Higher Education Economics: How Community Colleges Can Address Cost Inefficiencies
In a June 2023 speech, first lady Jill Biden, who teaches at Northern Virginia Community College, called community colleges “the best-kept secret in America.” She cited stories of two-year students who were making starting salaries of $25 an hour and $50,000 a year.
Those students are among the 10.2 million enrolled at community colleges, according to the American Association of Community Colleges. They account for 41% of all undergraduates, according to the Community College Research Center.
But if community colleges are heavyweights in higher education enrollment, they’re lightweights in higher education finance. They take in $13,780 in revenue per student, compared to $30,890 for public universities with doctoral programs, according to the College Board.
That imbalance between responsibilities and resources concerns Adriana Vamosiu, PhD, department chair of economics at the University of San Diego's Knauss School of Business.
“Community colleges get the least funding,” she says. “They can’t do enrollment management, they don’t have much ability to set tuition levels and they have to figure out how to do their best with it all. ”
In the 2022 paper “Neighbor‑Effects and Economies of Scale and Scope at Public Community Colleges” — co-authored with Knauss professor of economics Jon Sandy and Marvin Titus of the University of Maryland — Vamosiu offers lessons on how community colleges can use their resources more efficiently and how they can argue for more.
Key Insights
- Community colleges struggle with funding disparities despite enrolling a significant portion of undergraduates, hindering their operational flexibility and resource allocation
- Research findings highlight the 'Neighbor Effect,' where increased faculty hiring at one community college raises costs for others, along with cost differences between offering degrees and certificates
- Strategic partnerships with local entities alleviate cost inefficiencies, aiding community colleges in providing diverse educational offerings while addressing regional needs for job training
Challenges of Community College Funding
The core economic problem for community colleges is having limited control over both their costs and their funding, Vamosiu says.
On the cost side, open admissions policies require them to take everyone who wishes to enroll. Enrollment and costs can seesaw 5% or more from one year to the next, making budgeting difficult.
“If their enrollment is up this year, they’ll count it in the formula for next year,” she says. “The trouble is, they need the money now.”
Compounding the problem is that they serve three missions, but the funding emphasis is not equal on all three. They serve:
- Students seeking associate degrees or professional certificates to go directly into the workforce
- Students taking credits they can transfer to a four-year college
- Students taking noncredit classes for personal growth
Unfortunately, state and local governments often base funding formulas more heavily on the number of degrees and certificates granted. That’s a formula for underfunding, says Vamosiu.
“How many people got an associate degree or a certificate is not a good representation of the costs of these institutions,” she says. “Looking at total enrollment of these institutions is probably far more relevant. If you think of the costs, whether someone’s getting a degree or not, you still have to keep all their registrar data and other records. They’re still going to use tutoring services.”
Analyzing the Economics of Education
Within the constraints of higher education economics, how can community colleges address cost inefficiencies and make the best use of their existing resources?
To find out, Vamosiu, Sandy and Titus investigated operating costs at 682 public community colleges between 2004 and 2018. They found several lessons that can inform higher education policy.
The Neighbor Effect
Vamosiu has heard administrators complain that their own costs go up when nearby community colleges hire more faculty. Her data confirmed what she calls the neighbor effect.
“When one of my neighbors does a big hiring of new faculty, it takes away from the pool of labor out there,” she says. “That impacts my costs, because if I need to hire new faculty now, I’m going to have to pay them more.”
She found that when one community college increased its faculty size by 1%, it raised costs by an average of .07% at the other community colleges within a 100-mile radius.
While the percentage might seem small, it can wreak havoc on tight budgets, Vamosiu says. She suggests that community colleges add a budgetary cushion to prepare for higher hiring expenses.
Cost Inefficiencies of Certificates vs. Degrees
To meet community demand, community colleges should offer both associate degrees and professional certificates, the researchers found. But they found a stark difference in cost-efficiency between degrees and certificates.
- Degrees showed economies of scale. On average, increasing the number of degrees by 1% raised operating costs only .76%.
- Certificates, by contrast, showed diseconomies of scale. Increasing the number of certificates by 1% boosted operating costs by 1.93%.
The data doesn’t show why certificates are more costly, but some administrators have told Vamosiu it’s because each certificate requires a different kind of specialist.
“Maybe a college offers 10 different certificates,” Vamosiu says. “They might have to hire a lot of new faculty with specialized expertise that do not have the knowledge to teach across all programs.”
Finding Partners
Even if a certificate isn’t cost-efficient, a college may need to offer it because of the community’s needs, such as job training. One solution, the researchers suggest, is to find community partners to share a program’s costs — and its benefits.
- Sandhills Community College in North Carolina offers college classes at a local high school. The high school covers part of the expenses, while its students can accelerate earning a certificate or degree.
- Seminole State College in Oklahoma partners with local businesses like Canadian Valley Electric Cooperative to design certificate programs for their employees.
A key to partnerships, says Vamosiu, is to budget for staff to seek them. “Building connections with local industries is a full-time job,” she says.
Effects of Higher Education Finance on Higher Education Policy
Is there an optimal size for a community college? Measured by cost-effectiveness, Vamosiu says, each school does have one.
The average school can afford to award 487% more associate degrees before the costs exceed the revenues, the researchers found. By contrast, most community colleges can’t afford to expand certificate programs unless they find other ways to finance them, such as partnerships.
Another alternative, of course, is for schools to persuade their city or state to allocate more resources to them. Vamosiu hopes that her findings can give administrators dollars-and-cents ammunition to justify higher community college funding.
“We’re saying to campus leaders and administrators, you have costs you can’t control,” she says. “I hope they can use our study to help make their case.”
The bottom line when it comes to aiding community colleges, she adds, is to help their students. “There are so many amazing students at those schools,” she says. “Maybe it’s family conditions or social or economic status, that they’ve never had the opportunity to go to a four-year school. But they’re brilliant, hardworking minds.”
Learn More About Economics and Business
Higher education economics is just one example of how finance can have far-reaching impacts on society. At the University of San Diego Knauss School of Business, faculty such as department chair of economics Adriana Vamosiu study those impacts and identify practical strategies that institutions like community colleges can use to better students’ lives and create wider opportunities.
Learn more about how the Knauss School of Business can prepare you for a career of building businesses, solving problems, and having an impact on the world.
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Sources:
American Association of Community Colleges, Fast Facts
College Board, “Trends in College Pricing and Student Aid 2022”
Community College Research Center, Community College FAQs
Sandhills Community College, Career and College Promise
Seminole State College, Community and On Demand Courses
Adriana Vamosiu joined the department of economics at the University of San Diego's Knauss School of Business in 2013. Her main research interests are industrial organization, particularly pricing theory, bundling and compatibility issues and the economics of higher education.