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Tuition Discounting: 15 Years in Perspective

The 2004 NACUBO Tuition Discounting Survey data allow for analysis of 15-year trend. The authors offer an interpretation of the study and tuition discounting from the 1990s to the present.

By Loren Loomis Hubbell and Lucie Lapovsky

As reported in the June issue of Business Officer, the tuition discount rate for freshmen at the independent colleges and universities in the NACUBO survey fell marginally from 39.3 percent to 38.7 percent. (Due to data refinement, slight differences may exist between the final report and the preliminary data featured in the magazine.) Discount rates have remained relatively constant since fall 2000. The major growth in tuition discounting occurred between fall 1990 and fall 2000, when the discount rate increased more than 40 percent.

Freshman Tuition Discount

Table 1

Freshman Tuition Discount Fall 1990 Fall 1995 Fall 2000 Fall 2003 Fall 2004 1-Year % Change 15-Year % Change
All 26.4% 34.2% 37.3% 39.3% 38.7% -1.5% 46.6%
SCLT 28.5% 36.3% 41.3% 43.2% 43.3% 0.2% 51.9%
SCHT 27.4% 34.3% 35.8% 36.8% 35.7% -3.0% 30.3%
LCU 20.0% 28.9% 29.4% 33.4% 31.6% -5.4% 58.0%

In 1990, the discount rates of the small college, lower tuition (SCLT) category (colleges with an enrollment of less than 850 new full-time freshmen and tuition of less than $23,600) and the small college, higher tuition (SCHT) category (colleges with an enrollment of less than 850 new full-time freshmen and tuition equal to or greater than $23,600) were almost the same at 28.5 percent and 27.4 percent, respectively. In 2004, the discount rate of the SCLTs is 43.3 percent, an increase of 52 percent, while the discount rate at the SCHTs is 35.7 percent, representing an increase of 30 percent. Although they have the lowest discount rate, institutions in the large college and university (LCU) category have had the greatest percentage increase of the three categories over the past 15 years.

The discount rate can be calculated as institutional aid divided by tuition, or as the product of two components: the percent of students who are receiving institutional aid and the average award as a percent of tuition. All categories have significantly increased the percent of students that they aid while the size of the awards relative to tuition has either been flat or has increased only modestly over the 15-year period.

Overall, 61.7 percent of the freshmen students received institutional aid in 1990 compared with 79.7 percent in 2004. A significantly larger percent of the students at the SCLTs receive institutional aid than at the SCHTs or the LCUs, indicating a consistently different approach to discounting at SCLTs compared with the higher priced and the larger institutions. In fall 2004, 92.8 percent of the students at the SCLTs received institutional aid compared with 67.1 percent at the SCHTs and 63.9 percent at the LCUs.

Table 2

Percent of Freshmen Receiving Institutional Aid 1990 1995 2000 2003 2004 1-Year % Change 15-Year % Change
All 61.7% 73.5% 77.8% 80.0% 79.7% -0.4% 29.2%
SCLT 72.7% 83.4% 89.9% 92.6% 92.8% 0.2% 27.6%
SCHT 52.4% 63.6% 67.1% 67.2% 67.1% -1.0% 28.1%
LCU 47.0% 62.4% 62.7% 66.4% 63.9% -3.8% 36.0%

While the percent of students receiving aid increased by 29 percent, the aid as a percent of tuition increased by only 12 percent over the course of 15 years, going from 44.4 percent of tuition to 49.8 percent of tuition. For 2004, the average award as a percent of tuition was 46.7 percent at the SCLTs, 50.8 percent at the LCUs, and 54.7 percent at the SCHTs. The SCHTs’ average award as a percent of tuition has remained relatively constant over the 15-year period, while the average award at the SCLTs has increased from 38.8 percent of tuition in 1990 to 46.7 percent of tuition in 2004. The LCUs have increased their awards during this period from 45.0 percent of tuition in 1990 to 50.8 percent in 2004.

Table 3

Aid as a Percent of Tuition 1990 1995 2000 2003 2004 1-Year % Change 15-Year % Change
All 44.4% 47.7% 49.0% 50.6% 49.8% -1.6% 12.2%
SCLT 38.8% 43.3% 45.9% 46.6% 46.7% 0.2% 20.4%
SCHT 54.8% 55.7% 55.2% 56.8%

54.7%

-3.7% -0.2%
LCU 45.0% 48.1% 48.8% 52.2% 50.8% -2.7% 12.9%

The graph “Discount Rate by Decision Components” demonstrates both the overall increase in discounting and the general movement toward aiding more entering students. It brings together the management strategies with regard to the components of discounting and shows how they connect with the ultimate result: the discount itself. The vertical axis represents grants as a percent of tuition and fees; the horizontal axis represents the percent of students who receive aid. The resulting discounts are captured against the curved lines. For example, all combinations of these two variables, which are on the solid yellow curved line, represent institutions with a 20 percent discount rate. Two years are shown, 1990 (blue squares) and 2004 (red circles), to illustrate the shifts in discounting over the past 15 years.

The graph shows many institutions arrayed along the 20 percent discount curve in 1990 and a strong weight in the 20 to 40 percent range. However, by 2004, the circles are massed against the 40 percent curve, ranging from 20 to 60 percent, with some institutions awarding institutional student aid to as many as 100 percent of their students.

Discount Rate by Decision Components

The graph “Gross and Net Tuition Rates” shows a comparison of published tuitions charged by institutions in 2004. The vertical axis represents the net tuition rates, and the horizontal axis displays the gross tuition rates. The net tuition rates of those institutions that have a published tuition of $20,000 vary from $7,500 to $18,500. While the study reports many averages, the market includes an array of discounting results, approaches, and net and gross tuition rates. Beyond the average differences at each institution, the results among individual students at an institution differ significantly. Further, a student may get very different aid offers from similar institutions with the same discount rate.

Gross and Net Tuition Rates: Full-Time Freshmen, Fall 2004

Prestige and Money Matter

This year’s analysis looks at discounting patterns by measures of size of endowment and college rankings as defined by U.S. News & World Report. The lists of institutions with large endowments per student, high gross tuition rates, and top-tier college rankings tend to be a highly correlated set of measures. Together they paint a picture in which institutional wealth begets institutional wealth with overall lower rates of discount, fewer students aided, and higher average aid levels offsetting higher tuition levels for the aided students.

A direct comparison of the tuition and the discount rates of the institutions with larger endowments and those with smaller endowments reveals that those with the larger endowments tend to have the highest tuition and the lowest discount rates. The colleges and universities with endowments of more than $1 billion had a discount rate of 34.1 percent compared with the average discount rate for all institutions of 37.7 percent. (For the section on endowment and discounting, the study used the information provided by 450 institutions that reported endowment values and discounting.) Table 4 indicates that as the discount rate increases, the endowment size decreases, with the exception of colleges with endowments of less than $10 million. The average discount rate at institutions with $10 million or less looks more like that at the institutions with the largest endowments.

The composition of the discount rate also differs at institutions with larger endowments compared to those with smaller endowments. At the institutions with larger endowments, fewer students are aided while the average award as a percent of tuition is much higher than at those with smaller endowments. At the colleges with endowments in excess of $1 billion, an average of 55.7 percent of the class receives institutional aid and the average award is 64.3 percent of the tuition level. On the other hand, as endowment level declines, the percentage of the students being aided approaches 90 percent, while the average award declines to around 40 percent of the tuition. The tuition rates decline as the endowments decrease. Thus, the average student is paying a much higher net tuition at the wealthiest institutions.

Table 4

Endowment Size Discount Rate Percent Aided Aid as Percent of Tuition Average Gross Tuition Rate Average Net Tuition for Aided Students
$0 – 10 million 32.7% 85.4% 36.4% $16,029 $10,044
$10.1 - 25 million 40.1% 91.1% 44.2% $16,866 $9,278
$25.1 - 50 million 39.1% 88.3% 44.1% $19,572 $10,858
$50.1 - 100 million 38.8% 85.2% 45.2% $20,499 $11,177
$101 - 500 million 38.1% 75.5% 51.2% $24,813 $12,018
$0.501 - 1.0 billion 34.5% 57.1% 54.2% $27,162 $12,103
> $1 billion 34.9% 55.7% 64.3% $28,777 $10,142

For the institutionally aided student, the range of average net tuition is much tighter than the average discount rates and gross tuition levels suggest. Table 4 shows that the average amount paid by institutionally aided students is much more stable across the range of institutions sorted by endowment size and in fact declines at the institutions with larger endowments as compared to most of the preceding categories. It appears that the issue is less about the net amount that the average aided student pays and more about the fact that fewer students are aided that distinguishes the financial experience for students who receive aid.

Table 5

Tuition Average Endowment Discount Rate Percent Aided Aid as Percent of Tuition
< $15,001 $33,164,982 32.7% 81.4% 39.2%
$15,001 - $20,000 $50,349,262 38.7% 90.8% 42.4%
$20,001 - $25,000 $116,033,022 40.9% 87.0% 46.4%
> $25,000 $943,268,443 35.3% 64.0% 55.7%

Participating institutions were divided into three categories: the top 50 national universities and the top 50 liberal arts institutions from the U.S. News & World Report 2005 rankings were classified as the top tier; the next 50 in those two categories were called the next tier; and the remaining institutions constitute an additional category.

As the graph “Freshman Tuition Discount” indicates, in 1990, the stratification in discounting across these categories was virtually nonexistent. However, while the discount rates have risen in all categories, the slowest rise has been among the campuses that are top-ranked institutions. Discounts have grown far more rapidly and to higher levels in all other categories.

Freshman Tuition Discount

Using data for all institutions in the study (rather than the more limited set with 15 years of data), similar findings emerge. Top-ranked institutions tend to aid fewer of their students, have an overall lower discount rate and a higher average gross tuition rate, and yet provide relatively higher amounts of institutional aid to their aided students.

Table 6

Tier Average Tuition Rate Tuition Discount Percent With Aid Aid as Percent of Tuition
All Institutions $20,633 37.7% 82.7% 46.2%
Top 50 $29,528 34.4% 57.2% 61.4%
Next 50 $24,570 41.4% 81.9% 51.0%
Remaining Institutions $18,750 37.8% 86.8% 43.3%

This circles back to the twin issues of educational mission and educational access. Most institutions frame their missions in terms of “what” they do in academics, cocurricular experiences, and amenities. In that context, institutions with larger endowments are in the enviable position of being able to design the academic experience with the maximum amount of resources devoted to the desired outcome. Having fewer aided students may still provide diversity in student peer experience without providing truly broad access. That may be because of selectivity in recruiting students that shapes the admissions pools at these institutions; the preparedness of the students from diverse backgrounds who may not have the skills to vie for entrance at the most competitive institutions; the role of community expectations and college guidance; or another set of factors.

While institutional competitiveness has centered on the “what,” most of the debate on tuition and financial aid has centered on educational access—the “who” question in higher education. Admissions and aid decisions at the institutions with smaller endowments are generally more heavily weighted toward filling seats than selecting the entering class. There the issue becomes maximizing the “who,” thus providing the greatest access and the greatest use of pricing and discounting as tools to maximize enrollment and net revenues.

Gains in Net Revenue

The inverse side of the tuition discount is the net tuition revenue earned by each institution. In fall 2004, average gross tuition rates increased 6.4 percent since 2003, while average net tuition rates increased by 8.3 percent. In previous years, most if not all of the tuition increase was eroded by increases in the discount rate. What are the implications of this result? One interpretation is that the net pricing strategies of independent colleges are allowing them to earn enough on students not receiving a tuition discount to support their discounting strategies.

Average Growth in Net and Gross Tuition Rates

Second, borrowing to support college costs has increased significantly in the past few years. The latest College Board data indicate that loans for undergraduates have increased by more than 180 percent in the past 10 years. In addition, “As many as 25 percent of students may be relying on credit-card debt to help finance their education,” reports the College Board’s Trends in Student Aid 2004. The increase in borrowing may also help explain a reduced pressure on institutional grant aid.

A third implication: Tuition prices are rising beyond the large increases in published tuition, thereby eroding access even further. We continue to see a significant difference in the college-going rates of students from low- and high-income families—even when we adjust for academic ability.

More About the Data

NACUBO conducted this survey during the fall and winter of 2004-05. The table below indicates the number of colleges and universities for which data are included in this report.

Number of Institutions 2004 data 15 years of data
All 450 197
SCLT 292 101
SCHT 85 54
LCU 73 42
 
Number of Institutions 2004 data 15 years of data
All 450 197
Top 50 57 39
Next 50 40 25
Remaining Institutions 353 133

A further implication is that the colleges are finally able to reduce the discount rate because they are becoming more strategic in how they package financial aid and how they make families aware of all the resources for financing a college education. Perhaps people better understand the tax credits for college and how to factor into their ability to pay for college. The maturation of college IRAs and 529 plans have increased the funds that parents have available to pay for college, although this affects only a small proportion of the students attending college today.

In addition, we have seen the proliferation of alternative loan programs, which are now being directly marketed to families to provide ready cash for college. Finally, we have seen colleges become more strategic by including institutional loan programs as a part of their aid packages. This provides parents directly with all the cash necessary to cover the out-of-pocket costs of attendance.

A final interpretation: Families continue to realize the value of college and are willing to pay more. As the return on a college education has continued to increase over the years, perhaps families view college as an investment for which they are willing to bear more of the costs, even if they need to borrow to pay them, to allow their children to go to the colleges of their choice.

What Can We Expect in the Future?

Over the past 15 years, we have seen a dramatic rise in discounting. The stasis we see today could mean many things. There are several potential interpretations of willingness to pay and the effective use of enrollment management strategies to better maximize net tuition revenues. However, we continue to worry whether net tuition maximization and the commercialization of competitive pricing will become the next barrier to access. Financially, greater stability in net tuition revenues will lead to greater stability for many institutions in budgeting and planning for the future.

While we believe that this is likely to be the case for the independent institutions, the outlook for public institutions could be quite different. The level of predictability of state support at these institutions has declined greatly in the past few years, leading to often-significant increases in tuition. The public sector is looking to understand how to effectively use tuition discounting to shape their classes and achieve their revenue goals. The action in tuition discounting will move to this sector of higher education. One area to watch: how the reduction in the price difference between public and independent higher education affects access.

Author Bios Loren Loomis Hubbell is the former senior vice president for finance and Lucie Lapovksy is a professor of economics at Mercy College, Dobbs Ferry, New York.
E-mail llh@suscom.net; llapovsky@mercy.edu