The next week we learned that the medium pizzas we used to order now appear to be small pizzas. The prices have not changed, but the serving sizes have decreased. The impact of inflation is felt daily whether it is food, fuel, clothing, utilities, or much more. As the cost to produce a product or service increases, the price you pay increases.

In a recent study produced by the College Board, it appears that colleges and universities are not passing along the full impact of inflation to students. According to the Trends in College Pricing and Student Aid 2022, tuition and fees increased at a pace lower than inflation. Published tuition and fees for public four-year (in-state) institutions increased by 1.8% and private nonprofit four-year institutions increased 3.5%.

This result may be linked to the timing of the tuition and fee approval process, which occurs at least one year in advance of implementation. In addition, schools are cautious of the disconnect between the perception of tuition, the cost to operate an institution of higher learning, and the value of a degree. The prime question is affordability.

Let’s be honest with ourselves—education is expensive because it is a personal service. Pedagogy, by its very nature, is a personal experience that cannot be automated or outsourced.

Know the Cost to Deliver an Education

What can university leaders do to help address the issue of college affordability when college is inherently expensive? A good place to focus on the journey toward affordability is to understand the true cost to deliver services. Do you know how much it costs to provide a course of instruction or a degree to a student? Calculating the basic cost of business will help enable you to make informed decisions on tuition and fees. The analysis should both calculate and display the educational component and the support service component.

The direct cost of education is composed of the classroom activities such as faculty salary and benefits, supplies, equipment, department budgets, administrator wages, and other academic support staff pay and benefits. At this cost level, leadership can make data-informed decisions on the direct instructional costs compared with net tuition and fees. Allocating these costs to the student credit hour will inform leadership of the specific margin dollars per credit hour at the course level. This exercise should be able to answer the question: What does it cost to provide instruction?

The next level of cost allocation could be considered an overhead allocation. These costs should include broader university operations such as academic support, student services, and institutional support. Through a credit hour allocation, leadership can now parse out the direct and indirect costs to each course and department across the institution.

Understand Net Tuition & Fees in Relation to Costs

Tuition and fees are not the sole sources of revenue for institutions of higher learning. In fact, it is healthy to maintain a diversified revenue portfolio that includes government grants, private giving, auxiliary services, and endowment income.

Net tuition is a critical component of the operating model. While prospective students typically see the “published” cost of tuition on the school’s website, net tuition is the driving force for cash flow to the institution. Unfortunately, unfunded scholarships are increasing in both private and public institutions. Student enrollment pressure is driving up discount rates and lowering overall net tuition. That is a losing formula in the long term.

The College Board noted that the average net tuition and fees—in 2022 dollars—paid by first-time, full-time students enrolled in both private nonprofit and public four-year institutions have declined over the past six years and seven years, respectively. It is unlikely that these tuition decreases are by design or correlated with actual costs to operate the university.

Academic leaders need to better understand and manage the relationship between net tuition and fees and the actual cost to deliver a degree. As of now, many institutions are depending on other sources of revenue to meet budgetary demands. The ever-increasing “published tuition and fees” are not supporting the cash flow needs of the institution.

Explore Alternative Options to Enhance Affordability

A pathway toward affordability also could involve innovative methods of delivery. The pandemic has taught us that colleges and universities do have the capacity to pivot. If we can find a new way to challenge the status quo and strive toward innovation, we may discover that affordability is achievable.

Schools are helping students with affordability by offering multiple start dates to onboard students throughout the year. These programs help match course timing with the schedules and are often linked to short-term degree or certification programs. By providing a rich educational experience to students who are not interested in the full 15- or 16-week session, your institution is creating new pathways for student success. Employee sponsorship is another avenue for affordability whether through scholarship opportunities or the use of experienced adjuncts. These workforce relationships can help bridge the skill and competency gaps that connect students and faculty to meaningful careers and long-term student success. Other considerations may include self-paced programs that provide flexibility and a lower cost of delivery.

As your institution explores the relationship between net tuition by program and course and the actual cost to deliver the program and course, you may discover an imbalance in the economic model. Finding the correct mix of full-time faculty and adjuncts is an important feature of a program’s economic analysis. The balance between academic quality and cash flow is an important topic of conversation that is required for viability. This could include conversations about the use of full-time faculty in lower-level versus upper-level courses or by program type. It also would be important to consider the amount of release time faculty have in their contracts to “not teach.” Many times faculty are paid, via load release, to serve on academic or nonacademic committees or perform other duties. In addition, it may be that your institution is paying a stipend on top of the load release.

This article adaptation is from our partner, FORVIS, LLP. FORVIS is ranked among the nation’s top 10 public accounting firms. David Armstrong is a Director in the Dallas office.