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Tuition Discounting

The awarding of financial aid is a way to address a student’s inability to pay tuition as well as a method for increasing diversity and achieving other institutional goals. Boards should be aware of the implications of institutional aid practices and how their college or university distributes grant funds among students with different incomes.

Board members and other college leaders must grapple with how to set tuition rationally, how to articulate a student-aid philosophy, and how to balance competing priorities while ensuring financial stability.

The board should be familiar with the institutional discount rate and understand how it impacts overall net revenue at the institution.

Tuition discounting is the process by which the institution offsets its published tuition price (sticker price) with institutional grant aid for enrolling students. The result is the discount rate, the ratio of total institutional grant aid relative to gross tuition revenues at an institution. At most public and private nonprofit colleges and universities, even full-pay students are subsidized: the sticker price is less than the average cost of educating a student. The difference is made up through a combination of government subsidies and revenues from endowments and other private sources.

Some colleges rely so heavily on discounting that when they raise their tuition, they do not generate new net revenues. In today’s economic climate, where students and families are struggling financially, some institutions are so afraid of losing students to lower-priced institutions that they are discounting away their needed operating revenues. That is not a viable long-term strategy, and it threatens an institution’s ability to offer the educational opportunities that allow it to fulfill its mission.

Calculating the Cost of Attendance

It is the net price—the price after taking grant aid (and federal education tax credits and deductions) into consideration—that determines the institution’s tuition revenues and also represents the amount that students pay. Despite that, sticker prices matter for perceptions. To prospective students, a high sticker price conveys a sense of quality; at the same time, students feel wanted and special when they are offered an institutional grant to a college or university with a high sticker price. The flip side, however is  that many low-income, qualified students who cannot afford the sticker price are deterred from applying and enrolling. Without being able to calculate the cost of attendance (net price), it is difficult for students and families to plan their finances, which may ultimately generate negative publicity for the institution.

Starting in October 2011, institutions are required to publish a Net Price Calculator on their Web sites for prospective students to determine the true cost of attendance at the institution. The introduction of the Net Price Calculator should make the admissions and financial-aid process more transparent for incoming students. They will be more cognizant of the true cost of attendance and might not make the decision to apply based on price alone.

Board Responsibility

The appropriate role of boards in navigating many of the issues surrounding financial aid—government regulations, individual aid decisions—is limited. But sound institutional financial aid policies are central if an institution wants to serve those students who can benefit most from the opportunities provided. They are also crucial to ensuring the economic security of the institution. Specifically, boards should understand the complex relationships among tuition and fees, institutional financial aid, state support for higher education, published price (sticker price), and average price paid (net price).

The need to attract students who bring their own funds to  campus and the desire to enroll a talented group of students should not preclude a focus on diminishing the gap between students’ ability to pay and the cost of attendance. Neither shutting out students with financial need nor encouraging them to accrue unmanageable levels of debt is a viable long-term strategy. Boards that understand the issues can shape policies to ensure that their college will not follow a path leading to financial instability for either its students or the institution.

Data on Tuition Discounting

  • Most institutions do not publish their tuition discount rate, but more than half of all undergraduate students, including over two-thirds of those who are enrolled full-time, receive grant aid.
  • According to the 2011 Almanac of Higher Education, private colleges and universities discounted tuition for all undergraduates by an average or 33.6 percent in 2000 and a rate of 37.1 percent in 2010.
  • According to a report in the Chronicle of Higher Education, public institutions discounted tuition at an average rate of 12.3 percent in 2008. Between 2002 and 2008, those institutions increased the amount of money spent on financial aid from their operating budgets by 47 percent while endowment spending on scholarships stayed flat. 
  • Colleges and universities awarded about $33 billion in grant aid to postsecondary students in 2009-10, an increase of about 70 percent in inflation-adjusted dollars over a decade. 
  • The average published tuition and fees for a four-year independent college in 2010-11 were $27,290, and the average net price paid was $11,320. At public four-year colleges and universities, average published in-state tuition was $7,610, and the average net price paid was $1,540. (Room and board were an additional $9,700 at independent colleges and an additional $8,540 at public institutions). 
  • About two-thirds of bachelor’s degree recipients borrow, and the typical borrower graduates with $20,000 to $25,000 in debt, depending on a combination of circumstances, including family income and the type of institution attended. 

How does your institution’s tuition compare to the tuition of institutions with which you compete for students? When you raise your tuition, how much new net revenue is generated?

What percentage of your students receives institutional grants? What is the average grant received by students on financial aid at your institution? How fast have the numbers been increasing in recent years?

Are institutional-aid policies making it more possible for students to enroll and succeed? Or are they burdening students with levels of debt that will make it difficult for them to move forward with their lives? Are those policies strengthening the financial and academic profiles of the institution? Or are they pushing it closer to the brink of financial crisis?

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