Chapter 81 Question 072

Why aren't there top-notch for-profit universities? (Asher Jayne) Among the hundreds of top universities in the United States, none of them are for-profit institutions.Most other higher education institutions are also not-for-profit.The only exceptions are for-profit colleges that specialize in vocational education (such as Phoenix University), but to attend such schools, students must forego any hope of attaining elite academic status.Why are top-notch educational institutions, without exception, not-for-profit? In the top universities in the United States, tuition income generally only accounts for one-third of the annual expenditure, or even lower; the shortfall mainly comes from cash donations from current alumni, and interest income from sponsorship funds from former and current alumni.Assuming that the school adopts the form of a for-profit organization, there must not be many alumni who are willing to donate. Therefore, non-profit universities have a clear competitive advantage.

But even disregarding donations, nonprofits still have an advantage.Let us assume that the quality of education increases with the amount of money colleges spend per student.Suppose there are two universities, one is not-for-profit and the other is for-profit.In the beginning, none of them contributed financially.If a for-profit university charges $20,000 in tuition and spends $20,000 per student, its profit is zero just to keep it afloat.Non-profit universities charge one.For $80,000 in tuition, it spends $20,000 per student, so it borrows $2,000 per student and pays it back through future alumni grants.

Since the quality of education at both colleges is the same (measured by how much the school spends per student), students now pay $20,000 to attend a for-profit college, or pay $1.$80,000 in tuition, plus a $2,000 endowment later on, at a nonprofit college has the same effect.Assume further that the student's marginal income tax rate is 50%.Donations are tax-deductible, so he can donate $4,000 to a nonprofit college and not lose much more than paying $2,000 in extra tuition to a for-profit college. Once the donation rolls over, the nonprofit university collects one for each.80,000 US dollars in tuition, you can spend two.twenty thousand dollars.For-profit universities still can only charge $20,000 in tuition, and spend up to $20,000.

In general, nonprofit educational institutions have an advantage over for-profit institutions in that a portion of their income comes from tax-deductible grants.As a result, nonprofits can spend more per student, while for-profits operate with zero profit.