What makes college so expensive?

The cost of college is a hot topic in politics. Many candidates on all levels of government

heading into the 2016 voting season promise to either keep the cost of tuition in check or even offer “free” tuition through some tax scheme. What many miss in the debate is actual economics. What makes college so expensive? Running a college is no different then running a business. Money comes in and then a budget has to dictate where it’s spent because colleges have expenses. What are those expenses?

Long time ago I worked for a manager at a retail store. He had no people skills but he was a great manager of the stores budget. Even though we had a falling out, he taught me a lot about profit/profit margin and the philosophy of managing a payroll. He once told me this, “Your number one controllable expense is payroll.” Meaning the hiring and firing of people. Salaries eat up a lot of revenue in the form of salary, taxes and benefits. If he had it his way, no one would work in the store. But economics forces him to hire people to provide customer service, expertise in certain areas of products being sold and maintenance. Staffing numbers always went down when certain seasonal stages were over.

The example above pertains to colleges. Colleges are notorious for not managing their payrolls and just keep adding staff which causes increased expenses. While government keeps promising to increase spending for students to attend college, they never have a plan to actually manage rising cost of college. Colleges need to start managing payroll.

Here is a classic example of this via TheStarPress.com and their write up showing Ball State University horrendous budget they just passed.

Ball State University’s board of trustees on Friday approved a $356 million general fund budget for 2016-17 that includes spending increases for student scholarships, employee salaries and intercollegiate athletics.

The budget calls for a 2-percent increase in the salary pool to be mostly distributed on merit, a 1 percent increase for intercollegiate athletics, which is funded by student fees, and an increase in financial aid for students, which makes up 12 percent of the total general fund budget, Treasurer Bernie Hannon told trustees.

The biggest expense is for personnel: 71 percent of the general fund budget.

This is a whopper of a percentage in payroll to eat up your budget. The university needs to have a payroll percentage rate of 50%….MAX! Below is an example of what most businesses shoot for:

According to Second Wind Consultants, a sound goal for most businesses’ payroll percentage is 30 percent to 38 percent of gross sales. If your payroll costs you as much as 50 percent, you may find yourself struggling frequently.

I don’t think this will happen anytime as the student debt machine keeps fueling the college bloated personnel budgets. Only a financial reset will make this happen. That will be a hard fall for many universities.

 

 

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