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Tuition Discount Shake-Up

The financial crisis pushed institution leaders to overturn rates that had been stable since 2002. The 2009 NACUBO Tuition Discounting Study reports that the economy’s recent dynamics have sent rates to an all-time high.

Catalyst for Change - The Economic Downturn Reshapes Higher Education

By Santiago Merea

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Times are tough. American families have faced a prolonged economic recession, rising unemployment, credit freezes, and other financial challenges. Families with college-age young adults were—and continue to be—particularly squeezed. These trends have taken their toll on higher education institutions as well.

READ AN ONLINE EXTRA, "Using Endowed Scholarships to Finance Higher Education," in Business Officer Plus.

According to the 2009 NACUBO Tuition Discounting Study, the results of these trends for independent institutions have been threefold: (1) Many independent institutions have increased their grant awards to undergraduate students in an effort to keep enrollments stable. The average institutional grant in 2008 covered more than half of the mandatory tuition and fees for freshmen students, resulting in an all-time-high discount rate. (2) In spite of the crisis, private colleges and universities continued giving institutional grants to the same percentage (82 percent) of full-time freshmen in 2008 as in the previous year. (3) On top of all that, higher education endowments, often a source of funding for institutional grants, suffered great losses in 2008 and 2009.

The combination of negative factors—the pressure from a highly competitive industry, the all-time-high tuition discount rate, and the loss of value of endowments—led many institutions to experience net tuition and fee revenue losses in 2008. The following study analysis, along with comments from chief business officers representing institutions that participated in the NACUBO study, sheds light on changing times for tuition discounting.

Say Goodbye to Stability

Every year since 1994, the annual NACUBO Tuition Discounting Study (TDS) has measured tuition discount rates and other components of institutional grant awards to undergraduates attending four-year private, nonprofit (independent) colleges and universities. The TDS defines “tuition discounting” as the share of tuition and fee revenue that independent colleges and universities use to award institutionally funded scholarships, fellowships, and other grant-based awards to undergraduates.

As part of their tuition discounting strategies, colleges and universities use their institutional grants to aid students who might otherwise be unable or unwilling to pay the tuition and fee “sticker price” to attend a particular independent institution. The TDS focuses particularly on institutional grants awarded to first-time, full-time freshmen. Since these students are often the focus of discounting strategies at many institutions, the data on awards made to them are a leading indicator of current and future trends in tuition discounting.

In the 1990s and early 2000s, discount rates jumped rapidly, in part because of changes to enrollment strategies. For example, from fall 1990 to fall 2002, the average tuition discount rate at four-year independent institutions increased from 26.7 percent to 39.4 percent. Since 2002, however, the average tuition rate remained stable at around 38 percent. (See Figure 1 for an historical overview of tuition discount rates since 2000.)

That era of stability and predictability appears to have ended. As mentioned, the fallout from the Great Recession has driven many independent institutions to increase their grant awards to undergraduate students.

The 2009 TDS indicates that the average discount rate for first-time, full-time freshmen at participating independent institutions reached an all-time high of 41.8 percent in 2008. Preliminary estimates for fall 2009 show that the average rate among these schools increased an additional half percentage point to 42.3 percent. The average institutional grant as a percentage of the tuition and fee price covered 53.5 percent of the mandatory tuition and fees for freshmen students in 2008 (see Figure 2). According to a number of respondents, it is expected to stay at the same level in 2009. “These [survey] numbers are not surprising,” says George Synodi, vice president of finance at the University of New Haven, West Haven, Connecticut. “Our university has experienced comparable increases.”

Additionally, and in spite of the current economic crisis, institutions continued giving institutional grants to the same percentage of full-time freshmen in 2008 (82 percent) as in the previous year (see Figure 2). In 2009, that number is expected to increase by a percentage point.

Reasons Behind the Rates

Interrelated factors have driven discounts up and, sometimes, revenues down.

Pricing that attracts. As for all-time-high discount rates, “the overall trend,” says Synodi, “is reflective of the current economic environment as schools attempt to strike a balance between achieving their respective enrollment and financial goals and providing prospective students with the lowest cost of attendance possible.”

At the same time, institution leaders hope that they can eventually adjust the rate back down. “Our university,” Synodi notes, “anticipates achieving its 'optimal sustainable size' within the next few years and is working to slow the rate of growth in the discount rate. It's much easier said than done, but that's the goal.”

Searches for alternative funds. But, enrollment goals are not the only reason why tuition discount rates are rising. “The current economic environment,” explains Wilma Phillips, vice president for finance at Faulkner University, Montgomery, Alabama, “is obviously causing families to look to other sources—such as state, federal, and institutional aid—to cover more of the college tuition bill than they might have needed to in better times.”

Vying for students. When it comes to factors influencing the growing percentage of institutional grants (as a portion of tuition and fees) and steady percentage of student recipients, one of the causes most mentioned by survey participants is the highly competitive environment. As one TDS participant explained, there is a “more competitive environment to gain new students and, thus, the need for an increase in institutional grants and tuition discounting [is] greater than in the past.”

And, despite the recession, tuition costs at private colleges and universities have not decreased or even leveled off. In fact, says Phillips, “independent colleges are being forced to give more institutional aid in an effort to close the price gap between public and private institutions.”

Inverse Revenue Relationships

Study Specifics

The 2009 NACUBO Tuition Discounting Study (TDS) survey instrument was sent electronically to all four-year private colleges and universities that were members of the association and had a valid e-mail address (1,050 members) as of October 2009. Roughly 34 percent of these members (355) submitted usable responses by the end of the survey period.

In addition to collecting data on institutional grant recipients, dollars awarded, and tuition and fee revenue, the 2009 TDS asked participating institutions to report two new items: the percentage of their institutional grants that were funded by endowment earnings in fall 2008, and the percentage of their institutional grants awarded based on students' demonstrated financial need and other factors.

The increases in tuition discount rates and institutional grant awards in 2008 led many institutions to experience losses in net tuition and fee revenue; that is, the difference between total gross tuition revenue and the amounts awarded for institutional grants. On average, for study participants, net tuition and fee revenue fell 2.5 percent from 2007 to 2008. While net tuition revenue is estimated to have grown 1.9 percent in 2009—resulting in some revenue recovery—a worrisome situation remains for many independent institutions. (See Figure 3 for the change in net tuition rates since 2000.)

As a result of the net tuition revenue losses and other effects of the recession, a number of institutions have implemented a wide variety of cost reductions and other measures. One survey participant described the situation this way: “Our college budgeted a 4 percent increase in the comprehensive discount rate for fiscal year 2009. ...[To] address projected revenue shortfalls during the crisis, the college has implemented a number of cost-cutting and revenue-producing strategies that included increasing the student body by 50 full-time students over the next five years, implementing a two-year salary freeze for faculty and most staff, holding operating costs flat, and putting new major capital projects on hold.”

Notes Synodi, “The University of New Haven was able to offset the negative financial impact of the lower net tuition rate with enrollment growth.” However, he advises, “schools cannot operate successfully over the long run with decreases in net tuition revenues on a per-student basis. In order to be sustainable over the long term, our goal must be increased net tuition revenue per student.”

Phillips adds, “We haven't really done anything differently during the current economic recession. However, we are considering hiring a strategic planning consultant to help us leverage our financial aid more effectively and to focus less on the discount rate and more on increasing net tuition revenue. In a challenging economic situation, when institutions are competing for students,” she says, “the temptation is there to throw money at the students without thought to what is happening to the net tuition revenue.”

The Endowment Factor

It is widely known that higher education endowments suffered losses in 2008 and 2009. The 2009 NACUBO-Commonfund Study of Endowments reported that college and university endowments realized an average investment return (net of all fees) of -18.7 percent in FY09. Because endowments often serve as a source of funding for institutional grants, this year's tuition discounting study survey instrument included a new question designed to shed some light on the relationship between independent institutions' endowments and tuition discounting.

Study results show that on average, and across all institutional types, about 12.1 percent of institutional grant aid is funded by endowment income. As expected, research university endowments fund an even higher percentage of grant aid than other types of institutions.

Another factor in the endowment-grant aid relationship is the positive correlation between endowment levels and the percentage of aid funded by endowments. (See Figure 4 for details on the relationship between endowment size and funding of grant aid.) For example, survey participants with endowments of greater than $1 billion reported that endowment income provided about 33.8 percent (on average) of their funding for institutional grants, compared with 5.7 percent at institutions with endowments of $25 million or less.

For Your Own Use

Now in its 17th year, NACUBO's Tuition Discounting Survey of Independent Institutions provides aggregate data about tuition discounting practices over the previous 10 years.

If your institution participated in the 2009 study, the online report, related charts, and a presentation on trends are available for no charge at NACUBO's Web site. Log in to My NACUBO, go to the Online Research Section, and click on NACUBO Online Research Publications.

Didn't participate in the study? Consider purchasing the online publication by visiting the NACUBO bookstore at NACUBO's Web site and following the log-in instructions. Survey results are priced at $29.95 for members and $39.95 for nonmembers.

These findings suggest that institutions with a higher percentage of institutional aid funded by endowments could have a harder time increasing their institutional grant aid, given the investment losses that occurred in FY09. For example, Phillips states that the decline in the value of endowments “has been a definite blow to our institution's budget, and I hope that Faulkner University can begin to recover some of the endowed scholarship funds soon.”

Need and Non-Need Award Criteria

While higher education institutions use a variety of criteria to award their grant aid, they usually disburse funds according to demonstrated financial need, academic merit, or other “non-need” criteria (such as athletic or artistic ability). The increase in non-need institutional aid in the past decade has caused many higher education leaders and analysts to worry about the shift's possible effects on access to higher education for low-income students.

With these concerns in mind, the 2009 tuition discounting study included a new question, asking participants to report the percentages of their 2008 institutional aid that were awarded based on the following criteria: (1) exclusively on students' financial need (as defined by the “federal methodology,” the system used to award federal student financial aid); (2) exclusively on non-need criteria, and (3) on a combination of both need and non-need criteria (sometimes referred to as “merit within need” awards).

Public Institutions Follow Suit on Discounting Practices

Tuition discounting is a strategy used not only by independent institutions. Public institutions employ similar practices when it comes to using institutional grant aid to manage enrollment and net tuition and fee prices. Data from the National Postsecondary Student Aid Study, conducted by the National Center for Education Statistics, shows that the average institutional grant aid awarded by public four-year institutions grew 37 percent between academic year 2003–04 and 2007–08.

In addition, a 2006 study produced by the College Board (Tuition Discounting: Not Just a Private College Practice, by Sandy Baum and Lucie Lapovsky) examined public college and university discounting during FY05. The College Board will soon release an update to this study. According to Baum, tuition discounting is defined the same way at both public and private institutions. However, tuition and fees are generally much lower at public than at private colleges, and the funds available for institutional aid are also much smaller—not only in dollar terms but also relative to gross tuition revenues.

As a result, Baum says, “At public four-year institutions tuition discounting has not been increasing as it has been in the private sector.” However, “the discount rate at public flagship universities is similar to the discount rate at private institutions—and much higher than the discount rate at other public four-year institutions.”

Another difference between the two sectors is that at public universities, “larger proportions of the discounts than at private four-year colleges go for purposes other than meeting student financial need,” Baum says. “Part of this difference is explained by the higher prices at private colleges, which generate greater amounts of need. Nonetheless, it is clear that despite considerable amounts of unmet need among their students, public colleges are awarding more of their general institutional aid dollars to students without documented [financial] need—or in excess of the documented need of the recipients—than to fill the gaps for those who cannot afford to pay.”

Baum adds that “the major impact of the recession on public colleges and universities has been the decline in state appropriations, which in many cases leads to higher tuition and fees. These circumstances generate greater financial need among students at the same time that they leave less discretionary funding for institutions.”

The study indicated that, on average, 36 percent of the institutional aid at independent institutions was awarded based entirely on need, 41.5 percent entirely on non-need criteria, and 22.5 percent on a combination of both. On average, about 58 percent of the institutional grant awards distributed by independent colleges and universities participating in the 2009 TDS based their aid awards at least partially on student financial need. (Figure 5 graphically illustrates this assignment of grant awards.)

Phillips underlines the importance of non-need-based grants: “Non-need aid helps athletic and academically gifted students broaden their options to include colleges that may not have originally been in their minds due to the institution's price.”

The Real Cost of Discounts

Overall, the 2009 NACUBO Tuition Discounting Study indicates that independent institutions have aggressively increased their tuition discount rates to accommodate the needs of students and families who are unable or unwilling to pay the full tuition and fee sticker price. However, these increases have come at a cost to a number of institutions. Net tuition revenue has generally fallen, and many institutions have had to implement hiring freezes and other austerity measures to make up the resulting budget gaps. On the other hand, tuition discounting strategies have been an essential way for some schools to generate net revenue by increasing enrollment.

Are tuition discounting rate increases good or bad for institutions? That's not unlike asking whether the federal stimulus package has been effective. The University of New Haven's Synodi says, “There is not a simple answer to that question in that, without our current institutional discount practices, we might not have achieved our enrollment goals and, thus, we would have been left with lower net tuition revenues.”

Given the slow pace of recovery that the U.S. economy is experiencing during the first half of FY10, it is possible that tuition discount rates will continue to rise in the foreseeable future. What is unclear is the kinds of other budgetary measures independent institutions will undertake should they feel the need to continue to increase their institutional aid budgets.

SANTIAGO MEREA is a research associate at NACUBO.