Determining Fee Levels

Determining Fee Levels

Deciding what is an ‘appropriate’ amount for students to pay is essentially a value judgement. However, there are three main approaches to thinking about this problem:

• Setting fees based on what other providers are charging for similar services in the market
• Using fees to recover costs incurred in providing the service
• Linking fee increases to the rate of inflation in the economy as a whole.

Each of these is discussed separately below.

Market-Related Fees

Commercial concerns often survey the market and determine the prices they will charge not only on the basis of production costs, but also on what the market will bear. Although many ODL institutions have public service mandates, it is important to consider the fees charged by other educational institutions, both public and private, when determining charges for their courses. A survey of the market for alternatives to the courses offered by an open school might include some or all of the following:

• State-run secondary schools
• private colleges
• university feeder or bridging courses
• other ODL institutions (local or foreign).

If the fees for studying at an open school are higher than those for comparable courses offered by private education institutions or in conventional schools or colleges, then learners may feel that they are being overcharged. Furthermore, enrolments are likely to decrease as potential students opt for cheaper alternatives.

Any comparison between an ODL institution and State-run secondary schools should account for the other costs of taking part in full-time education. In addition to fees, students in conventional education may be required to pay for some or all of the following:

• textbooks,
• uniforms,
• stationery,
• laboratory fees for science subjects,
• daily transportation to and from school, or
• hostel fees,
• other ‘voluntary’ contributions to school funds.

In many cases, those studying through the ODL mode are not obliged to pay such charges or at least do not pay as much as full-time students. As a result, the total costs of studying at a distance are often lower than those incurred for attending a conventional school, college of university.

Reflection

This exercise may be carried out individually, in pairs or in small groups. Draw a line down the middle of a blank sheet of paper to create two columns; At the top of the left hand column, write the word 'Advantages'; At the top of the right hand column, write the word 'Disadvantages' Brainstorm all the advantages and disadvantages of basing student fees on what others charge in the local or international market and write these down in the appropriate columns. Feedback: Advantages The principal benefit of adopting a system of market-related fees would be to sensitise the staff of ODL institutions to the economic realities of a commercial operation. Awareness of the institution’s market position and of what is offered by its competitors could contribute to greater cost-consciousness and improved efficiency among its employees. If an open school, college or university were to compete directly with other institutions to attract students, the rationale for enhancing a culture of customer service would become more evident to staff members. Disadvantages The distribution of household income in many countries is very imbalanced, and this suggests a fragmented and restricted market for commercial education services. While a private institution may have no difficulty filling a relatively small number of places at fees that recover all costs and yield some profits, the market for such a premium service is likely to be extremely limited. In many countries, such charges are beyond the means of the vast majority of potential students, who are looking for a basic and affordable service at the lower end of the market. In view of the social mandate of many public-sector open schools, colleges and universities, any comparison of fees for their courses with those charged by private institutions must be treated with caution.

Cost Recovery Models

Commercial entities must recover the full costs of producing their goods or services, plus a minimum level of surplus, if they are to remain profitable. However, in the case of public service delivery, governments often provide subsidies to ensure that those citizens who cannot afford the full cost may still avail of the services on offer. In many cases, attempts are made to recover at least some of the cost of providing the service. Setting fees to recover either a proportion (percentage) of costs or to recoup specific cost elements are two alternative models for determining what is an appropriate level for students to pay.

Percentage Cost Recovery

With this model, fees are set at a level intended to recover a proportion or fixed percentage of the actual costs of providing the service. In some cases, the percentage chosen may be set by government as part of a sector-wide policy; in others, it may be a decision taken by the board or management of the ODL institution. Where information on the practice in other countries is available, this may be useful in guiding the development of policy on this issue, but international comparisons must be treated with caution because of the specific circumstances prevailing in each country. At the end of the day, however, the actual percentage used to calculate fee levels is arbitrary, though it does reflect value judgements about what is fair, reasonable and ‘appropriate’.

However, in order to implement a cost recovery approach, it is necessary to analyse the institution’s expenditure and calculate the unit costs of providing different courses. As discussed in Unit 5, crude methods such as Backflush Costing (which yields only the average cost per student for the institution as a whole) can mask considerable variations in unit costs for courses at different levels. Special requirements for certain subjects (such as audio tapes/CDs for language courses) can also add a considerable amount to the unit cost of delivery. Another factor affecting unit costs is the number of students enrolling for a particular subject or course. All other things being equal, more popular subjects will always be cheaper per learner to provide than courses with few enrolments because it is possible to achieve economies of scale. Among other things, the cost of developing new study materials can be spread among a larger pool of learners in subjects where enrolments are high, thus lowering unit costs. For all these reasons, it may be necessary to carry out a more detailed analysis of costs by programme, by course or by subject/module. These correspond to Levels 2, 3 and 4 in the hierarchical taxonomy of cost objects.

Reflection

Percentage Cost Recovery This exercise may be carried out individually, in pairs or in small groups. Prepare a blank sheet of paper as in the reflection above; Brainstorm all the advantages and disadvantages of setting fees at a level intended to recover a fixed percentage of costs. Feedback: Advantages The principle of percentage cost recovery is both transparent and fair. Though disagreements may arise about the appropriate percentage to be recovered, the concept itself is easy to explain to students, their families and other stakeholders. It is desirable for governments to institute and enforce a sector-wide policy in order to avoid situations where State-funded institutions adopt conflicting approaches to the issue or even compete with one another to attract students through lower fees. Where open schools are able to charge lower fees while achieving the same level of cost recovery as conventional schools, then studying through ODL is likely to become a more attractive prospect. A further advantage of the percentage cost recovery model is that fees can be calculated on the basis of estimated costs, and this encourages institutions to thoroughly investigate the viability of a particular course before it is launched. Finally, a unit cost approach also provides a sound basis for negotiating with donors or the government on subsidies for new initiatives. Disadvantages In general, the main disadvantage of a system of proportionate cost recovery is that it does not encourage improvements in the efficiency of an institution. As long as a fixed percentage of costs is guaranteed, there is no incentive to change how things are done, especially if lowering costs will result in lower fees. Furthermore, if fee increases result in decreased subject enrolments, then unit costs will rise. Where charges are determined as a fixed percentage of the actual cost of providing courses, then fees will also increase, resulting in a further drop in enrolments. This creates a self-perpetuating spiral of rising fees and falling enrolments that ultimately undermines the viability of a course.

Recovering Specific Cost Elements

As an alternative to percentage cost recovery, fees can be set at a level intended to recover specific elements or categories of cost. Table 11a illustrates a series of options proposed by Rumble (2006, pages 107-108) which are graded from the lowest to highest level of cost recovery.

TABLE 11a – Options for Recovering Specific Categories of Costs

	Fees set at a level intended to cover the following:
Option A	Student-related variable costs, including all direct expenditure for: reproduction and distribution of study materials face-to-face or other forms of tuition tutor-marked assignments examination setting, administering and marking
Option B	Student-related variable costs (as in Option A), plus Annual depreciation of fixed costs of course development
Option C	Student-related variable costs, plus Annual depreciation of fixed costs of course development, plus Controllable committed costs
Option D	Student-related variable costs, plus Annual depreciation of fixed costs of course development, plus Controllable committed costs, plus Indirect common costs
Option E	All of the institution’s costs for the course, including: Student-related variable costs, plus Annual depreciation of fixed costs of course development, plus Controllable committed costs, plus Indirect common costs, plus Appropriate contribution to business-sustaining expenses.

Where government or donor funding is specifically ear-marked for certain categories of expenditure (for example, course development costs or institutional overheads), then this approach facilitates calculations of the level of student fees required to make up the difference.

Option A represents the marginal cost of providing services for each additional student. Rumble suggests that this is the ideal for ODL institutions which are funded partly by student fees and partly by government grants. If fees are set at a level that recovers all student-related variable costs, then additional students may be accommodated (within the manageable range) without incurring any extra costs for staff (controllable committed costs) or overheads (indirect common costs and business-sustaining expenses). <br
Of the five options listed in the table above, the last (Option E) is essentially the same as the percentage cost recovery model, with fees set to achieve 100% repayment of the expenses incurred in providing the service.

Reflection

This exercise may be carried out individually, in pairs or in small groups. Prepare a blank sheet of paper as in the reflections above; Brainstorm all the advantages and disadvantages of setting fees at a level intended to recover specific cost elements. Feedback: Advantages Many of the advantages identified above in relation to the percentage cost recovery model also apply where fees are set at a level intended to recover specific cost elements. The main benefit of the latter approach is that it tends to focus the attention of managers on the need to control costs and generate sufficient income for the organisation to sustain itself. Whereas in a commercial concern the drive to increase profits is the incentive underlying such efforts to control costs, it is not clear what might provide similar motivation in a not-for-profit organisation. If fees are designed to recover specific cost elements, reducing costs will only result in a reduction in fee income. Disadvantages The principal disadvantage of this model for setting fees lies in the complexity of the activity-based cost analysis process which would have to be carried out on a regular basis in order to adjust fees to changing costs. Whereas it is relatively easy to determine unit costs for programmes (Level 2 in the hierarchical taxonomy of cost objects), it becomes increasingly time-consuming to continue the analysis at lower levels. In addition, the concerns raised in the discussion of the disadvantages of the percentage cost recovery approach also apply to this model.

Index-Linked Fees

The final basis for determining what is an appropriate amount for students to pay is to start with the current level of fees and adjust these in line with inflation. The rationale for this approach is both straightforward and fair. The operating costs of the ODL institution tend to rise at roughly the same rate as inflation in the economy as a whole. Like any other business, it can be argued that the open school, college or university needs to raise its fees to cover these additional costs.

The calculation of annual fee increases can be based on either of two figures. The central bank in each country normally publishes a Consumer Price Index (CPI). The CPI records the rate of price inflation over the preceding twelve-month period, and this provides an actual basis for adjusting fees. Alternatively, it may be possible to obtain a projection of the rate of inflation over the coming year from the ministry of finance, though economic projections should always be treated with some caution. This figure for the projected rate of inflation can then be used to calculate fee increases in the coming year.

Reflection

This exercise may be carried out individually, in pairs or in small groups. Prepare a blank sheet of paper as in the reflections above, Brainstorm all the advantages and disadvantages of ajusting fees in line with inflation. Feedback: Advantages The principle advantage of this mechanism for reckoning fee increases is that it is objective and simple to calculate. It is also manifestly transparent and easy to explain to students, their parents and other stakeholders. Though no one is happy when prices are increased, such index-linked adjustments are commonplace and have come to be accepted (often with resignation) by the public. Furthermore, since wages and salaries also tend to increase in line with inflation (though often lagging behind), fees for studying with the ODL institution should remain constant relative to household disposable income. Disadvantages In times of high inflation, there is the danger that fee increases may not keep pace with the actual cost of providing the service. In order to prepare publicity materials, fee adjustments will need to be approved well in advance of the academic year to which they relate even though real costs may have increased dramatically by the time tuition commences. Furthermore, this approach assumes that the existing charges represent an appropriate level of cost recovery. If the current fees for a course are inadequate to make up for shortfalls in income from government subsidies or other sources, then linking them to inflation from here on out will simply perpetuate an unsatisfactory situation and endanger the long-term sustainability of the ODL institution.

Activity

Compare the effects of different approaches to determining the level of student fees by carrying out Exercise 11.2. Feedback: You can check your answers by clicking on Exercise 11.2 - Answer Sheet.