A Discussion with Members of the
National Commission on the Cost of Higher Education
College Cost Working Group/Monday Group

October 16, 1997
Stauffer Auditorium, Herbert Hoover Memorial Building

The Cost of Higher Education


As we begin, let me offer a bit of context on the cost of college. As Derek Bok, the former president of Harvard, pointed out in 1989, most of the public attention focuses on tuitions at institutions that are attended by a tiny percentage of all undergraduates. In a more recent study the Sallie Mae Education Institute suggests that about 5% of all undergraduates are concerned. At least half of this population receives financial aid.

Nonetheless, as one of this small cluster of institutions, Stanford is greatly concerned about tuition, as are most research-intensive universities. And Stanford has been working on the problem. Since 1989, we have cut expenses in the budget supported by unrestricted funds by approximately $60 million, allowing us to hold down our tuition-rate increases - not to as low as we would like but lower than any time in the last two decades.

Why can we not restrain tuition as much as we would like - say, to no more than the rise in Consumer Price Index? There are many reasons, such as the labor-intensive nature of education or the fact, that over the last 15 years, on the average, domestic book prices increased at the rate of 2 times the CPI, foreign titles at 4 times the CPI. However, two seldom examined reasons are the cost of excessive government regulation and the disproportionate cost of government research borne by the universities. To cover those costs, Stanford must use the very same sources - unrestricted gifts, endowment, investment earnings - that otherwise might be applied to further restraining tuition.

Reimbursement for research costs and excessive government regulation are the second and third major points I wish to discuss with you today. The first is the importance of undergraduate education in a research-intensive university.

1. The importance of undergraduate education in a research-intensive university.

Contrary to the belief of some, tuition does not subsidize research. Indeed, our calculations indicate that undergraduate tuition covers only about 2/3 of the true cost of attending Stanford. Undergraduate education and every student - even those paying full tuition - are highly subsidized by gifts, our endowment and our other investment earnings.

Stanford also directly subsidizes the tuition costs of many of our students through some of the most generous financial aid policies in the nation. For over a generation, we have been committed to admitting the most talented students who apply, without considering whether they can afford to pay. Once a student is admitted, Stanford will meet that student's demonstrated financial need through a combination of scholarship grants, loans, and job opportunities. More than 60% of our students get some form of financial aid, and, last year alone, Stanford committed $38 million of its own funds to undergraduate scholarships.

And let me briefly point out how the research enterprise actually enriches undergraduate education. Many undergraduates specifically choose a research-intensive university because of the opportunity to interact with faculty members who are at the frontier of their field. Students who seize the initiative, and seek out the incredible range of opportunities offered at Stanford and other research-intensive universities are rewarded in ways that cannot be matched in other settings.

Let me offer some examples of the opportunities available to our undergraduates:

Undergraduate research results in real outcomes that touch the scholarly and scientific community. Fred Mancoff, who worked in the Physics lab of Professor Charles Marcus, was the first undergraduate ever invited to give an oral presentation at the meeting of the American Physical Society. Matthew Old, who worked in Pediatric Infectious Diseases with Dr. Yvonne Maldonado, developed the first non-radioactive assay for determining whether children have immunity to polio.

These are but some examples of how undergraduate education is enriched by, and complements, the research activities of a university. And all that without, I repeat, tuition's even paying for the full cost of attending.

The presence of research and leading researchers at Stanford clearly adds value to our students' education. About 60% of an undergraduate's course units will be taught by a Stanford faculty member. The majority of the remainder are taught by lecturers hired specifically for their excellent teaching skills.

And even as we have cut our administrative budget, we have continued to improve what undergraduate students get for their tuition. After a comprehensive review of our undergraduate education, we have instituted a new core Introduction to Humanities sequence; added an experimental Science, Math, and Engineering Core to give non-science majors a measure of scientific literacy; extended the writing requirement; strengthened foreign language instruction and requirements; tightened grading and drop policies; introduced minors in the School of Humanities and Sciences to encourage the more effective use of electives; redesigned distribution requirements; and, perhaps most exciting, added 75 new seminar courses for freshmen, each with a maximum of 16 students and each taught by a faculty member, many of them from Stanford's graduate and professional schools. These are not our only small classes: 82% of Stanford's classes are of 29 students or smaller.

That is all good news. Now let me turn to the concerns of a research-intensive university that prevent us from being as cost-effective as we would wish.

2. The costs of research overhead that universities must disproportionately bear.

The inability of the federal government to pay the full costs of sponsored research is forcing those costs back on universities, thus absorbing funds that otherwise might relieve pressure on tuition.

Let me remind everyone of the rationale for government reimbursement of overhead costs. Were the federal government to directly conduct all its research, rather than have it done at universities, it would have to set up labs with all the overhead costs they would involve, such as buildings, utility bills, salaries and benefits for researchers and staff. Instead, this nation chose a system of university-based research, with the universities reimbursed for the overhead costs they incur and the government escapes. This system has served the nation well. At Stanford alone, research results range from new cures for disease, to insights about life on Mars, to breakthroughs in technology.

However, federal reimbursement for such overhead is continually dropping, a particular problem at private universities, which cannot rely on state subsidies to make up the difference. Overhead reimbursement for general administrative and student service costs is capped at 26 points. This policy has the effect, at Stanford, of forcing about $10.6 million of legitimate costs of government research to be absorbed by university funds - funds thus not available for academic purposes.

The contrast with government treatment of other research sources is rather stark. In most industrial research, overhead rates are roughly twice those of private research universities, and there are no arbitrary caps. And the federal Small Business Innovation Research Program gives small businesses an automatic 100% overhead rate.

Yet, university research not only is cheaper for the government, it provides an important side benefit for the nation: the training of graduate students to become the next generation of researchers. And, as any faculty member working on a sponsored agreement will quickly confirm, graduate students are essential contributors to the process of research and creation of knowledge.

3. The high-cost/low-benefit ratio of excessive government regulation.

I now turn to the costs of excessive government regulation. The costs of complying with federal, state, and local regulations are considerable at almost any organization in American society. Research universities, such as Stanford, however, bear some particularly irrational costs. Let me give you two examples.

Our Dean of Research, Charles Kruger, was working with a new faculty member to put in place some combustibles for a lab. It is important to note that these were non-toxic fuels and no unusual gases were being used. Meeting the various requirements cost $600,000. Dean Kruger asked how many kilowatts of combustion were being produced and, when he got home, looked at the amount of combustion produced by his own home's furnace and water heater. He found they were roughly the same. Now, housing in California is expensive, but no one would dream of paying $600,000 to set up a furnace and water heater in their home.

The second example is a pending regulation from the federal EPA. As a result of an inspector general's interpretation of one line of the 1990 Clean Air Act, the EPA has proposed a new regulation that would require application of Maximum Achievable Control Technology to all air emissions from research and development facilities. This could mean that every single fume hood - and at Stanford we have more than 1,000 of them - would need to be retrofitted with a $10,000-to-$20,000 filtration unit, for a total of $10-to-$20 million, plus annual operating and maintenance costs of $1/2 to 1 million. The issue is not whether we should be concerned about air emissions; we long have been. It is about whether the cost and benefits are rational.

By a very conservative accounting, Stanford already incurs about $20 million per year in on-going costs related to compliance with regulations. It is important to emphasize that this figure does not include any capital costs. A portion of these costs are recovered through outside overhead payments. However, $7.8 million of the $20 million in such costs are not recovered by outside sources of funds and bear directly on tuition and other sources of unrestricted income.

In addition to the on-going operating costs of compliance, we are also forced to absorb costs that in other organizations would have been picked up by the research sponsor. This amounts to approximately $21 million.

When we take the $7.8 million in on-going operating costs for compliance and the $21 million I just mentioned, we calculate that approximately 7 1/2 cents on every tuition dollar goes toward supporting these costs.

I must point out that this does not even count the value of the considerable amount of time spent by Stanford faculty and staff time in compliance related meetings, on panels, doing paperwork, meeting with compliance officials, and performing other tasks. These kinds of activities are simply absorbed into the days and nights of our people, and reduce the amount of time available for teaching and research. I have to believe that these hidden costs amount to at least another 5 cents of each tuition dollar.

And, I repeat, these examples do not include any capital costs, of which there clearly have been many as we have struggled to meet our obligations under government regulation.

When I say "government" regulation, I do not wish to imply one, uniform set of regulations. Take a one-pint bottle of alcohol, which could be found in most of our bathroom medicine chests. If found in a university laboratory, it falls under the regulation and scrutiny of at least six different regulatory agencies, all of whom have varying administrative requirements for that same container. These include:

Even when dealing with a single agency, we too often are confronted by regulations intended for an entirely different setting. Let me offer a quick case study of such an agency - the California EPA - and how such regulatory processes have begun to interfere seriously with the very nature of the academic enterprise.

At Stanford, more than 4,000 faculty, staff, and students work with chemicals and the resulting waste, in one way or another. Research involving usually small amounts of thousands of chemicals is conducted in roughly 700 locations in schools and departments throughout the campus.

California has promulgated hazardous waste regulations to protect human health and safety, preserve the environment, minimize waste, and prevent pollution. These rules, however, were developed with large-scale manufacturing processes and industrial settings in mind. And that was a wise decision by the state because 99.99% of all hazardous chemical waste comes from manufacturing and industrial processes; less than one one-hundredth of a percent (0.01%) comes from university laboratories.

State officials freely admit that the development of the regulations did not take into account the nature and organization of universities. The result is agreement between the university and the state on objectives and outcomes - safe practices, sound management of waste, environmental protection - and sharp disagreements on paperwork, administration, and organizational requirements.

Take, for example, labeling. Research and teaching at Stanford produce about 25,000 small containers of chemical waste annually - most of them smaller than a glass of water. State regulators require that each of those containers be labeled with a special label itemizing six specific pieces of information, even if the chemical is in its originally labeled container provided by the manufacturer. An error on any one of these items is a violation. Furthermore, if a state inspector finds a container mislabeled in laboratory A on the west side of the campus and on a subsequent visit finds that another container is so mislabeled in laboratory B on the east side of the campus, Stanford can be considered "recalcitrant" because "repeat" violations have occurred. Labeling fines range from $100 to $10,000 per violation. A 1% error rate, therefore, could result in annual fines of $25,000 to $2.5 million.

In one actual incident, a conscientious graduate student at Stanford put the wrong date on a bottle because his calendar watch was off by a single day, and by chance a state inspector that day noted the resulting labeling violation. The student's supervising professor, a distinguished member of our chemistry department, wrote a memorandum on the incident to our Environmental Safety Office. The professor commented:

I would invite ... the inspector to meet with this individual and better understand how serious he and others are about compliance and how inspections that focus on such human errors and not on more pressing issues of safety serve only a destructive purpose.... We have very little time these days to do much science because it seems that every week there is a new issue, many of a reasonable nature but far too many of which simply do not address safety.... If we continue to focus on non-problems, we will not achieve what should be the objective of our safety programs and legislation, i.e., to create a safer environment. Instead we will discourage compliance and drive our educational and research system into the ground.

This illustrates the regulatory attitude we are dealing with. Nevertheless, we could live with labeling - if that were our only problem. But it is not.

Far more important to us are complicated issues of authority over laboratory practices, the definition of laboratory and associated work spaces, the requirements for supervision and storage of chemicals, the length of time substances can remain in a laboratory, when a substance becomes a waste, when containers can be reused, what training documentation is required for different job classifications and for students, and other important issues.

In the end, the California EPA chose to interpret existing regulations in ways that bore no rational relationship to the reality of the university setting, and imposed $460,000 in fines, $235,00 in state administrative costs and $300,000 in contributions to private environmental groups. Perhaps worse, it imposed expensive and unnecessary bureaucratic requirements on us for the future. Real environmental protection was not at issue, nor was compliance with the law. The dispute was not about whether these activities should be regulated; it was over the state's rigid interpretation of regulations designed for industrial processes and its insistence on applying those to university laboratories.

It is the country that will suffer if the research enterprise is smothered by red tape. And, I will add, it is students and families who suffer as funds that could go to academic purposes and perhaps greater tuition relief are eaten up excessive regulation and the shifting of legitimate expenses from the government to universities.

With that, I conclude and welcome your questions.