The Current Practice of College Tuition Discounting is Not Sustainable

In my last blog, I wrote about the practice of tuition discounting, and how college presidents have a very different understanding of how applicants and their families view tuition than they actually do. Tuition discounting is the widespread practice of setting the “sticker price” of tuition at a high level, but then offering financial aid to discount what people actually pay.  Hardly anyone pays full price. The average discount is about half the price in private colleges and universities.

And the rate at which schools discount is increasing every year. In the last ten years, it has increased about a percentage point a year, from 38.6% in 2006-2007 to 49.1% in 2016-2017 (figures are from the very well done NACUBO Tuition Discounting Study).

Economically, this annual increase is a disaster for colleges and universities, since it means less tuition revenue per student.

The schools know this. In a survey that I created and conducted with The Chronicle of Higher Education, we found that four out of five college presidents and chief financial officers (CFOs) thought that the practice of tuition discounting was unsustainable. At private institutions, we found that among CFOs, the people most knowledgeable about institutional finances, 70% thought that tuition discounting was not sustainable at their own institution.

Clearly, something needs to change.

For more results on the College Pricing Survey, get the report from the Chronicle’s website.

The Tuition Pricing Crisis

We have a big problem with college tuition.  

Multiple analyses of college tuition have indicated that it has risen at rates higher than inflation, health care, housing, and a host of other items and services.

The inevitable question, then, is why is college so expensive?  And how are tuition prices determined?

Much of the research on tuition pricing looks at economic data, such as the relationship between tuition increases and decreases in state monies going to higher education. At the same time that we see public colleges receiving less money from the state, we also see that tuition at those institutions is rising. The conclusion then is that those responsible for setting tuition are making the decision to raise tuition to make up for decreasing state contributions.  

There are many other factors, however, that are more complicated.  And while the decisions around tuition pricing might be informed by economic factors, ultimately, they are made by people. 

I wanted to know what the people making the decisions were thinking.  

So, I worked with The Chronicle of Higher Education to develop a survey for college presidents and chief financial officers that would ask about their decision-making process. The results are available in a nice report on the Chronicle’s website.

I always think that when you have to solve a problem, it’s important to trace that problem back to assumptions that people have made.  They are not always right.  So, here’s a big disconnect we found.

College leaders’ assumptions about what prospective students and their families understand about college pricing are pretty much wrong.

Here’s the situation.  Many of you know this already, so bear with me for a minute.  

The real problem is that many people looking at colleges don’t know about this. 

Hardly anyone pays those high sticker prices for college tuition.

View fullsize

College leaders know that prices are too high for many to afford, and so after those high prices are published, the colleges throw a lot of financial aid at the problem.  A high sticker price is associated with quality.  Just like you assume that a $50 bottle of wine is much better than a $10 bottle of wine.  And it usually is, but not many people can spend $50 on a bottle of wine.  So, colleges discount tuition.  On average, they discount it by about half.  

That means that at a college with a sticker price of $30,000, the average amount that gets charged to students is $15,000 (of course it varies student by student and school by school, but this is about average).  

All of a sudden students and their families are paying only $15,000 a year for a $30,000 a year college education.  Great deal, right?  

Here’s the disconnect.

College leaders assume that prospective students and families know this, and take it into account when applying to schools.  We tested this in our survey and over half of college leaders thought people knew they would get a discount.  Three out of four college leaders at private not-for-profit institutions though that students knew they would not pay sticker price due to tuition discounts.  Many college leaders also thought sticker price would not cause prospective students from looking at a school.  

Other research indicates that this is just not the case, however.  A 2013 survey by Longmire and Company, Inc. indicated that: “Approximately 4 in 10 students and parents say they rejected colleges on the basis of their published sticker price alone. Six in ten say they are unaware that “colleges discount their published price so that incoming freshmen pay less than what is published.”   
   
This is a remarkable mismatch. Forty percent of potential students reject a school out of hand purely on sticker price.  Even more have no idea that tuition discounting ameliorates the sticker price.  This is a very large sector of the population that think they cannot afford an institution when it might be affordable.  The sticker price shocks them.  Yet the people setting that price think that what they are doing is well known.  

It’s not.  Obviously, this is one of the big problems with college tuition.  And there are more that are in the report I did with the Chronicle.  I’ll talk about a few more in subsequent blog posts, but you probably want to get that report.  It's got a lot of good information for college leaders as well as prospective students and their families.