Tuition Discounts Rise at Public Colleges—and Could Prove Costly

November 18, 2010

To keep up with competition from private colleges, many public universities are spending more money on student aid. While that approach has attracted lucrative out-of-state students, as well as those with financial need or high standardized-test scores, it could cut into revenues at a time of dwindling state support, new research suggests.

Increasing the discount rate, or the percentage of tuition covered by institutional aid from the operating budget, initially earns a public four-year college more revenue per student, according to research being presented on Thursday by Nicholas W. Hillman, an assistant professor of educational leadership and policy at the University of Utah, at the annual meeting of the Association for the Study of Higher Education.

But once the discount rate rises above 13 percent—as it is has done at a number of public colleges, Mr. Hillman says—the financing approach earns less of a payoff.

Mr. Hillman studied 174 public colleges and universities, finding that they had an average discount rate of 12.3 percent in 2008.

Between 2002 and 2008, he found, the money these colleges spent on aid from their operating budgets grew by 47 percent, while scholarships they gave from endowed funds stayed relatively flat.

Mr. Hillman fears that burgeoning aid budgets could push the discount rate past the 13-percent threshold on more campuses. "All these public colleges might really want to offer discounts so they can fulfill their enrollment-management objectives, but in the end they really need to be aware of the financial implications," he said in an interview. "Discounting is going to start to cannibalize revenues."