If you’re a parent who recently paid a tuition bill for a college student this fall, you know full well that tuition bills are about as transparent as the pricing of airline tickets.
Discounting the published tuition price is a widespread practice throughout higher education. Students have no idea how much the classmate sitting next to them is paying. The sticker price is meaningless, and students who pay more don’t get anything extra for their money. At least on an airplane, you might get a better seat, some food, and a free checked bag for a higher fare.
Before the 1980s, tuition was largely discounted for students based solely on financial need. It was a quite simple, and, many argued, fair system: The more your family earned, the more you paid for college.
Then two decades ago, private colleges started to use discounting strategies to attract better students away from higher-ranked competitors. They gave students aid — disguised as “merit scholarships” — no matter their family income to entice them to enroll. It worked. And the floodgates opened.
Private colleges everywhere copied the practice, and in the past decade or so, public colleges started to follow along, too.
For quite a while, the approach worked. Using software developed by outside enrollment management companies, colleges were able to increase their published prices just enough to attract the students they wanted and bring in more net-tuition revenue at the same time (that’s the cash colleges actually have to spend after giving out financial aid).
But every good strategy eventually runs its course, and there is increasing evidence that the days of tuition discounting are coming to an end. Net-tuition revenue is flat or declining at three-fourths of public colleges and three-fifths of private colleges, according to Moody’s Investors Service.
Then there was the news last week that the discount rate at private colleges continues to rise unsustainably. Students at private colleges received an average 42 percent discount on their tuition in 2014-2015. As recently as 2010, it was 36 percent.
There is another number that is perhaps even more important for students and parents to consider. The same survey, from the national association of college financial officers, found that the average discount for first-year students is 48 percent. That gap of six percentage points between the overall rate and the discount for freshmen usually means that colleges are giving bigger grants to first-year students than everyone else.
In other words, it’s a classic bait and switch. Colleges attract students with a bigger discount and a boatload of financial aid the first year, and then once the students like the campus and want to stay to actually finish their degree, they give the students less aid for their remaining years. It’s just like what credit card companies or cable companies do to attract new customers — they offer an introductory rate followed by a big rate increase in year two or three.
Mark Kantrowitz, senior vice president of Edvisors and a financial-aid expert, has calculated that half of all colleges give first-year students higher grants than they do sophomores, juniors, and seniors.
One school that has eliminated the practice of front-loading grants is the University of Dayton in Ohio. A few years ago, it made a guarantee to entering freshmen that they would pay the same net price for four years. So as tuition increases, so does aid. Dayton found that the change has resulted in more students staying in school to get their degree and taking on less debt in the process.
Unfortunately, few colleges have followed Dayton’s lead, even as the spread has widened between the freshman discount rate and that of other students.
To find out if you’re at risk of a bigger tuition bill your sophomore year, Kantrowitz suggests that students ask the college about the difference in grants before enrolling or ask upperclassmen about how their grants might have changed. He also urged students and parents to use the government’s web site, College Navigator, and look at the percentage receiving grants and the average grant amount for first-year students and all undergraduate students. If the numbers differ significantly, this is a sign that the college is front-loading grants.
The time is quickly approaching when colleges will need to rethink their discounting strategy altogether. Even as they push up their sticker price each year, they are getting less revenue because they are discounting tuition by even greater amounts and falling short of enrollment goals at the same time.
Colleges can live on a smaller revenue base for a few years, but eventually they need more cash to invest in faculty, new programs, and to maintain their campuses. The discounting race ultimately results in a death spiral for colleges.
That should be enough to encourage colleges to give up on this outdated practice. But the incentive to change likely will come from parents and students who are accustomed to living in an economy where you can compare prices of almost anything with just a few clicks on a mobile phone.
Parents and students remain confused and frustrated by the pricing games that colleges play, games that are just as disingenuous as the credit-card offers we toss in the recycling bin. We should expect more from our non-profit colleges than we do from for-profit companies fighting for market share.
Tuition pricing should be based on demonstrated need and real merit, not just the desire of a college to steal a few smart students from a competitor down the street. It’s unlikely that colleges will change on their own, but soon they might not have a choice if the financial and enrollment trends of higher education continue.