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Sticker Shock

By Leslie McBain

Originally published in the November/December 2016 issue of Trusteeship magazine.

College costs and financial aid are perennial concerns, not only for students and families, but also for governing board members charged with ensuring institutions’ fiscal health and sustainability. Tuition discounting, the practice of awarding institutional financial aid to students who might not otherwise be financially able or willing to pay the full tuition and fee price to attend an institution, thus reducing the amount of tuition a student ultimately pays, is one key component of institutional financial aid.

An institution’s tuition-discounting practices can indicate its financial health and competitiveness. So what should board members know about tuition discounting? What questions should they ask about the practice at their institutions, particularly if their business expertise is not in higher education finance?

Background and Important Terms

Tuition discounting and tuition bartering are not new concepts in American higher education. In the Colonial era, college tuition charges were often paid in kind, for example, in grain, cotton, or sheep. Records exist of Harvard University’s treasurer selling a pair of shoes previously received as an in-kind tuition payment. While such bartering is obviously no longer accepted, Harvard currently uses its institutional aid to discount tuition extensively. According to the Harvard College Griffin Financial Aid Office website, close to 60 percent of undergraduates receive a Harvard Scholarship.

To measure present-day institutional tuition-discounting practices at private, nonprofit institutions for first-time, full-time freshmen and all undergraduates in degree or certificate programs, the National Association of College and University Business Officers (NACUBO) conducts an annual nationwide survey. This study, known as the “NACUBO Tuition Discounting Study” (TDS), has been running since 1986, when the Eastern Association of College and University Business Officers (EACUBO) conducted it independently; NACUBO took over survey administration in 1994. NACUBO does not presently study public institutions’ tuition-discounting practices.

In the TDS, NACUBO defines the average institutional discount rate for all undergraduates as: institutional grant dollars as a percentage of gross tuition and fee revenues. For first-time, full-time freshmen, the average first-time, full-time freshmen discount rate is defined as: an institution’s total grant aid awarded to freshmen as a percentage of gross tuition and fee revenue from freshmen. Alternately, this can be expressed as:

      (dollars awarded to freshmen)       
(number of freshmen) x (sticker price)

Key 2015 NACUBO TDS Results

The most recent TDS survey was conducted in fall 2015. Results are based on survey responses from 401 private, nonprofit four-year colleges and universities that were NACUBO members in September 2015. The study reports on both prior academic year data (in this case, 2014- 15) and estimated data for the academic year in which the survey is conducted (in this case, 2015-16).

Key findings include:

  • The average institutional discount rate for first-time, full-time freshmen reached 47.1 percent in 2014-15; it was estimated to be 48.6 percent in 2015-16, the highest reported in the history of the TDS project.
  • The average institutional discount rate for all undergraduates reached 41.3 percent in 2014-15 and was estimated to be 42.5 percent in 2015-16. This is also the highest reported in the history of the TDS project.
  • Increased tuition discount rates have led to much slower net tuition revenue growth. The average growth in net tuition revenue per first-time, full-time freshman is estimated at 1.2 percent in 2015‑16, as compared to 2.1 percent in 2014-15.
  • Approximately 88 percent of first-time, full-time freshmen received institutional grants in 2014-15 and 2015-16. The estimated average 2015-16 grant award covered approximately 55.5 percent of first-time, full-time freshmen’s tuition and fees, an increase from 53.9 percent in 2014-15.
  • More than three-quarters of institutional grant dollars that institutions reported awarding in 2014-15 were used to meet students’ demonstrated financial need.
  • Survey respondents with over $1 billion in total endowed funds reported their endowments provided nearly one-third of institutional grant funds in 2014-15; by contrast, institutions with total endowments under $25 million reported those endowments provided only about 7 percent of institutional grant funds in 2014-15.
  • Of institutions that provided enrollment data to the TDS between 2014-15 and 2015-16, more than half indicated declines in total undergraduate and first-time freshman enrollments. A total of 37.5 percent indicated that both their first-time freshman and undergraduate enrollments had declined.

The TDS instrument also asks for data on institutional strategies to increase net tuition revenue. For the first time in the survey’s history, free responses were coded in the 2015 report to identify overall themes in the strategies institutions used or implemented to increase net tuition revenue. Approximately 28 percent of respondents implemented enrollment strategies, including both recruitment and retention, some specifically focusing on both traditional-age undergraduates and “nontraditional” students, such as military-affiliated students. About 27 percent implemented financial-aid strategies (such as making changes to students’ financial-aid packages), and roughly 24 percent used tuition-pricing strategies (such as freezing or cutting the listed tuition and fee charge). Implementing or changing academic programs was one of the least-used strategies (4.7 percent).

Suggestions for Governing Board Members

How should college and university trustees engage with tuition discounting as part of their fiduciary stewardship role, particularly since one tuition discounting strategy does not fit all? How should they interpret their institution’s tuition-discounting practices and data in relation to either the increasing national trends described by the TDS or by comparisons to local peer groups? And how should they weigh the “Chivas Regal” effect described in The Atlantic magazine by Stephen Joel Trachtenberg, emeritus president of George Washington University, who was known for raising tuition sharply during his tenure, as “People equate price with the value of their education”?

As John Walda, NACUBO’s president and chief executive officer as well as a long-serving private college governing board member, acknowledges Trachtenberg’s point, “Historically, tuition discounting arose as a tool for competition. Price, for private institutions, has been a surrogate for quality.” However, he goes on to comment:

"The question [for board members] is 'Why are we using it now?' Institutions may have multiple, conflicting reasons [for tuition discounting]. Those may include being competitive in their geographic area, compensating for decreasing high-school-age student demographics, and attempting to attract more students from a higher-profile academic background or students who need more financial aid to attend."

Ingrid Stafford, an emeritus board member at Wittenberg University and vice president for financial operations and treasurer at Northwestern University, reinforces Walda’s point. One of the first questions she recommends new board members ask is, “Why do we discount tuition?” This question—and its potentially conflicting answers, as Walda notes—are reflected in the multiple answers to the TDS question on institutional strategies to increase net tuition revenue.

Questions for Board Members

Walda recommends that to answer the question “Why are we using [tuition discounting] now?” trustees should “educate themselves about the dynamics of enrollment management and tuition discounting at their institutions.”

In addition to asking why institutions discount tuition, Stafford extends this point by suggesting new board members ask, “What determines the discount? Who determines the discount?” One tuition discounting anomaly she notes is that “room and board are never usually discounted; the cost is incorporated in the determination of financial aid, but we rarely discount the list price of room and board.”

In addition, Bob Shea, former vice president of business affairs and chief financial officer at the Community College of Rhode Island and now NACUBO’s senior fellow for campus and finance management, recommends board members ask:

  • What is the institution’s average discount rate for first-time, full-time freshmen and all undergraduates? How does that compare to the NACUBO TDS average, both year-over-year and over time?
  • Are tuition discount rate projections available over five and 10 years, based on both optimistic and worst-case scenarios?
  • What is the institution’s tuition-discounting strategy? Does it appear sustainable in the long term, not just the short term?

But Shea cautions that tuition discounts must be considered in light of an institution’s overall financial picture. “Tuition discounting is only one lever. What do the fixed cost structures look like for the institution? Is there a way to reduce those fixed costs? Is a lower enrollment going to be the new normal?”

Walda echoes Shea’s sentiments, noting that board members should ask, “What are the costs associated with our institution’s current tuition discounting strategy? Have we reached capacity of facilities or of personnel? If so, what are the associated costs there?” He also expands on Shea’s point regarding institutional context:

"There is [an inherent] lack of predictability around enrollment and tuition policies. Trustees can hear, hypothetically, that 'Our fall target enrollment is 1,000 new students and a 42 percent first-time, full-time freshman tuition discount' and they don’t see the spread of rates within that [overall] discount rate. It’s very difficult to control and predict your enrollment and your tuition discount.

"The details of how the tuition discount is being distributed bear looking into. For example, how is tuition discounted for athletes versus students overall? What are the different [tuition discount] rates for first-year, second-year, third-year, and fourth-year undergraduates? What is the impact of the tuition discount on student debt? How does that connect to student retention? You really do have to look under the hood."

Strategies for Looking under the Hood

Board members may find the following strategies helpful in understanding and monitoring their institutions’ tuition-discounting practices:

  • Leverage institutional data, history, and resources. Walda suggests asking the CBOs and chief enrollment managers to co-present on tuition discounting and enrollment management strategies at board meetings. Board members can also review key data points (for example, year-over-year tuition discount, number of admitted students year-over-year, and first-year student-retention rate). Depending on the institution’s data analytics capacity, these can be accessed via data dashboards or in other ways. For example, institutions participating in the Common Data Set often post its data on their websites.
    Stafford advises that “a bit of history is important for board members new to this topic in terms of the philosophy of why we do what we do.” This is because “what has evolved [over time] is highly complex formulas...that determine the assessment of ‘ability to pay.’” She recommends getting a summary of “the institution’s basic aid philosophy, how it is constructed, who controls it, and whether the institution tries to control the discount rate to [a] certain level.” Further, “It’s important for board members to know that these decisions are primarily controlled by admissions and financial-aid staff—usually within financial parameters set by executive leadership.”
  • Analyze comparative data, not just institutional data. While one size does not fit all in terms of tuition discounting, institutions do not exist in a vacuum. Comparative data for peer institutions and national data can be obtained from campus offices. Institutional research offices can be particularly useful in this regard. When using comparative data, however, board members should remember that national aggregations can smooth out or hide fluctuations in an individual institution’s data (whether that of their own institution or a particular competitor).
  • Use relevant external comparisons to better understand tuition discounting. Says Stafford, “I believe that, especially for board members coming from outside higher education, the most relevant analogies to help explain tuition discounting come from the following industries with which they are familiar: healthcare pricing, airline pricing, and car pricing.” However, she also notes that “a deeply held value in American higher education [is] that, whether a university is public or private, we believe in equal opportunity—and that we should evaluate students on their merit as students and not on their ability to pay.”
  • Keep the educational mission in mind when analyzing tuition discounting data. As Walda comments, “Is the mission of [their] institution being served by how [they] allocate institutional aid? Retention is an educational quality issue. [Board members should understand] the relationship between tuition-discounting policy and desired student success outcomes.” Shea reinforces this point, noting, “Tuition discounting is a balance between mission, altruism, and meeting the financial needs of the institution.”

Conclusion

While tuition discounting is influenced by many factors—not all of which are under an institution’s control, such as regional demographics—it is crucial to institutional competitiveness. National average tuition discounting rates continue to reach record levels, bringing up the question of their long-term sustainability. Thus, as fiduciary stewards, board members should use resources available both institutionally and in the larger higher education community to educate themselves on the complexities of tuition discounting.