Cost of Education
As we see school teachers take to the streets, and lobby their states for more pay, it is certainly understandable. After all, many starting school teachers make almost the same as the guy flipping your burgers at the local fast food joint. On the other side, we have parents and students who are not happy with the level of education their children are receiving for the already high cost of public education. Rather than jumping on one side or the other, wouldn’t it be refreshing to look at both sides of this debate?
The Business of Education
My day-job is a Business Coach. As a business coach, I review profit and loss statements and help my clients increase their ability to generate a profit. While every industry is slightly different, most service businesses target a 50% gross margin in order to make a 10% net profit. Gross margin is the amount of money over and above the direct cost associated with running a business. If it costs me $50 in direct cost as a business owner, then I need to sell my service for $100 in order to get a gross margin of 50% (($100-$50) / $100 ). Continuing on with this business analogy, in order to make a 10% profit, my overhead cannot exceed 40%. Here’s the summary of my typical business: 50% direct cost; 40% overhead; and 10% profit.
Let’s see how this works with our public education system. According to data obtained from 2017, teacher’s salaries are all over the board depending on your state. However, most states generally have the same overhead and gross margin rate. For the purpose of simplification, I will use New York. While New York does have higher teacher’s salaries; it also has a higher cost per pupil and so it seems like a good test case. In New York, teachers make an average of $73,247 per year; and the per-pupil-funding for New York is $21,206. This means that for a classroom of 25 students, New York tax-payers are paying $530,150 per year. Since school teachers are truly the only direct-cost of a public school district, you can calculate the gross margin by subtracting the teacher cost from the classroom revenue which is $456,903. When you divide this amount by the total classroom revenue, you will get a gross margin percentage of 86% ($456,903 / $530,150). This means that only 14% of New York tax payer money is funding the direct cost of a student’s education.
While New York has higher numbers than most states, the ratios are pretty much the same all over the U.S. The average gross margin rate is 81%. Ironically, New York pays their teachers the most per year; but they also have the highest revenue of any state and so their gross margin is also the highest.
Why does Gross Margin Matter?
For business people, this gross margin will pop out as ridiculously high, and we will automatically see the problem. I can understand why this may not be the case for proponents of public education. Let me explain.
In a private-sector company, if we were to have an 80% gross margin, we need to be able to compete with other companies who will try to reduce their overhead costs and gain customers at our expense. That is why most companies are pushed to a gross margin of 50% instead of a whopping 80%. Keep in mind, that private-sector companies still need to earn a profit of 10%. In public education, there is no such force. The one force that is emerging in public education is the cries of a few tax-payers who don’t want to pay more taxes. All the tax-payer knows is that their taxes seem awfully high and they don’t want to pay more. Then they hear teachers wanting higher salaries; and they are convinced that they will need to pay even higher taxes than they are already.
What Value is the Public Getting for their Education Investment?
Since New York has the highest per pupil spending, this must mean New York has the best public education system in the country, right? Wrong. If you were to move to Massachusetts from New York, your child would get a much better education; and you would pay $5,000 less per year than you would in New York. In a private sector system of competition, New York would lose to Massachusetts. In fact, New York would eventually go out of business, because they would not get any student or parent customers. If we were to look at how we compete as a nation to other developed nations, our public education system would look even worse.
What this means is that there is little relationship to what tax-payers pay and what our kids receive in the way of quality of education.
Where is the Money Going?
Whenever, I bring up my gross margin discussion to anyone in the public education system, I get excuses like:
- We need to pay for school buildings
- We need to pay for busing
- If states could pay less, I’m sure they would.
- We need to pay for administrators
All of these are valid responses. And, for the most part, I concur with many of these added costs. However, the additional costs should be closer to 40% of the total cost; not 80% as they are currently.
I believe our investment is going to a lot more than it should. Let’s consider what we have demanded of our public schools.
Sports – We want our kids to participate in organized sports with the public school; but don’t offer any compensation to do this except for whatever they are already getting from the state. We need to take care of athletic fields, buy sports equipment, and purchase property all because we want to watch our kids play sports. While I love sports, we have burdened our public education system dollars for sports. Many schools charge athletic fees; which don’t come even close to paying the bill for the high cost of sports programs.
Busing– Schools spend an inordinate amount of money on transporting kids to school. While this is a convenience for some and a necessity for a few, it is a cost that is driving up the overhead of most public schools. Especially, rural schools that have difficulty paying their teachers, now have to shell out an inordinate amount of money to bus their few students who are spread out to their school building.
Facilities – We have decided as a country, that we need to have education happen in a school facility. I will acknowledge that human contact in a structure is a good foundation for educating kids. Especially, children at primary school grades. However, it is not necessary.
Instruction Method – As the internet has become more prolific in recent decades, private companies are trying to reduce travel costs by providing online training to their workers. Not only will online training eliminate the cost of facilities, a single training can be recorded and played back multiple times at a fraction of the cost of in-person lectures. Sites like Teachable and Udemy are offering courses from $50 to $1,000. If you stack up 8 online courses, you would have a year’s worth of school education for $400 to $8,000. How does that compare to the $22,000 price tag New Yorker’s are paying?
We have an impasse. Teachers want and deserve higher pay; and tax-payers want and deserve tax relief. The only way to connect these two, is to change the way we educate our kids. Other countries are doing better than we are… we can certainly learn from them. I have described a few items above that ought to receive serious consideration. If none of these work, the one thing that can force public education to change will be a voucher system. A voucher system will attract business-minded people who will create value, reduce costs and improve education quality.
The other alternative, is that we can continue the way we are; and simply pay more money to a bloated public education system; where teachers and students will continue to be the losers.