When is Fee Hike Justified?

We keep hearing about the students and parents protesting against fee hike at schools and colleges. Are all fee hikes unjustified and must be opposed.

In many cases, the fee hikes are necessary, but there is no communication from the administration explaining it, and hence the students and parents get upset. Fee hike should be explained in terms of institutional finances, and I believe most opposition would go away. But, of course, there are times when some institutes try to be unfair and that is why they don't explain the hike properly.

The most common charge by students is that they are not improving service, but charging more. This argument is usually bogus. An increase in fee which is commensurate with increase in expenditure can only result in current level of service. Only if the increase is substantially higher than the increase in input costs can the question of improved services be raised.

The second most common charge is: The inflation was 6-7% but you are increasing the fee by 12%. One really needs to look at all costs and all revenues to decide whether a fee hike is justified or not. Let me give an extreme example. In a government college, say, 99 rupees out of 100 spent come as a grant from the government, and one rupee as tuition. At the end of a year with say 8% inflation, the cost would have risen to 108, but if he government grant remains 99, the fee will have to be increase from 1 to 9, an 800% increase without any new and improved facilities, or some services would have to be curtailed.

While this was an extreme example, the point is that a university may have multiple revenue streams, and if some revenue stream doesn't grow at the rate of expenditure, then some other revenue stream will have to increase faster. For example, if you were dependent on philanthropic funds, and they don't grow as much, tuition may have to go up faster.

Also, there can be some sudden increase in expenses beyond rate of inflation, like the 7th pay commission award. Your faculty costs are going very high. So you will have to increase the fee appropriately.

When does a fee hike become unjustified? In the following situations.

If the fee hike is resulting in significant revenue surplus. A bit of surplus is ok, since there are many uncertainties in running any entity. But a large surplus is an indicator that you want current students to pay for future improvements or worse, there may even be a doubt that the institute will find a way to take this surplus out in some way or the other.

The other thing to check will be whether there is cross subsidy. If my fees is going up and my program is making profit, there is an explanation needed for why the other programs shouldn't pay more, reducing my fee.

The controversial part is when the students/parents think there is inefficiency in running the institution and if certain costs are controlled, their fee need not be hiked by as much. My own take is that if tuition is the only or primary revenue stream, then it is the responsibility of the administration to convince students that their fee is being spent efficiently. However, if students are paying only a fraction of the costs, they would have less say in determining what is useful and what is wasteful expense.

The most problematic cost is the cost of building new infrastructure. The problem here is that any building that you are constructing is likely to last 60-70 years, but if you take a bank loan for a shorter duration (say, 15 years), then you are loading all the costs to a few batches. This is fine if the growth rate is small. After all, current batches are paying very little for the infrastructure they are using. So some payment for future infrastructure is fine. But if the growth rate is high then asking a few batches a very substantial amount to take care of bank loans is certainly problematic.

Lastly, consider a situation in which there is a genuine reason for fee hike. The administration has done its best to control costs. They have worked hard to maintain all revenue streams to the extent possible, and yet there is a shortfall in the budget. Even in this situation, there is a need to cap the fee hike to a reasonable number. When someone joins as a student, one should have some idea about the total cost of education. When I am told the first year fee (and other expenses like hostel/mess), my expectation is that the costs will rise roughly at the rate of inflation. So, if the inflation is 6-7%, may be the costs will increase at 8-10%. If once in a rare while, the fee has to go up by another couple of points, I will understand. But anything more than that is a problem because I hadn't planned for it. To take care of sudden increase in input costs (like 7th pay commission) or sudden reduction in some revenue stream, instead of high increase in tuition, the institutions should depend on its surplus. As mentioned above, a small surplus every year is acceptable if it is properly invested and used only for the institution in due course. And may be the new batches can be asked to pay more. This will ensure that everyone who joins can have a reasonable plan for their educational expenses.

To conclude, the issue of fee hike should be handled by engaging with those who are going to be affected by it, and sharing as much information about the reasons for fee hike as possible. Try to limit the hike to little more than inflation every year, and the new batches can have higher cost, if there is a need to increase revenues further.