Betsy Fleming, channeling the late management guru Peter Drucker, says there are two crimes in business: Pretending to cost more than you do, and buying customers. “Colleges are in the business of doing both,” says Ms. Fleming, president of Converse College, a women’s institution in South Carolina. “We are not going to do that anymore.”
Last month Converse became one of the latest institutions to announce that it was going to slash its tuition, of $29,124, which no one paid anyway, and “reset” that price down 43 percent to $16,500.
Ms. Fleming and the Converse trustees who backed the plan talk about the “transparency” of the new tuition—the way it clarifies Converse’s real cost both within the college and for prospective students and their families. Those groups often don’t understand the complicated world of sticker prices and discount rates, or the average percentage of tuition covered by institutional aid.
Amid families’ anxiety about rising tuition, colleges’ anxiety over record-high discounts, and the lackluster economic recovery, one might think tuition resets would be the wave of the future. Converse’s announcement, after all, followed similar recent tuition cuts at Ashland University, in Ohio; Concordia University, in Minnesota; Seton Hall University; Sewanee: the University of the South; Wilson College, in Pennsylvania; and more.
“At some point you’re going to have to do something—the financial models for a lot of schools are unsustainable,” says William M. (Billy) Webster IV, a payday-loan entrepreneur who, as a Converse trustee, had a prominent role in pushing the tuition reset. “You can either wait until you are forced into a solution that everyone else is adopting, or you can try to be innovative about a decision that can move the needle for your own institution.”
But hold on. While it might seem like tuition resets are a pervasive new trend, experts say, we probably won’t see colleges chopping back their prices en masse. The process is enormously complicated, a viable option for only a limited number of institutions. It’s also not a long-term solution for the big problems that colleges and their students face—it’s often just a short-term fix that brings attention, and more students, to an overlooked college. In time, for most institutions, the benefits dissipate as the publicity goes away, and the sticker prices resume their inexorable climb.
Radical Choice
Kevin W. Crockett, president of Noel-Levitz, a company that helps colleges with tuition-reset strategies, says that at least half of the institutions that consider lowering tuition find out it won’t work or decide not to pursue it.
“The radicalness of a reset is still scary enough to some institutions that even if it makes financial sense for them, it’s hard for them to get across the finish line,” he says.
At Mills College, in California, administrators were aware of the reset notion but instead opted to minimize yearly tuition increases to stay affordable. The chief concern about lowering tuition, says Brian O’Rourke, the college’s vice president for enrollment management, was a loss of flexibility in the financial-aid office. Mr. O’Rourke says the college especially wanted to keep its ability to “situationally assist” middle-income families who might be squeezed out by a reset, which limits the possibility of variable discounts.
What’s more, it’s never a panacea. “This is rarely done in a vacuum,” Mr. Crockett says. Colleges are also usually working on diversifying revenue streams and strengthening programs. “This is always part of a broader set of strategies where they are trying to reposition the school.”
The studies that lead up to lowering tuition, consultants say, involve looking at the prices of competitor institutions, analyzing information in a college’s database of applications for financial aid, or studying how prospective students would view a change in tuition or aid.
At a deeper level, the studies involve survey research—"boiling down to one form or another of asking a person how much she wants to pay for her Chrysler,” says David W. Strauss, a principal with the Art & Science Group, which does price studies and other market research for colleges.
“The problem is, a person usually can’t tell you how much she would pay for a Chrysler, and if she can, she won’t,” he says. Art & Science’s methods are proprietary and secret, but they involve a combination of surveys and statistical modeling.
Mr. Strauss is generally down on tuition resets: “Theoretically, there exists the institution where reducing the price significantly and reducing aid significantly make sense. I haven’t seen it yet.”
For most colleges, the strategy involves offering a lower price but also taking away aid, he says. The students are not necessarily getting a better deal than they were before the reset. “Essentially you are potentially advantaging the lower-performing, higher-income family, the one that didn’t get a merit award.”
In the end, he believes, toying with price and aid does not solve higher education’s real problems. “In the long run the solution is to position yourself so that the experience you provide is going to be competitively more appealing, and that more kids will choose you,” Mr. Strauss says. Institutions are reluctant to take on that tougher strategy, he says. “It’s much easier to play with price.”
Students Needed
But playing with price has its traps. Often these strategies depend on growth, which works only if a college has the capacity to enroll more students without laying out more money to set up classrooms, build dormitories or parking ramps, or hire professors.
However, in some cases growth can pay. Concordia University, in St. Paul, Minn., cut tuition by 33 percent for this fall. The university had to grow by 24 students to break even; if they didn’t come, the university would have to eat $600,000 in losses. Fortunately for Concordia, dropping tuition yielded 100 students. Concordia already had excess parking and space in its classrooms, and it had just finished renovating a residence hall that could absorb new students.
Ashland University, in central Ohio, needs growth. The university is in a tight market, competing against more than two dozen liberal-arts colleges in a state with declining numbers of traditional students. Late last year, Moody’s Investors Service downgraded the university’s bond rating to junk-bond status, citing the institution’s complex and rising debt, limited liquidity, and turnover in enrollment and fund-raising personnel.
“It’s the college that is not looking to grow their enrollment that is the exception, to my mind,” says Stephen Storck, the new chief financial officer at Ashland. “That’s what gives you the income, and we’re no different.”
In late August, the university announced that it would reduce its sticker price by 37 percent, to $19,000. Scott Van Loo, vice president for enrollment management and marketing, says the college will cut its discount rate from 50 percent to about 35 percent. If the college sees a 6- to 7-percent growth in students, it hopes to get an 8- to 9-percent growth in net revenue. Without the cut, Ashland projected hitting a $50,000 sticker price by 2021.
Ashland figured out this financial model on its own, looking to Concordia as a guide. Ashland had been working with Noel-Levitz, which helped both Concordia and Converse with their tuition cuts, but “we just felt that by stepping out we could shape this uniquely to our institution,” Mr. Van Loo says. Mr. Crockett, from Noel-Levitz, wouldn’t comment on Ashland, but noted that “if schools do this absent of empirical market research, that’s a big mistake.”
Growth is not always necessary. Ms. Fleming and Mr. Webster, from Converse, say that growth would be a desirable outcome of the tuition cut, but if the women’s college doesn’t grow, it won’t lose money. Converse has had record enrollments in the past few years, and following the recession it went through deep cost-cutting measures, eliminating outdated and low-enrolled programs.
Price and Quality
Converse pursued a tuition reset because administrators saw a growing gap between its sticker price and what students actually paid. In higher education, sticker prices have been used to signal quality. But the high-tuition, high-aid model “becomes more and more difficult to execute the further up the tuition-discount scale you go,” Mr. Webster says. Converse draws half of its students from South Carolina, a relatively poor state, and he believes that when those parents and students see a high-priced college, they see barriers, not prestige. That leads to unpredictability in recruiting a class.
“You don’t know how much aid you are going to need to attract” a student, he says. “That affects how you plan for your annual fund, or how you plan for a capital campaign, and that affects at the margin, to the extent that you can deal with it, how you cut your expenses.”
When it came to a reset, perceptions about quality and price also affected decision making within Converse. Mr. Webster says some trustees were skeptical about a reset, mainly because they remembered the glory days of Converse, when it was a well-known, influential women’s institution. Lowering the price might have felt like devaluing the college.
The question is, where will these colleges’ prices go from here? Ms. Fleming says that Converse’s price will be tied to growth in operations costs, not the need to cover a growing discount rate.
But Ohio’s Muskingum University, which tried to reset its tuition in 1996, might offer a history lesson in price cutting. The university chopped its tuition by more than 25 percent—from $14,000 to $10,000—and got the expected publicity. “Applications grew. It was as simple as that,” says Jeff Zellers, vice president for enrollment.
Enrollment grew from about 1,050 students to 1,550 in the early 2000s, and has tapered off slightly since, as the college has emphasized adult education.
But in terms of discounting, Muskingum is back to where it was before the reset. In 1995, with a sticker price of about $14,000, average net price was $7,000; today, with a $23,000 sticker price, the average net price at Muskingum is $12,000—once again at about 50 percent of its sticker price.
Mr. Crockett says one of the biggest misperceptions about a tuition reset is that it’s “a one-shot thing,” with temporary effects and limited potency. But it doesn’t have to be that way. The problem, he says, is that colleges stop touting their resets.
“That is one of the reasons these lose steam, and not because it is not a viable strategy,” he says. “It happens, and everyone talks about it for two or three years, and that becomes just who they are. They stop reminding families of what they are from a sticker-price standpoint.”
