The report of the National Commission on the Cost of Higher Education points out that tuition does not cover the full cost of students' education and that there is “a general subsidy that goes to all students, regardless of what institution they attend or whether they receive financial aid.” Stanford calculates that even full tuition covers only about 60 percent of the costs the university incurs to educate an undergraduate; therefore, every student at Stanford receives a subsidy of at least 40 percent.
There is no single accepted method for calculating the exact amount of the general subsidy. Here is how Stanford made its calculation:
The federal government, in order to reimburse some of the costs of research it sponsors at universities, requires the institutions to separate out research costs from education costs. The category in which education costs are reported for these purposes is called “Instruction and Departmental Research.” It includes everything related to instruction, such as professors' salaries, departmental supplies, and administrative support.
The Stanford calculation of the true cost of providing an undergraduate education begins with this amount. We then make adjustments to remove from the federal category costs not associated with undergraduate education (e.g., departmental research and graduate education) and add in others that are (e.g., a portion of the costs of facilities, personnel, utilities, and libraries.)
Stanford takes a conservative approach in subtracting all of some costs while adding only a portion of others. For example, we exclude all fundraising costs, even though a high proportion of fundraising supports the undergraduate program directly. And, we do not include any research costs, even though undergraduates benefit from being taught by professors at the forefront of their fields and by being involved in research themselves.
This calculation indicates that tuition pays only about 60 percent of the true cost of providing an undergraduate education. Other sources of support, particularly donations, continue to make that large subsidy possible, helping to keep tuition—even at full “sticker price”—well below the true cost of a Stanford education.