Predicting Tuition at the US News Top 50 Liberal Arts Colleges Neal Christopherson, Office of Institutional Research July, 2002

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1 Predicting Tuition at the US News Top 50 Liberal Arts Colleges Neal Christopherson, Office of Institutional Research July, 2002 For upper-level administrators creating a college budget, a yearly question is How much should we charge next year? Tuition rises each year to keep pace with costs, increasing more some years than others. Tuition needs to be fair to students, while allowing a school to keep pace with its peer institutions. Also, tuition varies from school to school, and this report will attempt to uncover the factors that influence tuition differences at the US News top 50 liberal arts colleges, focusing on the effect of endowment. To what extent does endowment affect tuition? Background: Whitman s Tuition and Peer Institutions Table 1 shows Whitman s tuition over the past 6 years and how it compares to a group of peer institutions. Note that Whitman is consistently below the median, and our tuition has fallen farther from the median over the past 6 years as other schools have increased their tuition at a higher rate. Table 1: Tuition Among Peer Institutions School Beloit 18,230 19,050 19,770 20,420 21,550 n/a Bowdoin 21,750 22,905 23,895 24,955 25,890 27,280 Carleton 21,120 21,885 22,611 23,469 24,390 25,530 Colorado 19,026 19,980 20,880 21,822 22,800 24,528 Grinnell 17,134 17,568 18,446 19,460 20,500 22,250 Haverford 20,890 21,740 22,861 23,780 24,940 26,060 Knox 17,778 18,393 19,075 19,836 21,174 22,620 Oberlin 21,576 22,438 23,175 24,264 25,355 26,580 Occidental n/a 20,114 21,088 22,518 23,828 25,030 Pitzer 19,934 20,684 20,879 24,128 25,238 27,030 Reed 21,490 22,340 23,121 24,050 25,020 26,260 Swarthmore 21,144 22,000 23,240 24,190 25,200 26,376 U Puget Sound 18,170 18,940 19,795 20,605 21,425 22,505 Willamette 18,500 n/a n/a n/a 22,821 23,392 Whitman 18,806 19,756 20,300 20,900 21,550 22,796 Median 19,934 20,684 21,088 23,469 24,109 25,280 Whitman Rank 9th of 14* 10th of 14 10th of 14 10th of 14 11th(t) of 15 11th of 14 Source: HEDS Tuition and Fees Reports. Comparison institutions are a mixture of HEDS and Panel of 14 schools. * Read: Whitman had the 9th highest tuition out of 14 schools. The Current Project: Data and Methods This report attempts to uncover various predictors of tuition at liberal arts colleges. Data from the US News top 50 liberal arts colleges (2001) are used. The main dependent variable for this study is tuition. Independent variables initially included were admit rate, yield ratio, US News rank, percentage of incoming first year students from the top 10% of their high school class, the 25 th percentile of the SAT scores of incoming first year students, the US News prestige score, the 1994 cohort 6-year graduation rate, associate professor salary, and endowment ( fiscal year). Also, a variable measuring endowment per FTE was computed. All data come from the 2001 US News and

2 World Report ranking data except salary and endowment data, which come from The Chronicle of Higher Education website. Analysis methods include bivariate correlation and OLS Regression. Correlates with Tuition Some very strong correlations exist between tuition and various measures of college quality (see Table 2). There is a strong negative correlation between tuition and admit rate, and between tuition and US News Rank. There is a strong positive correlation between tuition and the US News prestige score, graduation rate, and faculty salaries. Interestingly, the correlation between tuition and endowment is fairly small (see also the scatterplot in Figure 1), and the correlation between tuition and endowment per FTE is close to 0. Table 2: Correlations with Tuition Correlation with Variable Tuition Endowment Endowment/FTE Admit Rate * Yield Ratio US News Rank * % Top Ten % SAT 0.369* US News Prestige 0.424* Grad Rate 0.504* Assoc Prof Salary 0.564* * p<.01 Figure 1: Tuition and Endowment Among US News Top 50 Schools 30, Tuition 27,500 25,000 22,500 20,000 17,500 15, , , , ,000 1,000,000 1,200,000 1,400, Endowment (in thousands) Predicting Tuition Regression analysis paints a slightly different picture than the simple correlations. Building regression models with these data was tricky because the high correlations between independent variables created multicollinearity problems. Admit rate, for example, has a very strong correlation with nearly every other variable. The following variables were not included in the final regressions: US News rank: this measure is a function of several other variables in the model: admit rate, endowment, yield ratio, SAT scores, etc.

3 Top 10% of HS class: this is highly correlated with SAT score (r=.859), so one of these two variables needed to be dropped from the model. SAT score was kept because it is more strongly correlated with tuition. Graduation Rate: Despite having a high correlation with tuition, this variable was not significant in any model tested. Adding it to the final regression model (Table 3) increases the model r 2 a paltry.003. In addition, including graduation rate in the regression model causes other variables to become non-significant. Dropping this variable proved to be a good solution to the multicollinearity problem. Thus, two models were initially run to predict tuition. The first used endowment as the main independent variable, the second used endowment per FTE as the main independent variable (see Table 3). The B column shows the change in tuition for a 1-unit change in the independent variable. The Beta column shows the relative strength of the effect for each independent variable when compared to the others. Model 1 predicts 59.6% of the variance in tuition among schools. All variables are significant, and the strongest predictors of tuition are admit rate and the US News prestige score. Contrary to the bivariate correlation, endowment has a significant, negative effect on tuition. In other words, among the schools ranked in the top 50 by US News, when we control for admit rate, yield ratio, SAT score, US News prestige score, and associate professor s salary, for every $1,000,000 more in endowment, a school s tuition is, on average, $3.28 lower. Model 2 predicts 59.2% of the variance in tuition among schools. All variables except SAT score are significant. Again, the strongest predictors are admit rate and the US News prestige score. Endowment per FTE has a negative effect on tuition. Again, controlling for the other independent variables in the model, for every $1000 per FTE a school has in endowment, tuition decreases, on average, $4.85. Table 3: Initial Regression Models Model 1 Model 2 Variable B Beta B Beta Admit Rate Yield Ratio % SAT US News Prestige Assoc Prof Salary Endowment Endowment per FTE Constant Model R *All variables are significant at.05. An Interaction Effect A closer look at the data reveals an interesting pattern. Schools with higher prestige ratings tend to have higher tuitions, no matter what their endowment. In other words, the effect of endowment on tuition may differ depending on prestige rating. To test this, an interaction effect was included in the regression model, which improved the r 2 significantly. These new models are an improvement over those shown in Table 3, explaining 63.4% (endowment) and 61.3% (endowment per FTE) of the variance of tuition (see Table 4). In general, these models do a good job of predicting tuition.

4 Appendix A shows the actual tuition and the tuition predicted by Model 3. This model predicts tuition within $1000 for over half the schools, and within $1500 for about 75% of the schools. Table 4: Regression Models with Interaction Effects Model 3 Model 4 Variable B Beta B Beta Admit Rate Yield Ratio % SAT US News Prestige Assoc Prof Salary Endowment Endowment per FTE Endowment*Prestige EndowmentperFTE*Prestige Constant Model R *All variables are significant at.05 except US News Prestige (both models) and 25% SAT (model 4). The significant interaction effect indicates that the effect of endowment on tuition is different depending on a school s prestige rating. The greater the prestige rating, the less impact endowment has on tuition. Using Whitman College data as an example, we can see the impact of endowment on tuition at different levels of prestige. Table 5 shows predicted tuition for different endowments and prestige levels, keeping all other variables equal. Note that Whitman s actual tuition in this dataset is $22,796, and the model predicts $22,305. Table 5: Predicted tuition for different prestige ratings and endowments If US News Prestige Rating = and Endowment = Predicted Tuition = 3.3 $100,000,000 $23,792 $22,165 $20, $100,000, $100,000, $100,000,000 $24,876 $23,709 $22,542 $25,959 $25,252 $24,544 $27,043 $26,795 $26,547 Admit rate, yield ratio, SAT, and Associate Professor salary are all held constant using Whitman College figures when predicting tuition. Actual Whitman tuition ( ) = $22,796 Actual Whitman Endowment ( ) = $282,156,000 Actual Whitman Prestige Rating (2001) = 3.3

5 A glance at the Predicted Tuition column shows several things. First, it is obvious that a higher prestige rating leads to higher tuition. Second, the impact of endowment on tuition is much different depending on prestige level. With a 3.3 prestige rating, going from a $100 million to $500 million endowment leads to a $3000 decrease in predicted tuition. However, with a 4.8 prestige rating (the highest in the 2001 US News survey), going from a $100 million to $500 million endowment leads to only a $500 decrease in predicted tuition. Conclusion What can we conclude from this? This analysis shows that endowment does impact tuition, but this impact becomes less and less as prestige ratings increase. Other factors that influence prestige, such as admit rate and SAT score, also have an impact on tuition. This indicates that tuition is less driven by costs and endowment than by market forces: if people are willing to pay a high tuition, a college can charge a higher tuition even if it is not necessary. In other words, if a college has a good enough reputation, they can charge what the market allows. Less prominent schools need to use their endowment resources to push down costs and attract better students through lower tuition. The implications of this finding for politically liberal colleges are left for others to debate. Next, note that in this dataset Whitman s predicted tuition is very close to our actual tuition. This indicates that, given our characteristics, our tuition about where expected (actual is about $500 lower than predicted), given current market forces. Finally, it is important to note that prestige is highly correlated with other variables in the model, including endowment, admit rate, SAT score, yield ratio, and graduation rate. Because prestige is partially dependent on these other variables it is possible that this model is much more complex than can be shown in a simple regression model. Appendix A: Tuition Predicted by Regression Model 3 This table shows a list of the US News Top 50 liberal arts colleges, their tuition, and the tuition predicted by regression model 3. School Name Actual Predicted Difference Amherst College 27,260 27, Swarthmore College 26,376 27, Williams College 25,540 27,090 1,550 Wellesley College 25,504 24,294-1,210 Bowdoin College 27,280 27, Carleton College 25,530 26, Haverford College 26,070 26, Pomona College 25,010 23,971-1,039 Middlebury College 27,300 24,221-3,079 Davidson College 23,995 24, Grinnell College 22,250 22, Wesleyan University (CT) 27,100 26, Washington and Lee University 19,345 21,990 2,645 Harvey Mudd College 25,506 26,660 1,154 Smith College 24,742 24,

6 Vassar College 26,510 25, Bryn Mawr College 24,990 24, Claremont McKenna College 24,540 26,400 1,860 Colgate University 27,025 27, Colby College 27,290 26,103-1,187 Hamilton College 27,350 26,288-1,062 Bates College 27,100 26, Oberlin College 26,580 25, Mount Holyoke College 26,418 25,058-1,360 Trinity College 26,786 27,813 1,027 Connecticut College 26,585 25, Macalester College 22,608 24,988 2,380 Barnard College 24,036 26,057 2,021 Bucknell University 25,335 25, Colorado College 24,893 24, University of the South 21,340 21, College of the Holy Cross 25,020 23,784-1,236 Kenyon College 27,550 22,805-4,745 Lafayette College 24,921 25, Scripps College 24,400 25, Franklin and Marshall College 26,110 24,513-1,597 Union College 26,007 25, Bard College 26,170 26, Whitman College 22,796 22, DePauw University 20,470 22,194 1,724 Sarah Lawrence College 27,982 27, Centre College 18,000 21,412 3,412 Skidmore College 26,675 26, Dickinson College 25,485 24,133-1,352 Furman University 20,076 22,184 2,108 Occidental College 25,030 25, Rhodes College 20,566 22,224 1,658 Beloit College 22,404 22, Gettysburg College 25,798 23,204-2,594 Lawrence University 22,728 21,228-1,500 Wabash College 19,243 20,

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