others directly engaged in programs of sponsored research, as well as the associated costs of equipment and operations. While a division of expenses in these categories is necessary for management purposes (and for establishment of the total cost of sponsored research for reimbursement by the sponsors), this categorization is somewhat artificial in that it does not reflect the integrated and synergistic nature of the academic enterprise, particularly on the campus. Both undergraduate and graduate education are dependent on the research programs conducted on the campus, and these research programs benefit from the participation of students. For the faculty, the activities of education and research are interwoven and inseparable. With this caution about the coupled character of education and research in mind, it is possible to estimate the cost of education at MIT and relate it to the price of education, as reflected by tuition charges. The Cost of Education In addition to the $165Êmillion in direct costs for education and unsponsored research, there are $158Êmillion in indirect expenses for services that support instruction, research and depreciation. This $158-million total includes the cost of plant operation and maintenance; fiscal, personnel and other Institute-wide services; administration; general expenses; the libraries; medical services; student services; and depreciation of buildings and equipment. About $59Êmillion of these indirect expenses can be attributed to instruction, and $99Êmillion to research. This apportionment is the result of detailed negotiation with the federal audit agency, which represents the financial interests of federal research sponsors. A third element in the cost of education is the amount spent on scholarships and fellowships for undergraduate and graduate students. A total of $40Êmil- lion was spent for these purposes in 1988Ð89, $29Êmillion in funds generated by endowment or received from outside sources (such as foundations, government or individuals), and about $11Êmillion in unrestricted Institute funds. On the basis of this analysis, the cost of education at MIT is approximated as follows: Direct expenses of instruction and unsponsored research $165 million Allocable indirect costs $59 million Unrestricted funds used in support of scholarships and fellowships $11 million Total $235 million During the 1988Ð1989 year, there were 9,100 full-time (graduate and undergrad- uate students enrolled. Consequently, that year the cost of education per full-time student was about $26,000.* The Price of Education During the 1988Ð1989 year, the tuition rate was $13,400, and the total tuition and related income was $135Êmillion. Thus, tuition charges covered about 57 percent of educational costs at MIT in 1988Ð1989. This relationship has held true here for many years. From 1930 (which is as far back as the analysis has been pushed) to the present, tuition charges have covered from 45 percent to 65 percent of educational costs at the Institute. The circumstances at other private research universities are similar. Making Up the Difference What sources of revenues are used, year after year, to make up the difference (about $100 million in 1988Ð1989) between tuition revenues and the cost of education? There are only three such sources: a portion of the income derived from the InstituteÕs endowment, short-term investment income earned on a portion of working capital, and a portion of the annual flow of gifts, grants, and bequests. In each of the three sources, only that portion of the income not specifically designated for other purposes may be used. If these sources of revenue are insufficient to make up the gap and cover the costs of education, the Institute must either draw on nonrecurring capital resources to balance the budget (as we did in 1988Ð1989 in the amount of $5Êmillion) or run a deficit (as we did in 1987-1988), which requires a similar drawdown of nonrecurring capital funds (e.g., endowment principal or reserves) to close the books at year end. Our objective in financial planning and budgeting is to achieve balance without using nonrecurring capital resources to meet recurring expenses. This objective has been achieved in seven of the past ten years. The cumulative net surplus in these ten years was approximately $5.7Êmillion, which was added to the principal of endowment or otherwise used for capital purposes, such as the purchase of property for academic purposes. In addition, during that ten-year interval, $32 million of unrestricted gifts were added to the endowment. What Drives Tuition? The tuition rate increases from year to year as the cost of education at the Institute increases. About 74 percent of this cost reflects salaries and benefits. About 80 percent of faculty payroll costs appear as educational costs. These costs have increased strongly in the past five years, both because of the need to restore, to some degree, purchasing power lost by individuals in the high inflation years of 1975 to 1981 and because of the overriding need to preserve salary competitiveness in the context of other front-rank research universities. The most rapidly growing element of educational costs is the demand for unrestricted funds in support of undergraduate scholarships. About 60 percent of MIT undergraduates are needy and receive aid. This year the average need is about $14,000, which is about two-thirds of this yearÕs typical student budget. The average needy student assumes a self-help burden (loan and/or term-time employment) of $5,300 and receives a grant or scholarship of about $9,000 to cover the balance. In 1988Ð1989 scholarship aid to undergraduates totaled $20.5Êmillion, of which $4.8 million came from outside sources, $7.3 million from MIT sources restricted for scholarships, and $8.5Êmillion from unrestricted or general funds. This latter amount, $8.5Êmillion, has increased by a factor of 5.4 since the 1980Ð1981 academic year. This increase is primarily a reflection of changing federal priorities toward student aid. While the aggregate need for student aid has risen steadily, federal scholarship programs have remained essentially flat in real-dollar termsÑloans have made up the difference. (In 1980, the federal government provided 37 percent of all grants received by MIT students. In 1990, the government provided just 12 percent of these grants. The proportion of grants provided by MIT has risen from 51 percent to 79 percent over that same period.) Finally, in recent years, we intentionally decreased enrollments by a little over 300. This was done to reduce crowding in the undergraduate houses and to relieve pressures on graduate student thesis supervisors in several depart- ments, particularly those in the School of Engineering. This reduction has placed additional pressure on the tuition rate, since there have been no directly offsetting reductions in educational expenses. Tuition and Self-Help for Next Year While the process of budget making for the 1990Ð1991 academic year is not yet complete, the preliminary budget figures are in. In order to maintain a balanced budget, it is necessary to increase tuition for next year by 7.6 percent. Considerations of undergraduate student aid are closely coupled to tuition setting. The $5,300 self-help level will increase by $400 next year and afterwards is likely to follow a pattern of annual increases, in which increases in need are shared between the individual needy student (in the form of increased self-help) and the Institute (in the form of general funds in support of scholarships). This is not to say that the Institute is relying solely on tuition increases to reduce the projected budget imbalance. Other measures to increase revenues and cut costs are being taken. These include such measures as moderating projected salary increases for faculty and staff, deferring new program initiatives (unless their costs can be offset by reductions in ongoing programs), considering a modest increase in enrollment, and raising endowed funds for faculty and student support. These measures, taken together, should keep MIT on a sound financial footing, which, in turn, supports the InstituteÕs ability to provide the best possible education for undergraduate and graduate students alike. *This per-student estimate takes no account of summer session enrollment or of the fact that some portion of the $235Êmillion of educational expenses is incurred in the summer. One may also argue that the $235-million total overstates the cost of education at MIT because it includes some faculty effort devoted to unsponsored research rather than to instruction and because no allowance has been made for the portion of the shared indirect costs, which, in fact, supports other MIT activities, including the Association of MIT Alumni and Alumn¾, the MIT Press, the housing system, and Dining Services. While precise estimates of these offsets are difficult to establish, the associated reduction in the cost of the education figure is, in my judgment, certainly less than 10 percent. When these factors are taken into account, the cost of education drops to about $211Êmillion, and the per-student cost drops to about $23,000.