Finance

Is Tuition Discounting Leading Some Colleges Off a Cliff?

April 28, 2017

As growing numbers of private colleges offer steep tuition discounts to most of their students, the practice’s costs are starting to equal or exceed its benefits, a new study concludes.

The analysis of data from about 450 small, private baccalaureate colleges found that some actually had begun to lose net tuition revenue in using grant-aid offers to attract more students. For many, increases in tuition discounts had ceased to produce enrollment increases large enough for the practice to offer significant dividends.

Nevertheless, the researchers found, such colleges increasingly appear to be succumbing to competitive pressures to offer prospective students a break on the full advertised tuition — commonly known as the sticker price. During the period covered by the study, 2003 to 2012, the share that offered institutional grant aid to at least 95 percent of incoming students rose to 58 percent from 35 percent. The share of tuition and fee dollars being refunded in the form of grant aid rose to 36.4 percent from 31.7 percent.

"If this goes unchecked, the financial viability of institutions is heavily at risk," says Ann M. Gansemer-Topf, an assistant professor of education at Iowa State University who co-authored the study with Luke Behaunek, dean of students at Simpson College.

In a paper that Ms. Gansemer-Topf planned to present Friday, at the annual conference of the American Educational Research Association, the researchers said tuition discounting may also be undermining colleges’ efforts to enroll students who are minority or low-income. That’s because it leaves colleges feeling less pressure to stabilize or lower their sticker prices. which influence the decision-making of many students who lack information or guidance.

Other scholars defend tuition discounting as a means of making private colleges accessible to a broader segment of the population, including middle-income families that otherwise could not afford them. Harold V. Hartley III, senior vice president of the Council of Independent Colleges, said Thursday that tuition discounting helps account for how families "have different abilities to pay."

"What really matters is how this plays out at the institutional level," Mr. Hartley added, noting that private colleges vary substantially in their markets, their sticker prices and aid expenditures, and their ability to draw on endowments to remain affordable. Many such institutions continue to use tuition discounting effectively and to reap gains from it, he said.

How Much Is Too Much?

The National Association of College and University Business Officers has similarly concluded, based on annual surveys of private colleges, that tuition discounting may not be producing significant revenue and enrollment growth for such institutions. In their new study, Mr. Behaunek and Ms. Gansemer-Topf use data analysis to try to measure exactly how tuition discounting, enrollment, and net tuition revenue are related.

Over all, the two researchers found, the institutions studied had made small gains in enrolling more students, but the revenue that they reaped from raising prices and enrollments was eroded substantially by their expenditures on institutional grant aid. Over the period examined, the average college’s gross revenue from tuition and fees had risen by $12.2 million, or an annual average of 3.2 percent. But 61 percent of the additional revenue had been used to finance tuition discounts, leaving the average college with a net tuition-revenue increase of $4.7 million, or 2.3 percent annually.

In a separate analysis not included as part of their paper, the researchers found that the tenth of colleges that had most aggressively increased tuition discounting over the period studied had experienced a decline in net tuition revenue per student. At that segment of colleges, overall enrollments, and enrollments of students who are minority or receive Pell Grants, had risen by an annual average of less than 1 percent. The average SAT scores of its entering freshman classes had declined.

"You are going to have more students, but at what point have you discounted too much?" asked Ms. Gansemer-Topf, who pointed out that rising enrollments not only increase operating costs but also create demand for new residence halls and other facilities.

Over all, applications to the colleges studied had risen enough to suggest that tuition discounting had helped keep rising tuitions from depressing demand, the researchers’ paper says. At the same time, however, the real demand for such institutions had not risen appreciably either, because application growth had been heavily offset by an 11-percent decline in the colleges’ yield rates — the share of admitted students who actually enroll. The paper says such findings suggest that, by collectively embracing a high-tuition, high-discount model, colleges had prompted many students to apply to more colleges than their predecessors had and base their enrollment decisions on their expected costs after factoring in grant aid.

Too Narrow a View?

The study’s conclusions were praised as "dead-on" by Craig Goebel, a principal with the Art & Science Group, a higher-education consulting firm that annually advises more than a dozen colleges like those examined. Many such colleges "are reaching the limit" in terms of their ability to use discounts to increase net tuition revenue, and the gains they reap from doing so tend to be short-term, he said.

Mr. Goebel said he encourages colleges to rethink "the real substance of what they are offering" — their curriculum and programs — to "do more to differentiate themselves and therefore create greater appeal among prospective students."

Mr. Hartley, of the Council of Independent Colleges, characterized the new study’s conclusions as unnecessarily alarmist. He said that small colleges have experienced more recovery from the Great Recession since the end of the period examined, and that some experts were describing tuition discounting as unsustainable two decades ago, when discount rates were much smaller than now. Only a few small colleges close every year, he said, and "we don’t see any evidence that there is going to be a big uptick in this."

"These institutions are really being aggressive in finding ways to enhance revenues and cut costs," Mr. Hartley said. They’re discounting tuition "in large measure to keep college affordable for students and their parents."

The researchers based their study on data gathered by the federal government and by the Institute for College Access and Success, an independent nonprofit. They focused on a 10-year period, which they regarded as enough time to identify trends without having their results badly skewed by changes in data-reporting practices or colleges’ missions. They accounted for inflation, defined tuition discounts narrowly — as institutional grant aid to students — and excluded from their analysis some institutions, such as Berea College, with unique missions and tuition-discounting practices.

Among its limitations, the study focused on first-time, first-year students and did not consider changes in tuition and tuition discounts by class year. It did not take into account colleges’ selectivity, strategies, student populations, and methods of choosing whom to award aid.

Peter Schmidt writes about affirmative action, academic labor, and issues related to academic freedom. Contact him at peter.schmidt@chronicle.com.