Our discount rate is only off by three percent. That’s not too bad, is it?
Well, I hate to spoil a good theory with some facts but the math tells a different story.
Let’s presume that Solvay College had budgeted to recruit 240 first time students and charges $25,000 per year in tuition. Tuition discounts (financial aid in the form of unfunded grants) are budgeted to average 40% for these new students, meaning that the average institutional grant takes $10,000 off the gross tuition bill. In essence, even though $25,000 is charged for tuition, Solvay only nets $15,000.
For the budget, Solvay is planning to generate net tuition of $3.6 million ($15,000 * 240) from these new students. Bumping up the discount rate to 43% means that the average institutional grant for each new student grows by $750 ($25,000 * .03). Multiplying the added discount by budgeted students ($750 * 240) yields a deficiency of $180,000. This represents the net tuition lost due to the increased discount rate. For Solvay, this isn’t a small amount.
When $15,000 in net tuition per student is budgeted and an overspend of discounts results in a reduction of $180,000 for the incoming class, at least 12 would need to be recruited just to meet the original net tuition budget. Actually, because the higher discount nets only $14,250 per student in net tuition, another 13 students will be necessary to equal budgeted net tuition. Put another way, if Solvay College thinks it is a good idea to increase their discount rate by three percent, they will need to increase the recruited class to 253 from the planned 240 in order to meet the tuition budget. Will such a small change in a student’s overall cost be the deciding factor? Seems most unlikely.
The moral of the story is to guard the discount rate carefully. It should be crafted strategically, based on a rigorous analysis of student merit and need. Then, though you may be tempted to give the store away, the discount strategy must be deployed with discipline so that the plan has the best chance of becoming actual. With seemingly small changes in the discount rate resulting in major adjustments to net tuition revenue, time invested in this area is well spent.
The budget you save may be your own.