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Tracking Spending in Higher Education: A Case of Misclassification

American colleges and universities accept more than $135 billion each year in federal student aid. These dollars flow in the form of federal loans and grants, supporting students at the institution of their choice. Although these resources are designed to promote affordability, tuition prices continue to rise and student outcomes are lackluster, which raises the question of whether the funds are being spent effectively.

Policymakers and researchers have shown interest in better understanding what colleges spend on improving student success versus activities designed to attract additional revenues. Some lawmakers have even proposed tying institutional accountability in part to institutional spending priorities, with the goal of incentivizing additional spending targeted at retention and completion, and less on marketing and recruitment.

But what if we told you that it is currently very difficult to determine how much institutions spend on their students? Transparency on this point is being clouded by data limitations and insufficient reporting requirements, with the result being that no existing metric can accurately gauge student-centered spending by institutions. For a system that receives such a large amount of taxpayer dollars, this opacity is a major concern.

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The Current System’s Limitations

The Integrated Postsecondary Education Data System, or IPEDS, is the most comprehensive source of federal higher education data. The IPEDS Finance Survey, in particular, tracks institutions’ finances for several categories of spending and revenues.

IPEDS Spending Categories as a Percent of Total Institutional Spending*

Source: IPEDS Finance Survey Data 2016-17 *Does not include institution's auxiliary enterprise spending that is essentially self-supporting (e.g., residence halls, food service, faculty and staff parking). Columns may not add to 100% due to rounding.
   Institution Type 
Spending CategoryDefinitionPublic Private NonprofitPrivate For-Profit
InstructionIncludes all spending related to instruction, as well as research and public service expenses not separately budgeted. Excludes spending for academic administration if the primary function is administration (e.g., academic deans).33%35%27%
Student ServicesMeasures all spending for admissions (including marketing and recruitment), registrar activities, and activities whose primary purpose is to contribute to students' emotional and physical well-being and to their intellectual, cultural, and social development outside the formal instructional program. This includes athletics, student health services, student activities and cultural events, and supplemental instruction outside the normal administration.6%9%19%
Research and Public ServiceExpenses for activities intended to produce research outcomes and those that provide noninstructional services to outside individuals or groups.16%13%0%
Academic and Institutional SupportSpending on activities and services that support the institution’s primary missions of instruction, research and public service (e.g., libraries, museums, information technology) and day-to-day operational expenses.20%23%44%
Hospital, Independent Operations, and OtherAll other expenses, including spending for hospitals operated by the institution and operations that do not service the primary mission of the institution.25%20%9%

Unfortunately, the Finance Survey suffers from a few key problems:

  • The “student services” category often includes spending on recruitment, marketing, and inter-collegiate athletics, rendering it impossible to know what an institution spends on improving student outcomes.
  • Instructional spending is an imperfect proxy for student-centered spending, as the former generally only includes faculty salaries and therefore omits the many wraparound services provided to students.
  • Different types of institutions have different financing models, which precludes apples-to-apples spending comparisons across sectors. For example, online programs and commuter campuses tend to have lower overhead costs—and thus spend less on operations and maintenance—compared to residential campuses, which include dorms and dining halls.
  • IPEDS lacks a formal auditing process, which means that there is no way to know how much misreporting and human error make their way into the data. IPEDS does have some data quality measures, but these mostly target obvious anomalies—for example, a school with a negative number of students or a spending category with a multi-fold increase in a given year. The institution is also relied upon to independently correct the flagged errors.

Potential Reforms to Better-Clarify Student-Centered Spending

Given the vast amount of resources from students, families, and taxpayers that flow to institutions, there is a vested public interest in ensuring that colleges are directing the bulk of their spending towards ensuring positive outcomes among students. As a first step, policymakers could implement a few straightforward reforms to the IPEDS Finance Survey to better track student-centered spending, which would derive the portion of a school’s available resources that are being allocated towards student success.

Specifically, policymakers could follow these steps:

  • Reform the student services metric to include only investments made in students. This would be similar to the existing student services measure—including spending on social, intellectual and cultural development outside the formal classroom setting—except that it would not include activities whose primary purpose is to attract additional revenues, such as marketing and recruitment spending, or spending on inter-collegiate athletics. In addition, this new metric should include investments in information technology, which are increasingly crucial for modern schools.
  • Sum the student services and instructional spending metrics to derive “student-centered spending.” This total would include investments made both inside and outside the formal classroom setting.
  • Create a measure of “student service resourcesto identify what an institution should be reasonably expected to spend on students. This would include a given institution’s revenue sources, namely: net tuition revenues, state and local appropriations, and endowment income. It would also include any excess revenues related to student housing and food services. In addition, this measure would subtract spending on operations and maintenance, which would help to control for differences across sectors, given that residential campuses have higher overhead costs compared to commuter schools and online programs.
  • Divide the new student-centered spending measure by student service resources, which would derive the level of institutional investment in student success as a percentage of available resources. This calculation would provide a more comprehensive picture of what institutions are investing in student success—by including spending on both formal instruction as well as wraparound services—as a proportion of what they could be expected to invest.
    Student-Centered Spending = (Instructional Spending + Student Services) / Student Service Resources

Reforms along these lines would be more rigorous and useful if paired with an IPEDS audit, which would gauge the prevalence of errors and misreporting in the data. This is especially important given that these measures are self-reported by institutions.

Ultimately, the current federal higher education data system provides insufficient information on how institutions spend their resources, including billions in federal taxpayer dollars. The data are limited in clarifying what institutions spend to promote student success versus to attract additional revenues. In addition, the data system lacks quality controls to gauge and ensure accurate reporting. The reforms laid out above should be considered as potential first steps in providing accurate information to policymakers, researchers and students. Increasing transparency will promote positive behavior among institutions and lead to improvements in the higher education system for students and families.