Steep tuition discounts can be a boon for students attending private colleges and universities, but the practice is leaving some schools vulnerable to financial instability. And yet they continue to ramp up price cuts to attract a dwindling pool of traditional college-age students.
For every dollar in gross tuition revenue private colleges received from first-time full-time students in the 2016-2017 academic year, schools used nearly half for grant-based financial aid, the National Association of College and University Business Officers (NACUBO) said Monday. The association surveyed 411 private, nonprofit four-year colleges and universities for its annual report and found tuition discount rates — the percentage of tuition revenue colleges hand students in the form of grants — at 49.1 percent for freshman, the highest in the history of the survey. Among all undergraduates, the average discount rate penciled in at 44.2 percent.
Tuition has risen faster than inflation at a time when wages have remained relatively flat. Families are sensitive to price increases in this uneven economic recovery, and schools have responded in kind by providing more aid.
“There’s still a lot of need out there among families since the financial crisis of 2008,” said Ken Redd, NACUBO’s director of research and analysis. “A lot of families still have not fully recovered from that.”
Universities were generous in doling out grants and scholarships to a larger share of students than in years past, which increased their overall tuition discount rates. Roughly 88 percent of freshmen and nearly 79 percent of all undergraduates received money from their schools that covered more than half of tuition and fees on average. Well-heeled schools with endowments of more than $1 billion used almost 91 percent of all grant and scholarship funds to meet the financial needs of students of modest means, according to the report.
“This strategy provides an avenue for students, especially low-income and middle-income students, to get into private, nonprofit colleges,” said Pete Boyle of the National Association of Independent Colleges and Universities. “We have the same percentage of Pell-eligible students as public colleges and essentially the same median endowments, but we don’t get any state funds, so this is a way that our universities can provide that access.”
Wealthy universities and colleges that are not heavily reliant on tuition dollars are often in the best position to afford generous financial aid. Schools with impeccable bond ratings, such as top-tier research universities, can fund discounts through philanthropic gifts and endowment income, according to credit rating agency Moody’s Investors Service.
Yet small schools with fewer resources are also using discounting strategies to entice price-sensitive students to enroll and, in some cases, jeopardizing their revenue growth. Net tuition revenue — the money earned from students after schools provide financial aid — from first-time, full-time freshmen grew by an estimated average of 0.4 percent this academic year, down from 1.5 percent in 2015-2016. At the same time, nearly 40 percent of colleges that responded to the NACUBO survey reported declining enrollments in both their freshman class and total student body, up from 37 percent last year.
“Smaller private colleges remain the most pressured, with nearly 40 percent projecting that they would have a net tuition decline this year, which is largely a function of increased tuition discounting,” said Susan I. Fitzgerald, associate managing director at Moody’s. “Many of them are discounting because they don’t have the demand to charge their stated sticker price, and demand continues to weaken, so they have to increase the discounting to bring in students.”
Universities are contending with demographic trends that show no sign of abating. There are simply fewer 18-year-olds heading to college, especially in the Midwest and Northeast, which are facing below-average or weak population growth. Some universities are focusing their attention on retaining their existing population by beefing up advising to make sure students don’t fall through the cracks, rather than simply relying on a pipeline of new students to bring in revenue, according to the survey.
It used to be that discounts were based only on financial need. Wealthy families were expected to cover the cost of sending their kids to college, while schools focused their resources on students with limited means. But to lure top students away from competitors, colleges began offering more need-blind scholarships. And to ensure the scheme didn’t hurt their bottom lines, schools ratcheted up the sticker price to bring in enough net-tuition revenue to offset the discount.
But that strategy in the face of declining enrollment and tuition revenue is giving some college administrators pause. Forty-one percent of chief business officers told NACUBO that they consider discounting unsustainable or only sustainable for the short term. Another 44 percent, however, expressed confidence in continuing the practice as long as other net revenue strategies are successful.
“If an institution has done its planning and fiscal analysis and has determined that they can continue to discount and run at a neutral net revenue or greater, they can continue this trend,” Boyle said. “If they haven’t done that due diligence, then they run the risk of finding themselves in some pretty challenging situations.”
Nearly 1 in 5 university business officers said their schools are employing pricing strategies, such as a tuition freeze, tuition reduction, an increase in tuition below the rate of inflation or a combination of a few practices, Redd said. Some colleges have cut their sticker prices to reflect what students are actually expected to pay after financial aid is taken into account, known as the net price. Analysts say it’s too soon to tell whether these tuition resets are a viable long-term solution for colleges and caution that the practice doesn’t always benefit students as many schools reduce their financial aid budget along with tuition.
“There are a number of institutions out there that are trying some different things, but it’s too early to know how those strategies will play out,” Redd said. “All of these new strategies are being tried at a time when there’s been stagnant income growth, and there is a lot more need for financial aid.”
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