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Cutting Tuition, Increasing Revenue

July 11, 2005

At most colleges, tuition moves only in one direction: up.

But a number of small, private colleges in recent years have experimented with dramatic cuts in tuition rates. Much of the discussion about those colleges' strategy has focused on whether it succeeded in attracting more applications. In Baltimore on Sunday, at the annual meeting of the National Association of College and University Business Officers, officials from three of those colleges reported on what went into their decisions to cut tuition (each by about 30 percent) and how the reductions have fared in terms of college finances.

Albertson College of Idaho, Muskingum College, and Wells College are all pleased with their decisions and see them paying off. But at the same time, they warned that the strategy wouldn't work for everyone. "This is not a universal solution," said Chris J. Anton, chief financial officer and treasurer of Albertson.

Anton stressed that even if the strategy makes sense, colleges that don't execute it correctly can face new problems. Albertson cut its tuition to $13,900, from $19,800, two years ago. But both applications and the number of new students fell. Anton said that the college didn't adequately plan the tuition cut, or have marketing materials ready to go -- so prospective students were confused about the college.

Applications are now headed back up, he said, as the college has improved its marketing. And the college's tuition revenue per student is on the rise (to $9,034 this year, up from $8,352 two years ago).

Alberton has also seen its "discount rate" (or the percentage of tuition revenue that is turned right back into financial aid) cut to 45 percent from 54 percent in two years, and the rate is expected to drop even more when the lower tuition rates apply to all students (Albertson kept the old rates in place for continuing students).

That decline in the discount rate is why some colleges can make more money by charging less. Discount rates have gone up drastically over the last 15 years, according to data from NACUBO. Many colleges worry about the financial implications of their high rates, but fear that cutting aid could lose them students. And that's why some colleges end up thinking about major cuts.

Diane Hutchinson, vice president and treasurer of Wells, said that the discount rate at her college was a major concern of trustees and accreditors. Before Wells cut its tuition by 30 percent in 2000, to $11,850, the discount rate was 59 percent. "We didn't want to be perceived by guidance counselors and others as buying students," she said.

Four years later, enrollment is up substantially (and expected to grow more now that the college has become coeducational) and the discount rate is down to 41 percent.

One advantage of lowering tuition and the discount rate is restoring confidence of parents in understanding college costs. James Wilson, vice president and chief financial officer of Muskingum, said that some parents like to boast about what a great deal they got by paying a small percentage of total college costs. But many more parents, he said, feel confused by the system, and that discourages some students from even applying.

Muskingum cut its discount rate from 54 percent to 39 percent in the three years after it cut tuition by 29 percent, in 1996, to $9,850. While plenty of students still need (and receive) financial aid, he said, there is less of a sense of bargaining, especially by middle and upper class parents. Wilson said that the enrollment office at Muskingum boasts of having the "no haggling" strategy used by Saturn auto manufacturers, so that families know what they will have to pay.

Psychology in fact played into the colleges' thinking in several ways. Wilson said a major goal of his college's initial cut was to come in under $10,000. While tuition has since gone above that level, being below it helped the college attract more students. And since Muskingum had "excess capacity" on its faculty and in its facilities, Wilson said it was essential to do so.

At Wells, perceptions were also an issue. Hutchinson said that when the college started to consider a major tuition cut, the strongest opposition came from alumnae trustees, who believed that a cut would diminish the sense of the college's quality. When the college produced various financial models, it determined that it could have cut tuition all the way down to $10,000 -- without having a significantly different impact from the cut to $11,850. But Wells opted not to go to $10,000, to avoid exacerbating the fears of those alumnae.

During the question and answer period, it was clear that for many college officials, the discount rate remains a powerful tool that they want to use to attract better students or wealthier students or more students -- whatever headaches and financial problems might be created down the road.

One vice president in the audience said that his college prided itself on a very low discount rate for years, but that a new president wanted to increase the rate. The panelists who had just described their efforts to lower discount rates chuckled.

 

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