Climbing Tuition Discount Rates Come at High Cost for Colleges

Education Finance

Tuition Discounts Reach Records Highs

Last week, the National Association of College and University Business Officers (NACUBO) released their annual study on tuition discounting at private colleges. The 2009 report shows that, after remaining steady for years, the average tuition discount rate in the U.S. hit an all-time high in the 2008-2009 school year. The average discount rate for full-time freshmen climbed to 41.8% in the fall of 2008, up from 39.1% in 2007. For individual students, this translated into 82.3% of incoming freshmen receiving institutional grants, with an average award that covered 53.5% of the 'sticker price.'

A school's 'tuition discount rate' represents the difference between an institution's tuition and fees and what students actually pay to attend. Private colleges that tend to have very high tuition often offer institutional grants to close the gap between full cost, loans and students' financial need.

NACUBO has released the Tuition Discounting Study Report annually since 1994. A historical analysis of their data shows that between 1990 and 2002, the average tuition discount rate for new college freshmen rose rapidly, climbing from 27% to 39%. Between 2002 and 2008, rates stabilized around 38%, then climbed again to reach record highs in the fall of 2008. In 2012, the discount rate escalated even higher to 45%.

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For the latest study, the organization collected data from 355 private 4-year colleges across the U.S. As it has in the past, the survey focused on the entering class of full-time freshmen. However, this report added two new metrics: The percentage of grants that were awarded based on student need (as opposed to merit or other factors) and the percentage of grants funded by endowment money.

On average, 12% of institutional grants came from schools' endowments. Unsurprisingly, the report shows that the percentage was higher for wealthier schools: Colleges with endowments over $1 billion used those monies to fund 34% of grant aid, whereas schools with endowments under $25 million only reported covering 6% of grant costs with endowment assets.

The role that endowments play in funding grants is likely to impact the availability of aid over the next several years. The recession led to widespread endowment losses, which will soon take a toll on endowment-dependent institutions' ability to provide grants. This may hit low-income students the hardest, who have the greatest need but represent the smallest percentage of the tuition discount rates.

The 2009 report found that 41.5% of aid was awarded based on entirely non-need criteria such as academic merit, athletics or artistic ability. By contrast, only about 36% of aid was awarded for need, and 22.5% was based on a combination of need and non-need criteria. Although about 58% of institutional grants, on average, were at least partially awarded based on need, the total funds allotted for need were still lower than those designated for non-need awards.

Cost Risk Analysis

A Risky Practice

NACUBO points to the recession to explain the sudden increase in tuition discounting. Colleges have been feeling a lot of pressure to keep student enrollment levels up in an already competitive recruiting environment. And while the economic downturn has led to some increase in college applications, it has also led to a sharp decrease in students' and their families' ability to pay for college.

Increased tuition discounting has had a detrimental effect on many institutions' budgets. The formula only works if a sufficient number of lower-aid recipients enroll, making it possible for colleges to meet their revenue targets through tuition. If too many high-aid students enroll the delicate balance is disrupted and funds have to be pulled from other places.

The rise in student need and tuition discounting led to a 2.5% drop in net tuition revenue between 2007 and 2008. As a result, many schools have had to implement drastic cost cutting measures such as staff reductions and hiring and salary freezes. John D. Walda, president of NACUBO, argues that the fact that schools increased tuition discounting in these difficult times shows not only a desire to attract more students, but also a commitment to 'work to respond to student need.'

Looking for Funding

Critics of tuition discounting claim that the practice is a callous marketing tactic that actually directs funds away from low-income students. Many institutions use tuition discounts to attract students who will boost their numbers in influential college ranking systems such as U.S. News & World Report. Others use discounts to bait students who can pay the difference, rather than distributing larger awards to needier students. Many even find themselves luring students who are actually a poor fit for the school, a side-effect of what some education professionals call the 'commodification of higher education.'

Meanwhile, the need to make up tuition revenue keeps driving tuition costs up, causing public relations nightmares. Many college presidents decry having to defend staggering sticker prices that few people actually pay.

Nevertheless, tuition discounting can be a positive thing when both the financial equations and student-distribution measures are balanced. Stephen L. DesJardins, an associate professor at the University of Michigan at Ann Arbor where he studies enrollment management and tuition discounting, notes that the practice 'can help colleges add to their revenues and support their mission.'

In the current economic climate, the practice certainly appears to be failing in the revenue department. At the same time, the 36% of grants going to need is supporting colleges' mission to increase access to low-income students.

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