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.

Fortunately 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 ,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 x 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.)

Now 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:

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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