May 18, 2016

Record-high tuition discounts don’t produce desired results

Anyone working with families on the college admissions process knows that “price” sensitivity has increased sharply over the past several years. Most families and students are acutely aware of where their budgets stand in relation to the overall cost of four years of undergraduate education. And with very good cause, direct conversations about money are coming earlier in the process.

To address the money concern, colleges and universities engage in various strategies designed to make college more affordable by lowering prices usually in the form of “merit” scholarships focused on a student’s unique qualifications. Because everyone likes to think they’re getting a bargain, colleges provide institutional discounts—the Marshall’s “never pay full price” plan—on the education and experience they are offering. And the public has come to expect, if not count on, these discounts.

On the most basic level, the size of the discount is not only a means by which a family can bring expenses more in line with budgets, but it’s also viewed as a bizarre measure of worth. In other words, the college appears to be recognizing with dollars the value of my child and my child’s academic achievements. And a very crude calculus, which boils down to a trade-off between prestige and value, takes place as families evaluate and compare different scholarship offers, particularly at private colleges or universities.

As most students of human behavior will attest, money is a very unpredictable and fickle motivator. In fact, colleges are finding that tuition discounts are not producing the kinds of outcomes they desire. Institutions are investing more money in higher discounts that aren’t attracting the kinds or numbers of students they need to bring in a class.

As a result, institutions are caught “between the need to enroll highly price-conscious students and the squeeze discounting places on the amount of money they end up netting,” explains Inside Higher Ed.

So it’s not much of a surprise that the average tuition discount rate at private nonprofit colleges rose in 2015-16 to an estimated 48.6 percent for first-time, full-time freshmen, according to a report released this week by the National Association of College and University Business Officers (NACUBO). The rate, representing the part of total tuition and fee revenue provided to students in the form of grant-based financial aid, was up from 47.1 percent the previous year. Discount rates for all undergrads rose from 41.3 percent to 42.5 percent. In other words, the 401 private colleges participating in NACUBO’s survey put about 42 cents on every dollar of tuition and fee revenue toward scholarships and grants.

Discount rates have been creeping up since 2008-9, when family wealth began disappearing due to financial losses from the Great Recession. But they haven’t been particularly successful in achieving institutional goals. Net tuition revenue growth estimates averaged 1.2 percent for freshmen in 2015-16, down from 2.1 the previous year.  Net tuition revenue across all undergraduates averaged an estimated 1.8 percent, not significantly different from 1.7 percent a year earlier.

But more importantly, many private institutions are experiencing declining enrollment. According to NACUBO, 37.5 percent of institutions reported that enrollments declined in both their freshman classes and across the entire undergraduate population from 2014 to 2015. More than half, or 51.2 percent, reported decreases in total undergraduate enrollment.

Schools with the largest endowments used those funds most frequently to fund scholarships, and institutions with endowments over $1 billion funded about one-third of their scholarships with endowment dollars. At schools with endowments under $25 million, seven percent of scholarships came from endowment funds.

"Even in a year of lower endowment investment returns, colleges and universities spent substantially more from their endowments," said NACUBO President and CEO John Walda in a press release.

Despite their best efforts to recruit students and strategically discount prices using endowment funds, institutions strongly felt they were losing enrollment because of price. Among survey respondents experiencing freshman enrollment declines, 62 percent indicated they believed price sensitivity was the top factor, followed by increased competition (60%), changing demographics (51%), decreases in regional college-aged populations (40%), and decreases in yield rates (39%).

But the good news from the applicant perspective is that most first-time freshmen, 88.2 percent, received institutional grants in 2015-16, up from 77.2 percent and 76.4 percent in the previous two years. The average institutional grant also made up a higher percentage of tuition and fees—49.9 percent up from 48.6 percent and 47.6 percent.

"With the help of their endowments, private colleges and universities continue to strive toward increasing affordability for their students," said Ken Redd, NACUBO's director of research and policy analysis. "However, with net revenue growth slowing down and the nation's student population evolving, many schools are testing strategies to ensure they can continue to deliver on their missions and remain financially sustainable in the years ahead." 

And while students and families continue to assess trade-offs based on their limited budgets, it’s not likely the intense negotiations colleges have with admits around merit-based scholarships are going to go away anytime soon. In fact, as word gets out in the community that families succeed in increasing scholarship dollars at particular institutions, the demand will only get more insistent. And colleges will be surprised to see families walking away from offers they thought were very reasonable if not generous.

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