Nearly a fifth of private colleges have discounted their first-year tuition by at least 60 percent, significantly more than last year, according to a new report from Moody’s Investors Service.
The results of the credit-rating agency’s annual tuition survey, released on Wednesday, illustrate the pressures private colleges are facing to undercut their sticker prices by offering more-generous financial-aid packages to attract a static number of 18- to 24-year-old students. The average discount rate nationwide — or the average amount of tuition revenue a college devotes to financial aid through grants — has been steadily climbing for at least a decade.
In 2017 just 13 percent of private colleges reported a first-year discount rate of 60 percent or higher. This year the number was 19 percent. That’s a “fairly substantial” increase from last year, said Susan I. Fitzgerald, a Moody’s analyst and an associate managing director.
Some colleges, the survey found, reported a first-year discount rate above 70 percent. Moody’s received responses from 174 private, nonprofit American colleges, all of which are rated by the agency.
Scholars who are skeptical of tuition discounting worry that, if left unchecked, the practice will risk the financial health of an institution. It can also undermine a college’s efforts to enroll low-income and minority students, they say, because such students are often scared off by the full advertised tuition, commonly known as the sticker price.
Defenders of tuition discounting say it makes private colleges more accessible, including to middle-income families that would otherwise be priced out.
Private colleges increasingly rely on tuition discounting, Fitzgerald said, because they face competitive pressure to attract students. The number of high-school graduates has been relatively flat, with some slight decreases in the Midwest and Northeast, she said. Those students sometimes apply to dozens of institutions, and they pay close attention to the types of financial-aid packages they’re offered.
Also, private colleges aren’t competing only against one another, Fitzgerald said. They’re also facing off against lower-priced public and community colleges as well as states that offer free or significantly reduced college tuition.
“It’s just a very complex and competitive environment on a number of fronts,” Fitzgerald said. “Private colleges are trying to figure out the model that’s sustainable.”
In general, the report says, small private colleges are discounting more than their larger peers are, partly because smaller colleges offer mostly undergraduate programming. The median discount rate will most likely continue to rise, the report predicts, to 39 percent in 2019, a five-percentage-point bump from 2014.
Rising discount rates will continue to stifle private colleges’ pricing flexibility, Fitzgerald said. That’s because once a certain discount rate is promised to incoming freshmen, she said, it’s really difficult to tell them the following year that they’re getting less of a break.
In July, Moody’s issued a somewhat bleak longer-term outlook for private colleges. Declining tuition revenue mixed with mounting expenses would prove to be a recipe for financial stress, the group said. Some of the roughly 1,700 private, nonprofit colleges will merge. Others will reduce the number of programs offered. And a few, the report says, will close.
Emma Pettit is a staff reporter at The Chronicle. Follow her on Twitter @EmmaJanePettit, or email her at emma.pettit@chronicle.com.
