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Un-Guaranteeing Tuition Prices

Un-Guaranteeing Tuition Prices
December 19, 2008

As college tuitions have continued to escalate, and to rise significantly faster than the rate of inflation, political and public pressure has grown on campus leaders to rein them in. Success has been sparse; a few have frozen their prices or slowed their rates of increase, and a handful have experimented with cutting tuition outright, challenging the conventional wisdom that doing so sends a message to students and families that their quality is declining.

Another idea that is gaining some currency is the notion of guaranteeing tuition -- setting a price and then ensuring students and families that they will face no increases during the years they are enrolled. Such programs are not necessarily designed to save families money -- colleges typically charge the same amount over four years that they would otherwise -- but instead to offer students and parents certainty about what they will pay. As George Washington University, an early adopter of fixed or guaranteed tuition, explains on its Web page about its plan: "In comparing costs of education and offers of financial assistance, GW’s fixed-tuition plan gives our families a long-term, guaranteed outlook, compared to most other schools that provide only a one year financial glimpse."

That was very much the view taken by officials at Northwestern College, a 1,225-student institution in Iowa, when they introduced a guaranteed payment program in advance of the 2007-8 academic year. The goal, administrators said at the time, was to help "families to plan more effectively for the total cost of a college education at Northwestern," and better enable college employees to "advise students and parents on options to meet their financial needs."

Northwestern officials had some other goals in mind, too, and those objectives influenced the shape of the private college's guarantee and, in retrospect, may have contributed to dooming it. This is the story of one college's experiment with an approach to pricing that is attractive to many peer institutions -- and why it failed.

An Appealing Concept

It'd be a gross exaggeration to say that guaranteed, or fixed, tuition plans are about to take off. A relatively small number of individual colleges have adopted such programs in recent years (Finaid.org has a list of a couple dozen here, which includes costly institutions like George Washington and far less expensive ones, too).

But perhaps more notably, the idea has been catching the fancy of politicians and other public policy makers. States such as Georgia and Oklahoma have in the last two years adopted legislation requiring public institutions to at least offer guaranteed tuition options to students. Congress also adopted an amendment to the Higher Education Act renewal it passed last summer that, while stopping short of requiring colleges to lock in tuition rates, did require them to establish a multi-year tuition schedule or a single-year schedule with a "nonbinding" multi-year estimate of a student's net college costs.

Some colleges that have experimented with guaranteed tuition have been pleased with the results. Shawn M. Brown, director of college relations at Hiram College, said its officials believe that the Tuition Guarantee it introduced in 2004 has been among the factors that have allowed it to increase its enrollment from 700 to 1,100 in recent years. It began guaranteeing four-year, level tuition for the class that entered in fall 2005, with its tuition rising from $21,970 in 2004 to $23,510 in 2005, holding flat in 2006, and rising 3 percent in 2007 and another 3 percent, to $24,940, this year.

"We think the tuition guarantee has been helpful in recruiting students, who seem to appreciate the fact that tuition charges have been predictable," Brown said. "We market that against institutions where there are going to be unpredictable increases from one year to the next."

Northwestern College has always considered the education it offers to be a bargain, and has "sold" itself to potential students in those terms. For years, its annual cost of attendance was in the bottom third of the state's 27 private colleges, yet it regularly found itself in the upper third of those colleges in what it paid its faculty and staff, says Ron De Jong, vice president for external relations at the college. That disconnect was becoming increasingly difficult to sustain, he said,"as the cost of running the institution goes up."

As Northwestern officials talked about possible solutions, they concluded that "we should be charging more for what we're offering kids," De Jong says. "But how do you do that? Just take a great big jump in one year? That's tough, with colleges continuing to be raked over the coals for annual increases above the [Consumer Price Index]." It was in that context that someone raised the idea of a guarantee.

The logic, Northwestern officials reasoned, was that in discussions with families, most said that what they really wanted was stability. "A lot of people told us, 'If we know what it’s going to cost for a son or daughter our freshman year, we can plan that a similar amount will be needed to cover our share of expenses their sophomore, junior and senior year,'" says De Jong. "We were very upfront with them: 'This is not going to cost you less money than you would have paid, but it's going to help you plan as a family.' "

Unlike most of the other colleges that have adopted some version of a guaranteed or fixed tuition program that incorporates tuition only, Northwestern officials included room and board as well. They calculated what they believed the four-year cost of an education would be, divided it by four, and promised incoming freshmen in 2007-8 that they would pay that amount all four years. (Existing students were grandfathered in and were to pay incrementally more each year.)

Inevitably, under fixed price plans that spread future years' percentage increases across all four years of tuition charges, the freshman year price is higher than it would be otherwise, and often higher than those of competitors not on on a four-year plan. But Northwestern College's calculation was affected by other factors as well: not only by its decision to try to ratchet up its annual charges to price itself more reasonably, but also by its desire to slightly lower its "discount rate," or the percentage of its total tuition and fee revenue that it returns to students in institutional financial aid.

Northwestern's rate -- 38 percent -- is already relatively low compared to many of its competitors, which hover between 50 and 60 percent, De Jong says. Edging it downward even a little, as it sharply raised its annual cost to students, meant hefty increases both in its sticker price for new freshmen (to $28,500 from $23,500) and in the amount that it expected the average family to pay. If at $23,500, for instance, a student might have received a financial aid package (including federal aid) that covered $20,000 of those costs, at $28,500, that student might have received $22,000, requiring the family to pay $3,000 more.

"What happened is that it created a sizable gap between financial aid and the cost of attendance, larger than what families had been paying in previous years," says De Jong. "A lot of families said we can do that, because the education is worth it. But there were more families than normal that said, there's no way this pencils out for us as a family. We had more families that said, 'It just doesn’t work for us.' "

Tuition Up, Enrollment Down

Northwestern needs about 350 new students a year to make its economics work, and given its location in rural Iowa, hard by South Dakota and Minnesota, and "how difficult it is to generate a certain number applications to generate the size class we want," De Jong says, any significant downturn in enrollment is a problem, as it is for most small private colleges that aren't endowment-heavy.

But following enrollments of 363, 374 and 357 in the three previous years, the college drew just 325 new freshmen in the fall of 2007, and even fewer -- "just under 300" -- this past fall. "For the vast majority of families, we convinced them that this is a good thing," De Jong says. "But we just couldn't convince enough people" to make the enrollment guarantee work.

The flawed experiment with fixing its tuition price has Northwestern officials asking lots of hard questions, De Jong says, including fundamental ones such as "Is Northwestern's brand as strong as what we thought it was?" He and others there remain confident that "for many families, this is a great place and a place they'd like to have their son or daughter go to school," but "it has to pencil out financially."

The college is still penciling out its own calculations to determine where to peg its cost of attendance for the 2009-10 academic year -- a price that will not be fixed for four years. While that process is still underway, De Jong says in an e-mail message, one thing seems likely: "At this point, it looks as if the tuition, room and board costs will be lower than the guaranteed amount that we currently are charging our freshmen for the ’08-09 year."

 

 

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