Wouldn’t it be fun to cut our price?

To say that the sticker price for higher ed is eye-popping is an understatement.  NACUBO reports that the average cost of tuition, room, board, fees and books is around $38,000 for a private institution.  To earn a net pay of that amount requires a gross salary of about $50,000.  It is anything but cheap.

Of course, most people know that precious few actually pay the full sticker price these days.  Federal and state aid could knock off a few thousand anyway, as will the well-utilized Stafford loan.  Many schools have endowed assets that spin off three to five percent of their value every year to give to deserving students.  All of this represents real money from governments and investment earnings to offset the high cost of higher education.  Institutions and students alike are proponents of these funds mushrooming.

There is another category, however, that far outstrips all the other sources of aid combined.  The technical term for these awards and grants is “tuition discounts.”  This group represents reductions in price for the student, masquerading as a scholarship or grant.  NACUBO reports that the average grants received by a student of this nature are around 45% of tuition.  Some receive a much higher percentage; up to the cost of tuition, room and board for certain athletes.  Others are less fortunate, particularly if they are below average in the brightness category and their federally-contrived expected family contribution (EFC) is well above the cost of attendance. If your school attracts so-so smart kids from somewhat rich families, life will be good.  This is also known as the lost continent of full-pays.

The first question that comes to mind is whether this is moral, fair, or even legal.  After all, when students receive various levels of discounts, it seems as though some room exists for discrimination.  The Robinson Patman Act of 1914 requires a good deal of justification for any differential in pricing and commercial enterprises spend a lot of time ensuring compliance.  So, the kind of pricing irregularities seen in higher education seem illegal, until it is noted that non-profit entities are exempted from this Act.  What commercial enterprises are fined for is perfectly OK for a non-profit.  We can charge whatever we want to whomever we want.  It leaves a lot of room for “creativity.”

The second question is whether the practice of discounting is applied to all or nearly all students.  For most private institutions, that is correct.  Some provide some sort of discount to every student who is accepted, essentially reducing the price by whatever the base award is.  Others give institutional discount aid to over 90% of their students, effectively providing an across the board discount.  Those institutions that cater to the financially well-off and enjoy strong demand may have but a fraction of their students receiving discount aid.  It seems to depend on the reputation and selectivity of the school, with the least selective giving away the most.

This begs the third question:  Would it just be better to charge less and reduce discounts?  That might serve to reduce the incidence of sticker shock and restrict the incredible disparities that exist between two seemingly identical students.  A friend of mine asked me to comment specifically on this, based on the decision by Ashland University (OH) to take a chunk out of their price.  The rest of this blog is dedicated to this question and, to explain how this might work, an example or two seem appropriate.

Presume that College U charges $30,000 for tuition and $8,000 for room and board, giving it a sticker price of $38,000.  Presume then that the tuition discount for College U is 50%, meaning that, on average, a student receives a $15,000 grant that comes from thin air (a discount.)  To make things interesting, let’s further presume that every student gets the same discount of $15,000, meaning that every student’s bill shows the $38,000 sticker price and then reflects a $15,000 tuition discount, bringing each bill down to a net price paid of $23,000. No discrimination – everybody pays the same.

College U decides that this approach puts the published or sticker price at such a level that it is turning off prospective students.  The suspicion is that, rather than finding out how to afford College U, students stay away or head off to state or community colleges.  With every student receiving the exact same discount of $15,000, it would be possible for College U to reduce tuition by 1/3rd to $20,000 and chop off the discount to $4,000, leading to a net tuition of $16,000.  Note that, even though the tuition rate was reduced by $10,000, the discount was reduced by $11,000, making the net received $1,000 higher than it was under the old system.  Seems kinda slick!

College U trumpets this change in the press and the lower sticker price brings in 30% more incoming first year students than before.  It’s an exciting time and net tuition is growing by leaps and bounds.  Great work, if you can get it.

Of course, the example is unrealistic.  There is not likely to be any institution in America that gives the same discount to everyone, let alone a healthy 50% off!  Athletes that expect to receive 100% off (and more) will not attend there.  Those with great need and/or who are being wooed by others for their amazing academic, musical or artistic abilities will not select your school either.  The infinite levels of awards for this and that appear to comprise a successful strategy, allowing the student bragging rights while offering something, if only a token something, to everyone worth recruiting.

So, returning to our price reduction example, recall that College U decides to reduce tuition from $30,000 to $20,000, making the new gross price (sticker) $28,000.  In the case of a normal institution with a reasonable distribution of awards around our 50% mean, there will likely be those who pay more than $28,000 in total.  Presuming one of these people receives a $3,000 award off the $38,000 sticker price, he then pays $35,000 in one year, feeling grateful just to have been accepted.  When the sticker price changes to $28,000 and his $3,000 award is eliminated, SO WHAT!  The student will pay $7,000 less than he did last year.  That is a pretty good deal for the student – not so much for College U.

Consideration #1 – Students who receive little discount aid will likely pay less if tuition is substantially reduced from one year to the next.  A careful analysis of these students is needed to determine how much will be collectively lost.

The way in which Colleges and Universities generate new dollars is worth giving some thought to as well.  For most institutions, the award amounts provided for the first year remain fixed for the following three years, even though tuition, room and board increase.  Returning students thus provide the bulk of new revenues by paying the full price increase while maintaining the same discount aid in dollar terms.  If an institution decides to freeze tuition, the benefit of those added dollars is lost, unless the strategy leads to a significant uptick in demand.  I’ll reference the need for more bodies a few more times if you are inclined to read on.

An offset to the added dollars generated by returning students is what tends to be an ever-increasing discount rate for incoming students.  Often a goodly portion of the new revenues brought in the door by returning students is siphoned off by incoming students through significant increases in the freshman discount rate.  So, if a tuition freeze occurs, the ability to entice new students at the point of competition (the time when they are a prospective student) with higher discounts is limited – there is no added money from anywhere to give them bigger awards.  Sadly, for some schools, the growth in freshman discount actually exceeds the added revenues from returning students.  Again, unless a miracle occurs where student populations grow, the institution will suffer from reduced net revenues.  The Bills could win the Super Bowl too.

With this background, consider now the institution that actually goes beyond a freeze and reduces tuition and aid.  If the average net tuition goes down for returning students, the opposite of a price increase is in effect.  That is, returning students deliver less net tuition this year than they did during the last year.  Chances are that the transfer population will not grow markedly from this strategy but incoming freshmen numbers might.  Unless the institution is already generating a lot of surpluses, growth in the incoming class would be needed just to keep net tuition revenue at the same level as the previous year.  It could work – but it is a gamble.

Consideration #2 – Reducing net revenues from returning students requires a material increase in the first year (incoming) student population in order to generate the same level of net tuition of the previous year.  Discount rates offered to new students should be monitored during the recruitment season, along with the number of accepted and deposited students. It could be an anxious time.

A strategy this radical is not entered into without some collateral investment.  That is, announcing the price reduction merits a grand location (the statehouse?), a bunch of media on hand and the follow-through of a media blitz using virtually every venue imaginable.  Merely lowering the price and hoping that the web site works magic is wishful thinking.  The entire strategy of reducing prices requires that a lot more students show up or the strategy will have backfired.  It is also presumed that the capacity exists for added students, both in housing, classrooms and faculty.  A lot of planning has to take place for this to work but promoting it is critical and it is not free.

Consideration #3 – A major strategy shift toward a lower price and lower tuition discounts requires a lot of media attention and it requires a good deal of investment.  Perhaps a donor who gets excited about this idea will assist in the first year.

So, there you have it.  With tuition discounts at private institutions heading toward 50%, it may seem like a good idea to reduce prices and aid in order to generate a little media and prospective student excitement.  If your price and discount are low already, don’t bother.  If you determine that this is a needed strategy, however, a detailed and quantitative plan is important, along with the assistance of Cecil B. Demille and his cast of thousands with respect to media saturation.  At the same time, a solid monitoring mechanism is required so that mid-course corrections can be made.

Is it risky?  Indeed.   Could it work?  Maybe.  Will the Bills have a shot this year?  No comment.