American tuition discounting rose again: what that means and why it matters

Today I’m going to describe a key datapoint in higher education. To do so I need to explain a deep weirdness in how students pay for American college and university classes.  Many people have a hard time grasping this strange bit of finance, and many others have no idea it even exists.  But it’s crucial to understanding academia in the United States, both in terms of institutional innovations and weaknesses.

So here goes.

When most people talk about how expensive college is, they often cite published tuition figures.  For example, Williams College charges $59,350 per year for classes, not including room, board, and fees.  Central Michigan University’s tuition ranges between $12,510 and $24,450, depending on a student’s nationality and credits accumulated.  The University of Texas-Austin posts a wider range of tuition figures, but it looks like Texans pay $5,429-6,788 for a year of full time enrollment, while out of staters face the steeper amount of $19,325-23,249, all depending on course of study.

Except when students don’t pay those amounts.  Which is a lot of the time.

You see, published tuition is a sticker price.  Some students, generally the richest and those not winning merit scholarships, do actually pay it. Meanwhile colleges and universities offer other students, including less wealthy ones, financial assistance in the forms of grants, scholarships, and more.  In practice, “tuition” turns out not to be a single thing, but something as ill-defined, flexible, and individualized as a used car’s sticker price or whatever the heck patients end up paying for health care in the United States.

discount_Mike Cohen credit score geekFortunately we can come up with an average of just how much lower real tuition is in practice, compared to its sticker price. We call this difference the discount rate.  Say a university’s published tuition is $30,000/year. If they have a 10% discount rate, the average student pays $27,000.  So some students (and their families) pay the full thirty, while others – most – pay much less, $27K on down.  So the next time you hear about a campus charging dollars for tuition, you can ask “Ah, but how much is their discount rate?” and learn more.

Clear so far?

Critically minded readers might wonder why on Earth campuses do this, rather than just charging everyone the same flat fee, as when one purchases a sandwich or bicycle.   One reason is that institutions sometimes want to attract students with certain characteristics: achievement in one academic area, athletic skill, demographics, etc. Schools can induce them with tuition discounting.  Sometimes this is for humanitarian or social justice reasons, as in trying to attract underrepresented and marginalized populations.  Other times the reason is competitive, trying to create a student body that looks better in rankings.

Another, more macro reason is that the United States has been experiencing increasing economic inequality since the 1980s.  Tuition discounting maps well onto those class divides.  (A good question is does a given school set a discount rate to try to ameliorate those divides, to benefit from them, or to build graduating classes that will exacerbate them.  But that’s for another blog post.)

NACUBO_logoNow we’re ready for this week’s news item.  The National Association of College and University Business Officers (NACUBO) released a new report on private American college and university tuition discounting.*  Remember my hypothetical about a 10% rate?  We’re way past that.  The report estimates undergraduate discount rates stood at 48.1% last year.  The rate is even higher for first-year students: 53.9%.

Put another way, most students don’t pay the sticker price so many folks worry about:

[M]ost students received grant aid in 2020-21 and were awarded larger grants than in previous years—covering an average of 60.3 percent of listed tuition and fees for first-time undergraduates and 54.3 percent for all undergraduates. Nearly 90 percent of first-year students and approximately 83 percent of all undergraduates received some form of institutional grant aid.

As Inside Higher Ed put it, “In other words, for every $100 in tuition colleges appear to charge on paper, they do not collect $53.90 from first-time undergraduate students.”  That’s for undergraduate-focused institutions.  Other universities weren’t quite as high, but close: “Master’s-granting institutions on average reported a 55.3 percent discount rate for first-time undergraduates, and doctoral institutions reported 50.2 percent.”

This discount rate is not a one-off thing, although it’s possible offers were higher due to the pandemic.  Instead, it’s part of a long-running trend.  Discount rates have been rising for years.  From NACUBO:

tuition discounting 2011-2020 NACUBO

The new finding marks, as you can see from that graph, and in the report’s words, “record highs.”  This is a powerful trend.

So why does it matter?  Is Bryan obsessing too much over financial accounting structures?

For one, increasing discount rates show higher education responding to the macroeconomic picture of increasing income and wealth inequality. That’s an important connection to make.

Second, this trend is probably not sustainable.  Listen to the NACUBO press release:

Average net tuition and fee revenue reported in this study has declined from 2016 levels and, year-over-year, fell the most it has in a decade. Between 2019-20 and 2020-21, net tuition and fee revenue decreased by 6.2 percent per first-time undergraduate and by 2.5 percent per undergraduate, in inflation-adjusted dollars.

Did you catch that?  Colleges and universities are making less money, even when their sticker price tuition notoriously rise. So on the one hand the popular narrative of expensive tuition is really flawed at best, at least for private institutions.

On the other, the strategy is leading to a net loss of revenue. While sticker prices go up, discounts are growing far more rapidly and deeply.  As Emma Whiteford observes, “Rising tuition discount rates can depress net tuition revenue per student if a college does not raise its sticker price in lockstep or line up other sources of funding to pay for financial aid grants. ” Which brings to mind two questions: how many campuses can keep cutting their real revenue and hope to survive?  And how long can they keep playing this game before they have to start cutting programs and jobs to keep the whole operation afloat?

If we keep going down this path discount rates will hit 60, 70, then 75%.

*Said report is behind a hefty paywall, or available to NACUBO members, of which I am not.  So I’m going by what the organization shares publicly, plus this Inside Higher Ed writeup by Emily Whitford.

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7 Responses to American tuition discounting rose again: what that means and why it matters

  1. Jay Collier says:

    Doesn’t this also suggest that the full “list” price is intended to attract the highest payments from those families that can pay it, and benefit many others at or below the average discount price? As long as there is income equality, shouldn’t the haves subsidize the have-nots?

  2. Joe Murphy says:

    Related to Jay’s comment, is anyone publishing about medians and distribution, instead of just the average? I know that there are schools (including mine) where almost no one pays “the average” – we have lots of full-pay students and lots of full-scholarship students and not many folks in the middle. (The impacts on campus culture of different aid distributions are left as an exercise for the reader.)

    But I have no idea how widespread this issue is, or how widely it’s talked about.

  3. Glen McGhee, FHEAP says:

    In many ways, this is a status competition of grand proportions.
    But let’s not forget the 36 BILLION federal-Covid dollars that make it possible.
    Look up how much YOUR SCHOOL is socking away, using the link in tiniest-font at bottom “Get Data”.
    https://www.insidehighered.com/news/2021/05/12/feds-detail-36-billion-pandemic-relief-colleges
    What is Georgetown doing with its $16.7 million?

  4. Glen McGhee, FHEAP says:

    Not all Colleges and Universities are playing this game.
    Recently, Joshua Kim complained about the cost of a (credential inflated no doubt) online Masters.
    Here’s the so-called “financial aid offer” crammed with PLUS loans!
    https://www.insidehighered.com/blogs/learning-innovation/my-daughter%E2%80%99s-boyfriend%E2%80%99s-84k-masters-loan-offer

    If none of this is sustainable, What Comes Next?

  5. Catherine Wehlburg says:

    I know this might sound a bit like Margaret Spellings (who infamously suggested that choosing a college should be like buying a car), but the games that are often played with tuition, financial aid packages, and scholarship offers make it difficult to know what the real cost to a family will be—and that doesn’t show the actual cost of education because so much is subsidized by donor support, endowment income, and state/federal dollars. Similarly (maybe?), when buying a car, how much you will pay depends on what value is given to a trade in (and who hasn’t shopped around for the “best” value), sticker price, negotiating skills, and how much will be paid in cash vs. financing.

    Perhaps not the best framework to show the invaluable benefit to getting a credential in higher education. And with these increasingly high discount rates, colleges are losing money in order to bring in a class.

    • Jay Collier says:

      We just completed a full cycle of school “shopping” with our 17-year-old daughter, and the Net Price Calculators were almost all completely accurate for need-based colleges and universities. Merit-based aid was much more of a wild card.

      However, we were intrigued by the PayScale return on investment data by both school *and* major. Obviously an average (and based on past performance), but both data points were helpful. As was https://www.tuitiontracker.org/

      We also have 3 large boxes of admissions materials for any researcher who wishes to analyze the appeals currently being made to future students and parents. (A non-scientific observation: girls under trees still rule.)

  6. Jeremy Stanton says:

    To what extent do the high sticker prices scare off potential applicants? There was a case study a few years ago about an institution (I can’t remember which) that lowered its sticker price, which actually increased its net tuition revenues. The lower price attracted more “on the fence” applicants resulting in more enrollments and required less total discounting. Plus they leveraged the great PR from the tuition decrease.

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