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Business Officer Magazine

Tuition Ambitions

Using longitudinal data from the NACUBO Tuition Discounting Survey, Chapman Universi-ty President James Doti analyzes the interplay of the variables that affect tuition at inde-pendent institutions. His findings suggest certain actions and strategies that may be effective in dealing with various economic cycles.

By James L. Doti

*Economic cycles clearly affect public institutions of higher education, as the crushing effects of the 2008–09 Great Recession on state budgets and funding for public colleges and universities well illustrate. Not so well known are the ways that economic cycles affect tuition pricing at independent (private nonprofit) colleges and universities.

This article addresses that issue by examining across time the results of the annual Tuition Discounting Survey (TDS) conducted by NACUBO (the National Association of College and University Business Officers). This survey has been administered by NACUBO every year since 1994, and prior to that by EACUBO (the Eastern Association of College and University Business Officers).

Contrary to what some may believe, independent institutions do not live in a protected world, immune from external market forces. In fact, the TDS results reinforce the fact that economic cycles have significant effects on student demand at independent institutions. Those effects, in turn, influence pricing strategies that independent institutions use to contend with changing demand conditions. By analyzing NACUBO's annual study, leaders of independent institutions can weigh the various factors that determine tuition and fees—and use tuition discounting, in the form of endowment grants, athletic scholarships, and tuition waivers, as strategic marketing and admissions methods.

A Bit of Background

The survey requests detail on a number of independent institution characteristics, such as undergraduate enrollment, tuition and fees levels, and institutionally funded financial aid grants. The survey's sample size has grown from 139 independent colleges and universities in 1998 to 381 in the most recent 2010 survey.

The increasing sample size, however welcome, presents problems in analyzing trends over time, because the results will reflect not only changes in the underlying data but also changes in the types of institutions responding to the survey. To correct for that, the NACUBO data used in the following analysis includes only the same 71 institutions that reported results for every survey undertaken during the 12 years between 1998 and 2010. This particular period allows for analyzing the impact on the selected institutions of both the 1991 recession and the 2008–09 Great Recession. The 71 colleges and universities comprise a good cross section of higher education, including 12 national universities, 30 national liberal arts colleges, 22 regional universities, and 7 regional colleges, all from various parts of the country.

More Than Meets the Eye

At first glance, Figure 1 appears to show an unabated increase in annual tuition. Note the steady rise in the average level of published tuition and fees charges (hereafter referred to as "tuition") for first-time, full-time, degree-seeking freshmen entering the 71 institutions included in the sample. These prices increased from $17,483 in fall 1998 to $33,094 in fall 2010-an average annual increase of 5.5 percent over the 12-year period.

In fact, this general tuition number masks a strong upward trend in annual percentage changes in tuition followed by an even steeper drop over the 1999 to 2010 period, as shown in Figure 2.

The reason for this is that the stated amount of tuition, often referred to as the "sticker price," is not what most students ultimately pay. The vast majority of freshmen receive institutional grants and other forms of financial aid.

But, while Figure 2 shows that tuition largely maintained an increase during the 2001 recession and aftermath, the percentage of tuition growth actually decreased during the 2008-09 recession. No discernable cyclical pattern, therefore, appears to emerge—at least with respect to changes in the level of tuition during recessionary periods.

Tuition as a Strategy Tool

To gain a better perspective of tuition pricing as a strategic tool on the part of independent colleges and universities, it is necessary to consider the impact of these grants on student demand. In the NACUBO survey, these grants include restricted and unrestricted endowment grants as well as athletic scholarships.

Figure 3 clearly shows that institutions sharply increased freshman grants either during or immediately following recessionary periods. Given that need-based aid is calculated, in large part, on family income, this result is not surprising.

When grants are subtracted from tuition, the resulting net tuition maintained an upward trend, as shown in Figure 4. As compared to the 5.5 average annual percentage increase in gross tuition (sticker price) shown in Figure 1, net tuition increased at a lower average annual rate of 4.6 percent after factoring in grant aid.

When the net tuition levels of Figure 4 are converted to the annual percentage changes shown in Figure 5, we see the significant effects that recessionary periods have exerted on changes in net tuition revenue. In contrast to Figure 2, where gross tuition increased during the 2001 recession and decreased during the 2008–09 recession, Figure 5 shows that the annual rate of change in net tuition decreased in the year following the 2001 recession and declined even more sharply during the 2008-09 recession. Consistent with the severity of the Great Recession, notice in Figure 5 that the rate of change in net tuition declined to almost zero by the end of that recession.

One other notable difference is that gross tuition shown in Figure 2 increased about 4.2 percent between fall 2008 and fall 2009 and another 4.2 percent between fall 2009 and fall 2010. In contrast, net tuition showed almost no change between fall 2008 and fall 2009 but increased 
5.8 percent between fall 2009 and fall 2010.

How to Attract Students

The discount rate, defined as grant amounts per entering full-time freshmen divided by total individual tuition amount (this method varies slightly from NACUBO's methodology), increased during both recessions but more sharply during the 2008–09 recession (see Figure 6), as did the percentage of total freshmen receiving grants (Figure 7). It is interesting to note that independent institutions raised both the discount rate and percentage of freshmen receiving grants in the year following the 2001 recession and kept both relatively stable until the 2008-09 downturn, when both variables increased again to a higher rate and percentage.

In addition to the interplay between strategy and market forces that help institutions determine tuition and grant levels, a similar relationship between strategy and the market helps influence student admissions. Figure 8 shows that the average number of full-time freshmen entering independent institutions increased from 662 in 1998 to 801 in 2010, an average annual increase of 1.6 percent.

That said, the impact of both recessions in slowing enrollment growth is clear in Figure 8, but the recessionary effects are even more obvious in Figure 9, which shows annual percentage changes in enrollment. Notice that the only percentage declines that register below zero in average freshman enrollment occurred during the two recessionary periods.

Using the TDS data on tuition, grants, and enrollment for full-time freshmen, it is possible to design ways to generate net revenues from entering freshmen as shown in Figure 10, derived by multiplying net tuition by freshman enrollment. So even after taking into account institutional scholarship and financial aid grants, average net revenue more than doubled from $7.6 million in 1998 to $15.7 million in 2010, an average annual percentage change in net revenues of 6.3 percent over that period.

Although the impact of the two recessions in reducing net revenue can be observed in Figure 10, the impact is far more apparent in Figure 11, which shows sharp declines in annual percentage changes in net revenue during the two recessionary periods.

It is interesting to analyze the reason behind the sharp 8 percent increase in net revenues between 2009 and 2010 as compared to an increase of only 3.3 percent between 2008 and 2009. Figure 12 illustrates that freshman enrollment growth was higher between 2008 and 2009 as compared to 2009 to 2010, while tuition and fees increased the same amount. This would suggest that net revenue growth would also be higher. The fact that it is not is explained by the sharply higher growth in grants of 10.1 percent between 2008 and 2009 as compared to 2.1 percent between 2009 and 2010. By reducing the rate of growth in institutional grants to 2.1 percent in the earlier period, colleges and universities were able to improve the growth rate of net revenue to prerecession levels.

To note how net revenue is not only affected by recessions but also by economic trends each year, see Figure 13, which compares average annual percentage changes in net revenue with changes in gross domestic product. The figure shows that trends in GDP mirror net revenue trends for independent colleges and universities.

In summary, the findings in this study point to the fact that economic cycles have significant effects on student demand. Those effects, in turn, influence the pricing strategies that independent institutions have at their disposal to contend with changing demand conditions.

JAMES L. DOTI is president and Donald Bren Distinguished Chair of Business and Economics, Chapman University, Orange, California.

Strategic Implications for Tuition Pricing

Using the tuition discounting analysis explained in this article, leaders of independent institutions can weigh the various factors determining tuition and fees and use tuition discounting as an important planning tool for marketing, admissions, and, ultimately, net tuition revenue. Here are some actions and realities to consider.

Carefully evaluate economic conditions when determining changes in tuition and grants. For example, the fact that freshman enrollment for independent institutions declined during both recessions (see Figure 9), suggests that pricing strategies should be used to counteract the market impact.

Although tuition rates generally receive the most attention in academic planning, changes in grants are oftentimes more important in a strategic sense and deserve greater scrutiny. Figures 11 and 12, for example, show that recent gains in net revenue came about as a result of reducing the rate of growth in grants rather than increasing either enrollment or tuition.

The findings suggest that grant levels move up sharply during business downturns (see Figure 3). This is likely occurring because financial aid formulas are largely based on family income. Rather than allowing for the "automatic" increases built into financial aid formulas, assess whether such increases reflect the appropriate balance between institutional values and strategic financial planning. (Many colleges and universities use the federal methodology to determine eligibility for need-based institutional grants. So, any change in institutional eligibility would be driven by a change in federal, not institutional, aid policy.)

Even when institutions use aggressive pricing strategies to maintain enrollment levels during business downturns, Figures 6 and 7 suggest that those strategies be reexamined when recovery occurs following a recession. Without such a critical reexamination, institutions run the risk that an ever-increasing discount rate will absorb a larger share of the overall budget.

By comparing and contrasting your institution's results against the NACUBO sample presented in the accompanying article, you can identify strategies that help determine the numerous variables that go into net tuition revenue.