Tuition discounting in higher education keeps growing. The amount of institutional financial aid provided by private colleges and universities continues to increase and the gap between the published tuition and the net price, the price which students actually pay, continues to increase. The average price paid by students, according to the latest study by the National Association of College and University Business Officers, is only 44% of the published price meaning that higher education is discounting its price by 56% for new freshmen. This figure only takes into account the aid provided by the institution; students also very often receive aid from Federal and State governments as well as private organizations such as the Kiwanis and others. Included among the institutions that responded to this year’s NACUBO survey are 13 schools which did tuition resets over the last several years. These are schools which lowered their published price and lowered the amount of aid they give their students thus significantly reducing their tuition discount rate. If one removed the schools which have reduced their price from the survey results, the discount rate of the remaining schools would be even higher than 56%.
Beyond the average tuition discount rate, schools are providing aid to more than 90% of their first-time students; almost no one is paying the published price and at most institutions, no full-time student pays the published price. In the most recent study by Sallie Mae on How America Pays for College, 54% of students and their families eliminate colleges based on the tuition price alone without doing any further research and 66% eliminate colleges based solely on tuition after applying. These numbers are even higher for families with incomes of $150,000 or more because large numbers of these families do not believe that their student will qualify for any institutional aid despite the fact that most private colleges provide grants and/or scholarships to all of their students. This leads to the anomalous result that the average family income of students at the four-year public institutions is higher than at private colleges and universities as these higher income families are more comfortable having their children look at the lower priced public schools that they know they can afford.
Beyond the fact that the high tuition discourages many students from looking at a college, this strategy also has a negative impact on retention rates as most schools hold their institutional aid constant as students progress despite the fact that they continue to increase tuition. Thus, if a school increases its tuition by 3%, a student who has a discount rate of 60% will actually face a tuition increase of 7.5% in their second year and by the time the student graduates in four years, their tuition will have increased more than 23% while the published price will only have increased by 9.2% assuming a 3% increase in tuition a year. Institutions have positive incentives to increase tuition to get more money from continuing students as they continue to increase the discount rate to new students. According to the NACUBO study, the average discount rate for all students is only 51.9% because of this strategy. The impact of tuition increases on highly discounted students is never discussed, yet we know that students and their families are sensitive to price and these price increases have a negative impact on a student’s ability to continue in college.
One must then ask why do schools persist with this pricing strategy known as high price/high aid? Why do schools continue to put a price out in the market which, at a great majority of private institutions, no one pays? The myth persists among many that students and their families will resonate more to a substantial institutional grant rather than focusing on the net price, the bottom line of what it will actually cost them. As more schools are doing tuition resets and decreasing the gap between their published and net price with positive results, others are realizing that the high price/high aid strategy is not effective and that more and more students are making their college choice based on net price.
Furthermore, a high discount rate is usually a sign of institutional weakness as, at most of the high discount schools, they are unable to fill their classes without very high aid offers to all students including those without financial need. At the nine non-profit college that have announced that they plan to close in 2024 or 2025 for which data was available, the average discount rate in fall 2021 (the latest year the data is publicly available) was 65% and 98% of the students at these schools received institutional aid. It is highly likely that these numbers have increased in the last three years. It is time that schools seriously reconsider their pricing strategies; this system is broken.
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