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Tuition Discounting: Helpful or Harmful?

Tuition Discounting: Helpful or Harmful?

 

Tuition discounting is a hot topic right now. After all, it’s getting late into the fall season and that means many admissions offices are focusing their efforts on optimizing financial aid. Should that include tuition discounting? If so, to what extent?

The Current State of Affairs

Whether you call it “scholarships,” “merit aid,” or “institutional grant aid,” it’s still the act of granting money off the sticker price of tuition, typically taken directly from the institution’s bottom line. The “high-price/high-aid” model is usually employed by small, private colleges, but other types and sizes of educational institution have been known to utilize the same tactic.

The National Association of College and University Business Officers, NACUBO, published the 2017 NACUBO Tuition Discounting Study, which surveyed 404 private, nonprofit institutions for the 2017-2018 school year, and concluded that the average discount rate for first-time, full-time students was at an historical high—49.9%. The sophomore through junior year discounting was equally impressive at 44.8%.

With it becoming more and more popular, it begs the question: is tuition discounting harmful or helpful?

Why We Do It

There are several valid reasons why many institutions use tuition discounting, but it’s particularly prevalent in smaller, private colleges because they’re largely “donative-commercial nonprofit organizations with a high degree of tuition dependency,” as stated in “A Shell Game By Any Other Name: The Economics and Rationale behind Tuition Discounting.”

Inside Higher Ed summarized the history of the practice well. It was originally “...intended to allow students to afford college regardless of their wealth (or their family’s wealth). Monies were transferred from individuals with greater means to those with lesser means. An objective formula was used to sort people along a spectrum.” And there are still colleges that use it as it was originally intended, explicitly for the purpose of need-based aid if the student didn’t receive enough to support their tuition from the federal government or other sources. According to the same NACUBO study referenced before, tuition has risen 42.1%, while the average net cost for students has risen a much lower 18.8%. You’ll never hear us say that college is “affordable” these days, but institution discounting has, legitimately, helped private, nonprofits remain an option for certain types of students.

Because discounting has made the price of a private education more approachable, it’s also helped many schools enroll more students. Harold V. Hartley III, senior vice president of the Council of Independent Colleges, sees tuition discounting as a positive thing for this very reason.  

The senior vice president for enrollment and institutional planning at Drew University, Robert Massa, agrees that, when done correctly, enrollment increases using targeted discounting. Many account executives right here at Cappex would testify to its merit based on responses from college and university partners.

The benefit of enrolling more students alone is likely enough to encourage institutions to keep up the practice of tuition discounting, but it’s actually become ingrained in how students perceive colleges, as well as in their national rankings. Institutions raising their tuition prices raises the prestige of a university or college—it’s built right into the U.S. News & World Report rankings. Tamar Lewin in her New York Times article Getting Out of the Discount Game, Small Colleges Lower Price put it best: “For decades, most private college pricing has reflected the Chivas Regal effect—the notion that whether in Scotch or a school, a higher price indicated higher quality.”

And parents and students firmly believe it, despite the fact that normally less than a third of attendees pay the full sticker price at a private college, which is 100% due to tuition discounts. In fact, surveys found that both students and parents would rather they or their teen attend a school with a higher price tag at a deeply discounted rate than simply pay the actual cost of tuition purely due to idea that, well, the higher something is priced at, the better it must be, right?

The Cons

The aforementioned statistic, that less than a third of students pay full tuition, leads directly into one of the largest downfalls of tuition discounting: revenue. The Association of Governing Boards of Colleges and Universities, the AGB, says that, “Some colleges rely so heavily on discounting that when they raise their tuition, they do not generate new net revenues. In today’s economic climate, where students and families are struggling financially, some institutions are so afraid of losing students to lower-priced institutions that they are discounting away their needed operating revenues. That is not a viable long-term strategy, and it threatens an institution’s ability to offer the educational opportunities that allow it to fulfill its mission.”

The American Educational Research Association conducted a 10-year study that showed that, “...six out of 10 institutions had tuition discount rates that put them at risk for losing net revenue per full-time equivalent for every new student they enroll.” The NACUBO Tuition Discount study corroborated this, finding that “[a]cross the 448 institutions studied, average net tuition revenue increased 2.3 percent per year. But enrollment grew faster.” Federal funding remained stagnant.

There’s another side to this matter, though, and it can be a rough one if diversifying the student body is top on your admission team’s list. While the original purpose of tuition discounting was to make higher education more affordable for low-income students, the sticker price for colleges and universities has now risen so high that the high-cost/high-aid model is actually discouraging low-income students. A Longmire and Co. survey found that  60% of students and parents didn’t even know that private institutions offered discounts on tuition, nonetheless how much, and that 40% had rejected a school based on the sticker price alone.

For low-income and underrepresented students that aren’t deterred by a high price tag and enroll in colleges that use significant tuition discounting to enroll students, they often pay high net prices. The New America Foundation published a study conducted by Stephen Burd in 2013 “show[ing] that hundreds of colleges expect the neediest students to pay an amount that is equal to or even more than their families’ yearly earnings.” The insinuation made by a number of these studies is that institutions are using their financial resources to lure students with higher test scores, GPAs, and wealth, rather than using the discounting for the financially needy.

Final Thoughts and Questions

There are a number of institutions diverging from the high-price/high-aid model using tuition resets or freezes, but there are plenty of institutions with no intention of abandoning tuition discounting anytime soon because even if the net tuition per student falls, it can result in a higher total net tuition.

The primary questions every admissions office should be asking are:

  1. Is the high sticker price deterring students from applying?

  2. Is the tuition discounting model in place sustainable?

Ultimately, it comes down to each individual institution and what keeps students applying, enrolling, and coming back while keeping the lights on.

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