Fiscal Policy Effects on Grade Inflation

©2001 Richard J. Barndt

reedited 4/26/12

See also, Mechanisms for Policy Reversal


Grade inflation occurs when a student receives a grade for course work unwarranted by the level of work or achievement demonstrated (Stone, 1995). There is evidence that grade inflation is in fact present in both private and publicly funded colleges and universities. The exact causes of grade inflation and agreement on whether the issue is important enough to warrant serious concern are topics of much disagreement. The purpose of my paper is to suggest that grade inflation does exist and that another of its causes is fiscal and budgetary policy, specifically, the use by many states of enrollment based funding formulas as a means of allocating funds for higher education. My paper begins with a discussion of the grade inflation phenomenon and some of its more popular causes followed by a review of college economics and the funding formula. A look at the current student, the concept of higher education as a business, and defense of my thesis follows.

What is grade inflation? Dr. Perry Zirkel, the laccoca Professor of Education at Lehigh University, characterizes it as a societal trend to de-emphasize competition and make people feel better about themselves. Inflating grades has, in part, been a response to fears that stringent grading would damage the student's self-concept (Edwards, 2000). Stone (1995) says grade inflation is an increase in reported grades unaccompanied by higher student achievement. The effect of grade inflation is a devaluing of undergraduate degrees. Many students today seek Master's degrees immediately after the Bachelor's because it is seen to be the entry level degree by many students (Levine and Cureton, 1998). Undergraduate surveys conducted by Levine and Cureton in 1969, 1976, and 1993 showed that in 1969, 7% of students reporting earned A- or higher and 25% earned C grades or below. The 1993 study showed 26% of students reporting earned A- or higher and 9% earned C grades or below. A recent article by Sonner (2000) cites research finding only 10 to 20 percent of all college students receive grades lower then B-. That being the case, 80 to 90 percent of all college students must receive grades of either A or B (Sonner, 2000).

One might interpret this to mean that today's students are taking their studies more seriously and earning higher grades. The Levin and Cureton survey found that the degree to which academics were taken seriously varied by the institution, by the student body, and even the time of year (Levin and Cureton, 1998). Their study encountered schools where academics were rigorous and standards high and schools where academics were weak. Students stated that they worked hard or thought they did and 83% of them considered themselves to be intellectuals (Levine and Cureton, 1998). Although the extent to which the level of students effort has increased over the years is unclear, in the last 30 years the gentlemen's C has become the gentlemen's A as the percentage of Cs to A's appear to have reversed themselves (Levine and Cureton, 1998).

Studies of available data from the period 1965 through 1980 consisting primarily of Graduate Record Examination scores do not suggest an increase in average student achievement. In fact, while grades were inflating, overall achievement of college seniors appears to have declined. Additionally, preparedness for college as measured by the Scholastic Aptitude Test (SAT) scores and American College Training (ACT) scores declined during the period from 1963 through 1980 when grades were inflating most rapidly (Wilson, 1999).

Since the 1980's achievement in the areas of biology, chemistry, physics, mathematics, and economics have recovered somewhat while the areas of political science, sociology, psychology, education, history, and English literature have not. Stone (1995) cites empirical studies of U.S. colleges and universities finding the grade point averages (GPA's) of students receiving Bachelor's degrees rising from .3 to .5 points from the mid 1960's to the 1980's. At Princeton, the median GPA for the class of 1973 was 3.078, while the median GPA for the class of 1997 was 3.422 (Wilson, 1999). At Dartmouth, the average GPA rose from 3.06 to 3.23 from 1968 to 1994 (Wilson, 1999). In the 1996-97 academic year, 46% of the grades awarded undergraduates at Harvard were A's as compared to 22% in 1966 (Wilson, 1999). Stone concludes, therefore, that the 2.5 GPA of today would be a 2.0 by 1960s' standards and that today's students with less than a 2.5 GPA would have less than a 2.0 GPA, be under the minimum for college retention, and not be in school or graduate (Stone, 1995).

The suggested causes of grade inflation range widely, It has been around since the Academy, in the late 1940's, began to admit students different from the social groups that elite colleges and state universities saw as their clientele before World War 11 (Korshin). The war in Viet Nam influenced grade inflation as students flocked to colleges in fear of the draft (Levine and Cureton, 1998). Levine and Cureton go on to suggest that the nontraditional age students - serious minded and very focused - play a part. Administrative policy and practices such as reductions in rigorous core requirements, movements toward more electives, removal of first attempt grades from transcripts, and pass/fail options all tend to inflate performance as measured by grades (Edwards, 2000). The current practice of student evaluation of faculty is frequently cited as a cause. Faculty members realize that giving poor grades is not in their economic best interest. They believe that low grades lead to low faculty ratings by students, reductions in class sizes, and eventual loss of theirjobs (Edwards, 2000).

Sonner's (2000) research indicates the increasing use of adjunct instructors is at fault. The most likely explanation for adjunct faculty giving higher grades than do full-time faculty is that adjuncts, employed on a term- by-term basis, are hesitant to give lower grades as it could create student complaints resulting in the adjunct's not receiving an offer to teach in subsequent quarters (Sonner, 2000). These and many more suggested causes come with some very persuasive evidence. I suggest that no less compelling than these is fiscal and budgetary policy.

A review of the institution's economics, where colleges get their money, is important to understanding the impact of fiscal policy on grading. The U. S. Department of Education "Finance FY 94" survey suggests that publicly funded institutions of higher education received 35.9 % of their funds from state governments and 18.4% from tuition; bringing to a total of 54.3% the funds derived from numbers of enrolled students. The Federal government, local government, private sources, endowment income, and sales and service revenue combine to form the remaining 45.7% (U.S. Dept. of Education, 1996).

With state funds amounting to almost 36% of the institution's revenue, how solid is the state portion? A growing economy and record surpluses in many states spelled healthy appropriations and management stability for public colleges and universities (American Association of State Colleges and Universities State Issues Digest, 2000). The 1999 AASCU State Issues Survey completed by 47 presidents and chancellors representing public colleges in 43 states, as to fiscal issues, concluded that economic conditions in their states were good but anticipated a slowing of growth in the year ahead. Respondents indicated a plateau in the economic performance of their states.

Since all state spending on higher education is discretionary and more easily cut by lawmakers than spending on law enforcement, health care and some other services, college budgets are likely to fall off as the economy turns down (Schmidt, 2000). The growth of state higher education budgets has slowed throughout much of the nation. The Center for the Study of Education Policy at Illinois State University which tracks state expenditures on higher education needs other than construction found an aggregate spending increase of about 7% in fiscal 2000 (Schmidt). Adjusted for current annual inflation of about 3.4%, the aggregate increase in state funds rose only 3.6% (Schmidt). The study further points out that after adjusting the aggregate rate for the state of California which increased the year 2000 spending by 17%, the aggregate rose only 2.4% after inflation. James C. Palmer, a professor at Illinois State who conducted the survey said "nationally, we seem to be on a plateau". Finally, Schmidt advises of the need for care in interpreting the percentage increase in funds. Not taken into consideration are increases in enrollments and how the funds may be set aside i.e. funds taken from the general appropriation and made available only for community colleges for their efforts in state workforce development. Going forward, higher education appears to be faced with flat state educational budgets and competition for state funds from health care and criminal justice systems, to name a few.

The changes in the student in the last 20 years has also played a part in the grade inflation/fiscal policy issue. Between 1980 and 1994 the growth in college enrollment came from nontraditional students: students over 25, working students, females, or students attending part-time (Levine and Cureton, 1998). Their 1993 Undergraduate Survey found that 37% of the respondents admitted that, if they thought attending college wasn't helping their job chances, they would drop out. By 1996 fewer than I in 6 undergraduates fit the traditional stereotype. What it means is college is not necessarily the most important thing in the lives of today's students (Levine and Cureton, 1998).

Levine and Cureton (1998) point out that, not surprisingly, these different students are looking for a different type of relationship with their college. They want the type of relationship they have with other suppliers of goods and services. They want colleges nearby and operating at convenient hours. They want convenient parking, polite staff, and quality education at affordable prices for which they will shop (Levine and Cureton). Although consensus on a definition of a quality education is beyond this paper, Levine's study suggests that students view quality as a caring faculty, anxious to help. Additionally, on matters of curricular structure, course content, and educational relevance, there is fairly general agreement that colleges are right on target (Levine and Cureton, 1998). There has been a triumph of the consumer's perspective in the institutional culture of the academy, replacing the authority of professional judgment ... with the authority of student wants (Wilson, 1999). In short, students have for higher education exactly the same consumer expectations they have for any other commercial enterprise. For colleges and universities, survival means satisfying these consumer expectations and keeping tuition dollars coming.

Each of the 50 states in the United States has devised its own plan for financing higher education (Noe, 1986). At least one-half use some formula to determine at least part of their higher education budgets. The 1999 AASCU State Issues Survey reports that the number of states using enrollment-driven funding formulas has declined from 60% of respondents indicating formula use in 1998 to 55.3% in 1999 (AASCU, 2000). Additionally, 27.7% of the respondents reported state reliance on performance indicators to allocate a portion of state funds to public colleges and universities. Nearly two-thirds of respondents predicted that their states would adopt funding mechanisms linked to performance within the next five years (AASCU, 2000). Despite an interest in performance funding, formulas are being used to both allocate funds to institutions and to develop appropriation requests (Noe). Noe points out that most states use some quantitative approach linking funding to enrollment levels.

Noe (1986) traces formula funding to the early 1950's as an attempt to:

I reduce political complexities, 2 satisfy the need for a more equitable distribution of resources, adjust for inadequate revenues, and 4 to provide for increased demands for accountability.

Political issues provided strong reasons for development of formula funding. According to Moss and Gaither (1976):

The politics surrounding funding was perhaps the greatest single factor contributing to a recent increase of formulas in higher education. Prior to formula funding, each public institution approached the state legislature and presented its request for funding. This subjective method fostered a great deal of power politics and intrigue, resulting in the capstone institutions faring much better than other state institutions (Moss and Gaither).

Noe suggests that equity does not mean equality. The objective is not to allocate the same amount of funds to all institutions but rather to allocate based on need as determined by formula. He goes on to say that since qualitative differences among schools are subjective, it would be difficult to say higher quality deserves higher income. Accordingly, equitable distribution means equal resource support per student by program. Stone (1998) reminds us of the complexity of policy designed for an equitable distribution. The use of a formula simplifies the problem.

Each formula state is free to craft their formula as they see fit. Noe (1986) suggests there are some common characteristics in formula structure.

1. They are complex. Most states limit formula calculation to determining the resource requirements of instruction, libraries, student services, physical plant operation, and institutional support. Formula complexity is the result of the need to recognize and support the diverse missions of colleges and universities (Filipic, 1996).

2. Formulas use few base factors. Most formulas use enrollment attributes such as student credit hours, building square footage, or grounds acreage as allocation drivers. The State of Ohio bases its instruction subsidy on enrollment measured on an FTE basis (Filipic). An FTE (fall term enrollment) equals 15 credit hours of enrollment as determined on the 14'h day of the summer and fall terms. Campuses submit their student enrollment figures each year to the Board of Regents who use them for subsidy calculations (Filipic).

3. Formulas use a rate per base factor unit, a percentage of base factor unit, or a base factor adjusted for additional attributes such as teacher to student ratio as a basic computational method. The Ohio model recognizes that some coursework is more expensive to teach than others (Filipic). Accordingly, courses are classified into 15 groups or models by discipline and level. The rates thus determined are multiplied by the respective FTE's.

4. Formulas are zero based. Unlike "Incremental budgeting" which simply takes last years budget line items and increases them a certain percentage, zero based budgeting sets everything to zero at the beginning of the period requiring justification of every dollar put on the budget. The zero based budget process is a valuable exercise requiring one to look at all costs - even those taken for granted.

5. Budget formulas make no distinction among institutions.

6. Budget formulas assume a linear relationship between base factors and resource requirements. That assumption is one of convenience found commonly in the budgeting process making formula calculation uncomplicated. Curvilinear functions in budgeting are possible to work with but require more sophisticated mathematical models.

The formula basis for allocating is common in accounting. Some activity or driver is multiplied by a rate to allocate something. If one wanted to predict or budget the cost of employee benefits one would predict them as a function of total salaries or perhaps as a function of the number of employees. A budget for machine maintenance might be forecasted as a function of production hours. When we search for that driver in accounting, we search for the one with the strongest cause and effect relationship.

Noe (1986) suggests the major advantages of formula funding are 1) budget formulas help to assuage the political warfare among institutions and open lobbying by state supported institutions for scarce funds and, 2) formulas measure quantifiable objectives. Formulas provide a measure of comparison and subsequently are more equitable. They further aid In providing some measure of accountability. The use of a formula can provide some standardization of performance and facilitate comparison among institutions of higher education (Noe). He goes on to suggest that the most overriding criticism of the method is its failure to recognize quality. Formula use tends to level program quality.

It seems like a short stretch from fiscal policy and formula funding to the issue of grade inflation. Higher education appears to have become a business or at least evidences many of the characteristics of today's business. We have seen enrollments level and the number of colleges and universities increase resulting in increased competition for students. The last twenty years have seen the huge growth of community colleges (Pozdena, 1997). Colleges have changed from being education driven to consumerism as today's students demand customer service.

Public colleges and universities obtain better than one-half of their revenue from discretionary state funds that, although they have increased modestly over the inflation rate, appear to have plateaued. The formula funding model rewards public colleges and universities based on numbers of students enrolled. In those states that allocate funds on the basis of enrollment (better than 50% of the states) pressure to maintain enrollment levels in order to maintain funding levels must be present. Given that pressure, one can easily conclude that inflated grades must be a result. It would not be good business to have students leave the college to seek friendlier grading. Wilson (1999) claims to have seen first hand the corruption of academic standards, both in pedagogical rigor and honesty in grading, engendered by the university's scramble for enrollments and its insistence that students be retained once they have enrolled - by any means necessary (Wilson, 1999).

The college community have long considered themselves unique with a mission of discovery and disseminating truth, seeing themselves quite different from business; priding themselves on their social responsibility (Levine and Cureton, 1998). If we want to return to a time when academic excellence is the core value of university life, then we need to get the financial and budgetary pressures off the faculty (Wilson, 1999). This view of the academy may be changing today for many of the reasons cited. What if this change is just evolution in education? Higher education has become business and as such it cannot stay the same. Perhaps grade inflation really does not matter. There are no obvious sufferers other than people with nostalgia for their own college years (Korshin).


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Filipic, Matthew V. (1996, April). State Funding for Higher Education in Ohio: A Brief Introduction. Paper prepared for the work of the Higher Education Review Funding Commission, Ohio Board of Regents.

Korshin, Paul J. ( ). Why Everyone's Getting A's. The Penn Current.

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Noe, Roger C. (1986). Formula Funding in Higher Education: A Review. Journal of Education Finance, 11, 1986.

Moss, Charles E., Gaither, Gerald H. (1976). Formula Budgeting: Requiem or Renaissance. Journal of Higher Education, 67, 5, September/October 1976.

Pozdena, Randall (1997). Power to the Student, An Alternative to Higher Education Funding Increases. Analysis prepared for Cascade Policy Institute, Portland, OR.

Schmidt, Peter (2000). State Higher Education Funds Rise Over All, but Growth Slows in Much of Nation. The Chronicle of Higher Education, December 15, 2000.

Sonner, Brenda S. (2000). A is for "Adjunct": Examining Grade Inflation in Higher Education. Journal of Education for Business, 76, September/October, 2000.

Stone, Deborah (1998). Policy Paradox, The Art of Political Decision Making New York, NY: W. W. Norton and Company, Inc.

Stone, J. E. (1995). Inflated Grades, Inflated Enrollment, and Inflated Budgets: An Analysis and Call for Review at the State Level. Education Policy Analysis Archives, 3 (11), June 26, 1995.

U.S. Department of Education. National Center For Education Statistics. Digest of Education Statistics 1996. NCES 96-133, Washington, D.C., 1996.

Wilson, Bradford P. (1999). The Phenomenon of Grade Inflation in Higher Education. National Forum, 79, Fall, 1999.