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Upper Limits

Tuition discount rates at private nonprofit institutions climbed to record levels, while net tuition revenue has barely grown, according to NACUBO’s annual tuition discounting survey. How long can campuses maintain their financial aid expenditures?

By Kenneth E. Redd

Although the media and other higher education stakeholders continue to express alarm over annual increases in tuition and fee "sticker" prices, many colleges and universities are increasing their spending on institutionally funded scholarships, fellowships, and other grant aid programs at much higher rates than those for listed tuition and fee prices.

Loyola University Maryland,Baltimore, for instance, provided morethan $62 million in need- and merit-based institutionally funded grants toundergraduate students in academic year 2015-16, according to Mark L. Lindenmeyer, assistant vice president of enrollment management and director of financial aid. "On average, for the past several years, our financial aid budget has been increasing at approximately twice the overall percentage increase in our total tuition, fees, room, and board charges," he points out.

Muskingum University, New Concord, Ohio, which in the 2015-16 academic year provided approximately $17.8 million in grants and scholarships to students, has also seen institutional aid dollars rising faster than tuition and fee list prices. "Our financial aid budget grew by 7.5 percent in 2015-16," says Philip E. Laube, vice president for business and finance. "We have increased financial aid by about 1.5 times the rate of tuition increase over the past few years."

Loyola University Maryland and Muskingum University are not alone. Data from the College Board's Trends in Student Aid 2015 report show that average institutional scholarships to undergraduates increased 34 percent between academic years 2007-08 and 2012-13, while the average tuition and fee "sticker" price rose just 15 percent. Clearly, many private nonprofit colleges and universities have remained committed to assisting students and their families pay postsecondary expenses.

But this commitment has led to many concerns among chief business officers and other higher education finance experts. As results of the 2015 NACUBO Tuition Discounting Study (TDS) demonstrate, rising costs of student scholarships and grants are leading to much lower gains in net tuition revenue. Campus leaders have begun to discuss new ways to meet student finance and enrollment goals that can lead to much more sustainable outcomes.  

Rapidly Expanding Tuition Discount Rates

The strategic use of institutional grant aid to offset a portion of the tuition and fee price that students ultimately pay is sometimes referred to as "tuition discounting." The practice is used to attract or retain students who are unable or unwilling to pay the full tuition and fee sticker price. Many private nonprofit colleges and universities use a variety of tuition discounting strategies to increase their undergraduate enrollments.

NACUBO's annual TDS measures the tuition discounting practices and other indicators of institutional grant awards to first-time, full-time freshmen and all undergraduates who attend independent higher education institutions. The most recent results (see sidebar, "Accessing the 2015 NACUBO Tuition Discounting Study) are based on survey responses from 401 private nonprofit colleges and universities. These schools provided their final institutional financial aid expenses and other data for academic year 2014-15 (as of fall 2014), and preliminary estimates for 2015-16 (as of fall 2015). Data from the survey participants are used to calculate an overall average institutional discount rate—defined as institutional grant dollars as a percentage of gross tuition and fee revenue.

As the figure shows, tuition discount rates have been rising rapidly since the economic downturn of 2008-09. Since that year, the average institutional discount rate for first-time freshmen jumped from 39.9 percent to an estimated 48.6 percent in 2015-16. The average discount rate for all undergraduates reached an estimated 42.5 percent in 2015-16. Or, put another way, the rates show that for each dollar that private colleges collected from all undergraduates, they distributed nearly 43 cents to students in the form of grants and scholarships.

These rising discount rates don't surprise Lindenmeyer. "They represent the result of the ongoing intense competition among colleges for the highest academically qualified students, stagnating family incomes at nearly all socioeconomic levels, and the concern among parents and students regarding the accumulation of loan debt to pay for educational expenses. There is also an increasing number of families who may have the ability, but are no longer willing to pay the full cost of a private college education."

Laube agrees with this assessment. "Our experience has mirrored national trends. This year we had a somewhat needier entering class, and we have experienced declining yields in the entering student population over the past several years" due in part to greater competition for students.

In addition, Kathleen Dawley, Principal, Hardwick Day, Bloomington, Minn., and a member of the board of trustees at Regis College, Weston, Mass., says the results represent efforts by many campuses to enroll more transfer students. "Until recently, discount rates for transfer students have been very low," she notes. "Now, more institutional grant aid is being applied to this population because, for many institutions in this category, this is one of the few areas where enrollment growth is possible."

Flashback ... 5 Years Ago

Flashback ... 4 Years Ago
In the June 2012 Business Officer article "Enrollment Calculus" on the 2011 NACUBO Tuition Discounting Study ...
"Increasing net tuition revenue was accomplished by several different strategies at participating institutions. Some campuses added graduate programs, online courses, and other high-demand programming. Several colleges and universities looked at how they packaged their financial aid. One institution reported moving from a federal methodology for determining a student's financial need to an institutionally developed methodology for determining such need. This flexibility in awarding institutional grants allowed the institution to control its eligibility requirements for need-based aid."

Much Lower Revenue Growth

As many campus leaders point out, the rapid growth in financial aid budgets has led to many positive outcomes for students. "Among highly selective independent colleges and universities, low-income students are benefitting from the ever-increasing focus on access and affordability," Dawley suggests. "More importantly, these institutions are also thinking about the financial well-being of these students for the long term. They are matching institutional grant aid with programmatic supports designed to enhance success and degree completion."

Lindenmeyer adds that the rising grant expenses have "allowed us to meet our freshman class enrollment goals and targets in addition to maintaining low attrition and high graduation rates."

However, one main goal of tuition discounting is to substantially increase net tuition and fee revenue. According to the National Center for Education Statistics, private nonprofit colleges and universities get about 30 percent of their total funding from net tuition and fee dollars (the difference between gross tuition and institutional grant aid expenditures). Thus, any decline in net tuition and fees potentially has an adverse effect on overall campus finances.

To see if schools are able to balance their aid spending with added tuition dollars, the TDS calculates a per-student net tuition and fee revenue figure. Per-student net tuition and fees—based on enrollment of first-time, full-time freshmen—is an important measure for understanding the effects of institutional grants on college and university finances. Ideally, net revenue should rise by at least 2 percent each year (the current rate of inflation, as measured by the Higher Education Price Index) in order to cover the cost of the discounts in "real" or inflation-adjusted value. Net revenue below 2 percent suggests that institutions are not covering the costs of the increased grant expenses, potentially putting added strain on other parts of the institutional budget. 

Overall, as the table illustrates, on average, net tuition revenue has not met the 2 percent annual growth standard for the past several years, particularly among small colleges and universities. Average net revenue for small institutions in 2015-16 grew only 0.6 percent, compared with a gain of 3.2 percent for research universities and 1.8 percent for comprehensive/doctoral institutions.

The lack of growth among small and midsize schools is of particular concern to Dawley and Lindenmeyer. "Among regional, moderately selective private nonprofit schools, there is increasing pressure from boards of trustees, who fear the long-term impact of any further increases in discount beyond the 50 percent range for their first-year students," Dawley says. 

Lindenmeyer adds, "Not surprisingly, the resources devoted to funding our institutional financial aid programs put ongoing downward pressure on net tuition revenue. The inability to reliably predict each year's freshman class recruitment results, and corresponding net tuition revenue, puts considerable pressure on the long-term (five-year) budgeting process. As a highly tuition-dependent private university, funding our institutional financial aid budget at the level needed to meet our enrollment goals has become increasingly difficult." 

While the current practice of raising institutional scholarship spending in order to increase enrollment is a great benefit to students and families, it may no longer be sustainable, particularly for small institutions.

A Look Into Financial Sustainability

While the current practice of raising institutional scholarship spending in order to increase enrollment is a great benefit to students and families, it may no longer be sustainable, particularly for small institutions. As discount rates and institutional grant spending have risen, Moody's Investors Service, among other analysts, has continued to express concerns about declines in net tuition revenue. "Smaller colleges with limited scale and low revenue growth will remain fiscally challenged" in 2016 and beyond, Moody's predicts.

According to Dawley, leaders at small and midsize independent schools, in particular, have become more aware of the below-normal growth in net revenue and have responded with creating more diverse ways to meet revenue and enrollment goals. "Regional, moderately selective private institutions are attempting to either hold discount rates at the current level or lower discount rates slightly. Many institutions in this category are also turning to the transfer student population to achieve enrollment growth and are applying discount strategies to this cohort in new and generous ways."

Lindenmeyer and Dawley add that controlling costs and creating new revenue streams are also an important factor. "Sustaining the current discount rate has only been possible as a result of our implementation of initiatives devoted to controlling costs in all other areas of the university, such as compensation and benefits, procurement, physical plant, technology, and so forth," Lindenmeyer says. Dawley notes that "many institutions are continually searching for alternative sources of revenue by creating online academic programs for new student populations. Meanwhile, schools are limiting increases in operational costs."

In many ways, Muskingum University has become a leader in the areas of creating new and more sustainable approaches to financial aid and enrollment. "We have utilized a rolling five-year financial forecast for some time to help us anticipate trends and plan for revenue declines, and also to help us recognize and save the temporary benefit of any windfalls," Laube says. "Going forward, we have discussed several other alternatives [to raising discount rates], including lower increases in tuition, within our forecasts, and/or possibly shifting the focus of an extremely successful capital campaign from buildings toward endowment funding of student scholarships, among others."

On a number of campuses, trustees are working with chief business officers and other school leaders to solve the revenue challenges being brought on by rising financial aid expenses. "Many folks on campus are working on ways to match awarding strategies to the likelihood of student degree completion—looking beyond predicting initial enrollment to retention and degree completion. This is important work, but a challenging puzzle to solve," Dawley says.

Lindenmeyer believes that a big part of that challenge will expand to widen the scope of recruitment. "For a number of years, we have been expanding recruitment efforts beyond our traditional geographic regions in an effort to address the declining high school population in the Northeast and mid-Atlantic states."

Rethinking Strategies

More importantly, the recent trends have served as a clarion call for campus leaders to take action in new and innovative ways. "There is no doubt that tuition discounting has helped many institutions sustain or grow enrollments and net revenue over the years," Lindenmeyer says. "But only those schools with favorable demographics, appealing brand, and desirable programs would consider this practice as sustainable. Pressure from boards has caused many schools to rethink this practice." 

Any changes in strategies that come from this rethinking will likely vary considerably by campus, but, as Lindenmeyer emphasizes, serving students will remain the highest priority. "Academic programs and other programs directly related to enhancing educational value and mission will be protected. However, a new initiative is being implemented to review specific academic programs, majors, and course offerings to determine their relevance and sustainability. A similar effort is being considered to review administrative centers, departments, and offices."

KENNETH E. REDD is director, research and policy analysis.

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Accessing the 2015 NACUBO Tuition Discounting Study

The 2015 NACUBO Tuition Discounting Study (TDS) is available to study participants as well as to those who did not participate. Here's how to access the information:
Participants. Institutions that participated in the 2015 TDS survey received complimentary online access to the report in May. To access the report, first go to www.nacubo.org  and log in to your "My NACUBO" account. Then find and click on the "NACUBO Research Study" link. Find the 2015 NACUBO Tuition Discounting Study in the middle of the portal.
Nonparticipants. Institutions that did not participate can purchase online access to the report by clicking on "Online Research Products" under the "Products" tab on the NACUBO website.
The 2015 report is priced at $200 for NACUBO members and $750 for nonmembers.
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