Expenditures, efficiency, and effectiveness in U.S. undergraduate higher education: A national benchmark model

The purpose of the study was to investigate the relationship between cost measures and efficiency and effectiveness in U.S. higher education institutions and whether that relationship can begin to answer the accountability questions facing these institutions. Institutions are facing questions from federal legislators, state legislators, parents, students, and other stakeholders about the cost of U.S. higher education and whether these costs lead to success in educating students.;Using the Integrated Postsecondary Education Data System (2003-04) and the National Study of Postsecondary Faculty (2004), canonical correlation analysis and structural equation modeling were used to define and determine the relationship among four constructs: cost factors, institutional characteristics, efficiency and effectiveness. The results indicated that the efficiency of institutions is primarily defined by the number of for-credit classes taught by faculty, the number of hours per week faculty spend in teaching activities, and the student-to-faculty ratio. Effectiveness was primarily defined by the six-year graduation rate and full-time first-year retention rate of undergraduate students. A model was developed to predict efficiency and effectiveness from several expenditure categories--instructional, academic support, and student services expenses; and from several institutional characteristics--institutional size, Carnegie classification, and the percentage of students receiving federal grant aid. Based on that model, benchmarks were developed to identify optimal cost levels at which institutions are both efficient and effective.;A relationship was found between expenditures and the efficiency and effectiveness of an institution, and an equilibrium point was determined that maximized both. By plotting the benchmark expenditure levels for efficiency and effectiveness, an optimal expenditure level was found that maximized an institution's effectiveness without overspending. Institutions that spend above this optimal point may be over-extended and using resources unnecessarily. Institutions that spend below this optimal point may be underdeveloped and not achieving their maximum level of effectiveness. Institutions were further classified into levels of efficiency and effectiveness according to their institutional characteristics and cost factors.