Signs of Recovery for Net Tuition Revenue
Findings of the 2010 NACUBO Tuition Discounting Study show that, despite increased discount rates, overall net tuition revenue is recovering from significant drops in 2008.
By Natalie Pullaro
The recently released 2010 NACUBO Tuition Discounting Study (TDS) provides evidence that the tuition discount rate for freshmen and all undergraduates continues to climb as institutions respond to the recession's impact on family and student finances. Four-year private institutions -381 of which participated in the TDS-report increases in their discount rates driven by a greater population that is unwilling or unable to pay the full sticker price of a private school education.
In spite of rising discount rates, the 2010 TDS also shows some good news for private institutions, which on average, saw a small gain in net tuition revenue from first-time, full-time freshmen of 1.8 percent from 2008 to 2009, and an estimated 2.8 percent from 2009 to 2010. The increase indicates that discounting strategies have helped achieve enrollment stability.
Strategic Enrollment Efforts
Institutions typically use tuition discounting to accomplish two goals:
Maximize tuition revenue. Colleges and universities can maximize their net tuition revenue by filling seats that would otherwise be empty—and unpaid. Partial revenue is better than no revenue at all, and filling these seats helps institutions meet their enrollment goals for that academic year.
Shape an incoming class. Institutions may use the discount rate to attract and retain talented students and/or bring diversity to the student body. Particularly in hard economic times, institutions are faced with a growing number of families with need as well as those with a higher level of need than before, making tuition discounting a tool to keep enrollments stable.
According to anecdotal comments recorded by this year's survey, a large proportion of participating institutions did adopt policies to accommodate increased need resulting from lost jobs, home foreclosures, and other financial circumstances that challenged many families. For example, many institutions created emergency funds or increased the dollars directed toward financial aid to meet student need and ensure enrollment.
Trends and Comparisons
NACUBO has been conducting the Tuition Discounting Study since 1994 (see sidebar, "Research Project Leads to Ongoing Tuition Discounting Study" for further background). For the study's purposes, NACUBO defines the discount rate as "total institutional grant dollars as a percentage of gross tuition and fee revenue." This definition counts any scholarship, grant, or fellowship-including athletic awards-but does not include tuition remission or other benefits associated with employment at the institution or grant dollars awarded for room and board.
The latest data show that the average discount rate is continuing to climb—in 2010 to an estimated 42.4 percent for first-time, full-time freshmen and 37.1 percent for all undergraduates (see Figure 1). The trend line of the discount rate over the past decade reflects a period of stability from 2000 to approximately 2007, during which the discount rate hovered between 37 and 38 percent for first-time, full-time freshmen. The previous decade, from 1990 to 2000, saw a substantial uptick in the discount rate, from 26.4 in 1990 to 37.3 percent in 2000. The economic recession in late 2007 and early 2008 marked the end of such stability, with rates once again rising for incoming freshmen.
Other data reflect the following:
Freshmen—the main target of institutional grants—continue to receive higher discounts than other undergraduates. Undergraduates also experienced gains in the discount rate over the past decade, with the exception of 2009 when the discount dropped slightly for this group. However, the gap between the freshmen rate and the undergraduate rate seems to be widening in 2010, with a 5.3 percentage point difference compared to only a 3.7 percentage point gap in 2000.
The percentage of freshmen receiving grants is climbing. In 2010, nearly 88 percent of first-time, full-time freshmen were receiving institutional grants. Figure 2 shows that over the past decade, the number of freshmen receiving some kind of aid has increased by 10 percentage points. From 2008 to 2010 alone, the increase was 5.3 points.
The relationship between the cost of tuition and fees and the amount of grant aid awarded is not so straightforward. The TDS measures the average institutional grant as a percentage of tuition and fees for freshmen recipients (see Figure 3 for details). From 2000 to 2007, the percentage of tuition and fees covered by the average institutional grant remained between 47 and 49 percent. In 2008, at the height of the economic recession, the average institutional grant covered more than half of tuition and fees (52.3 percent). According to the 2009 and 2010 studies, this was largely because of increased need by those already receiving institutional grants, families appealing aid packages, and competition with public institutions.
However, from 2008 to 2009, results denote a steep drop-off in the percent of tuition and fees covered by the institutional aid. This is due to the large jump in the percentage of freshmen receiving grants, meaning that a greater overall number of students are receiving smaller grants, on average, in comparison to tuition and fees. Even though the 2009 and 2010 estimates reflect a return to prerecession averages, when considering the high percentages of students receiving these grants, it is evident that this represents a "new normal" for institutions.
The Bottom Line for CBOs
While business officers are concerned about the discount rate, they are even more interested in the effect the discount rate has on net tuition revenue. Fortunately, the 2010 study results show a gain from 2008 to 2009 of 1.8 percent in net tuition revenue from first-time, full-time freshmen, and a 2.8 percent increase from 2009 to 2010 (see Figure 4). These gains, however small, are good news for institutions, for which the average change in net tuition revenue in 2008 was -0.3 percent. Prerecession (2000 to 2007) annual average change was 4.3 percent compared to the postrecession percentage of 1.4 percent.
Funding and Budgets
Institutional grants can be funded by several different sources, including endowments, which colleges and universities often rely on as a designated revenue source for institutional grants. The TDS found that on average 10.3 percent of institutional aid in 2009 was funded by endowments. The larger the endowment size, the more the institution relied on this source for its grant aid. For example, for institutions with endowments over $1 billion, on average, 27.9 percent of institutional aid was funded by endowment earnings. Conversely, for institutions with endowments of $25 million or less, on average only 4.1 percent of institutional aid was funded by an endowment. Because an average of 10.3 percent of institutional grant aid is funded, this means that the rest of the dollars are largely unfunded.
The economic crisis clearly has affected the budgets of several institutions that participated in the 2010 TDS, many of which reported that they had to decrease expenditures in certain areas to redirect funds to financial aid for students. Many had to implement salary freezes, hiring restrictions, staff reductions, program eliminations, energy conservation, deferred maintenance, increased class sizes, or reduced course offerings.
The increase in the discount rate for some institutions resulted from a positive decision, as leaders were better able to stabilize enrollments through difficult economic times. As the country crawls out of the recession, NACUBO will continue to monitor the way tuition discounting practices continue to affect or influence outcomes for institutions.
NATALIE PULLARO is manager, research and policy analysis, at NACUBO, 202.861.2596.