Rising Tuition Discounts and Flat Tuition Revenues Squeeze Colleges Even Harder

College of Wooster

At the College of Wooster the expected family contribution hasn’t improved in six years, a reflection of the economic downturn. Said one official at the Ohio college, “Is there a surprise that financial-aid discounting goes up over that time?”
July 02, 2014

By now, the picture painted in a new survey of tuition discounting, net-tuition revenue, and other enrollment trends should be drearily familiar to many in higher education. The annual survey of private, nonprofit, four-year colleges, conducted by the National Association of College and University Business Officers, points to yet another year when discount rates for first-time, full-time freshmen reached a record high: 44.8 percent in 2012-13 and an estimated 46.4 percent for 2013-14.

More important, perhaps, net-tuition revenue remained stagnant, with an estimated growth of just 1.1 percent over the past year. While net-tuition revenue has seen peaks and valleys since 2000, the survey found that, on average and adjusted for inflation, colleges have seen no growth in net revenue for 13 years. Among the 401 institutions that responded to the survey, which was released on Wednesday, undergraduate enrollment was down at half of them. Those with declining enrollment said that price sensitivity was the biggest issue they faced, followed by increasing competition and a smaller pool of traditional students.

Of course, the question is, What does the survey portend for higher education? According to some observers, nothing good. The problem isn’t so much the money colleges are giving away in student aid, but the revenue they are not taking in.

"I see a situation that could become dire," said Michael Townsley, a college-finance expert and former president of the Pennsylvania Institute of Technology, who reviewed the trends outlined in the 86-page report. "The big issue that is going to be facing colleges is that if the market for enrollment continues to decline, if external sources like grants and aid are flat, if students remain or become increasingly price sensitive, I think that, over the next several years, small colleges with meager endowments could be in deep trouble."

Granted, he said, people made dire predictions about the future of colleges in the late 1970s and early 1980s. But colleges wriggled their way out by finding new revenue in adult learners and more female students. He said there’s no boon like that on the horizon.

Few Easy Answers

When discussing what to do about the challenges, higher-education officials acknowledged that there were few easy answers. Christopher Kimball, president of California Lutheran University, said that private colleges like his would have to grapple with the thorny issues associated with costs. You could argue, he said, that colleges should construct fewer buildings—people often bring up the amenities race and the infamous climbing walls—but what really costs money, and what is really needed, are more science buildings.

Colleges, he said, will be forced to tweak their biggest expense—compensation. They might shift to adjuncts and part-time instructors, but as those faculty members organize, he noted, "that might not be such a clear strategy." They might think that they can deliver education online for less, he said, but that notion contradicts a central marketing theme of small, private colleges: a highly personal education and a traditional college experience.

Mr. Kimball recognized a lot of what he saw in the Nacubo officials’ report on the survey. "What they describe is what we are experiencing here"—although not so bad, he was quick to add.

California Lutheran has benefited from students’ perception of the difficulty of getting into the state’s public-university systems. "They were starting to look at independent schools like us in a way that they never did before," he said. California Lutheran also matched the out-of-pocket cost for any student who had also been accepted by the top University of California campuses, in Berkeley, Los Angeles, and Santa Barbara.

But trouble in the public systems has not been seen as an advantage by most private colleges. Among the colleges responding to the survey that saw increases in enrollment, only 3 percent said that state budget cuts at public institutions could explain their results. Far more institutions cited increases in financial aid, new facilities, or new academic or athletic programs for their growth.

Compounding the Competition

An overwhelming majority of respondents who gained in enrollment attributed their success to better recruitment and marketing strategies.

W. Scott Friedhoff, vice president for enrollment and college relations at the College of Wooster, in Ohio, was skeptical of that response. "It is the easiest answer for nonenrollment professionals to give"—to lay the problem at the feet of the enrollment office, he said. While messaging is important, he said, adding or changing academic programs, or putting up new buildings, can be just as crucial but harder to pull off.

The fundamental problem is the economy—an issue he did not see mentioned much in Nacubo’s report. His office has been tracking the calculations for the expected family contribution among Wooster students, and it hasn’t improved in six years. At the same time, the State of Ohio has cut financial aid for students by half.

"Is there a surprise that financial-aid discounting goes up over that time?" he wondered.

Even in recent years, the College of Wooster has done well, reducing its discount rate and increasing its net-tuition revenue. (A third of the survey respondents have had a steady or shrinking discount rate.) But admitting the freshman class of 2014-15 "took me by surprise," Mr. Friedhoff said. He found it harder to recruit students, and the discount rate went back up.

"The surprise keeps getting validated by others’ telling similar stories," he said. "Competition was really heated. Many schools didn’t meet their enrollment goals last year, and the pressure to do so this year just compounded that competition."

He is most worried about "an extraordinary aversion to student debt." Student loans can be an effective and responsible way to finance a college education, he said, and certainly they are vital for tuition-dependent colleges. But because of news-media coverage of outlandish debts and an "inaccurate representation of the wise use of student loans," families are shying away from them. "I worry that many students are compromising their futures," Mr. Friedhoff said.

‘Bargaining All Over the Place’

Mr. Friedhoff said he wonders what we’ll see in next year’s Nacubo report.

Kent John Chabotar, an expert on college finance who just retired as president of Guilford College, in North Carolina, thinks he knows what’s coming. "More talk about radical restructuring, but not as much action," he said. Curricula will focus on fewer programs, with cuts in faculty members. Colleges will also be under pressure to reduce the numbers of administrators, which have expanded in recent years. More colleges will jump into online-education programs, and more will enter consortial relationships to share costs in administration or instruction.

He said he thinks colleges will focus much more attention on junior-year transfers. "Transfer students are going to become a much bigger piece of the puzzle," he said, "to the point that they’ll even have a discount rate for juniors."

It all reflects the tougher recruiting environment that colleges see today—and are likely to see more in the future.

"I have never seen savvier kids or savvier parents than the ones we are getting now," Mr. Chabotar said. "They are bargaining all over the place. It’s like going to the used-car dealership."