Discounting Heads

Despite spending nearly 43 percent of their gross tuition revenue from first-time, full-time freshmen on institutional aid for those students, many private colleges and universities had a harder time enrolling students last year, with almost half seeing no growth or a decline in enrollment for 2011, according to survey results released today by the National Association of College and University Business Officers.

The combination of higher discount rates – or institutional grant aid awarded to undergraduates as a percentage of an institution’s gross tuition revenue – and enrollment troubles at some institutions meant colleges and universities were not able to capture significantly more revenue from tuition increases last year. After all forms of aid were factored in, colleges increased tuition revenue only by an estimated 3 percent over last year, an increase that falls just under the inflation rate of 3.2 percent, and well below the 5 percent increase seen the year before. The problems were particularly pronounced at nonselective small colleges without much programmatic diversity.

Those findings, and others included in the survey, underscore that the market for students is becoming more competitive each year and that the high-tuition, high-discount strategy might be showing signs of faltering.  Private colleges -- particularly small, nonselective institutions -- may have to start thinking of new tactics to continue to draw students while ensuring budget stability.

“Given the decline in enrollment that a number of tuition-dependent institutions appear to have faced in fall 2011, institutions will need to be even more vigilant when making tuition discounting decisions in the years ahead,” said NACUBO President John Walda in a press release.

Discount rates have been climbing steadily since 1990. According to the survey, which the association conducts annually, the average amount that private institutions discounted tuition for first-time, full-time undergraduates in 2011 increased again in 2011 up to 42.8, almost a full percentage point more than 2010 and a 5 point increase from 2001. For all undergraduates, the discount rate is expected to increase to 37.2 percent from 36.4 percent last year.

Kathy Kurz, vice president of Scannell & Kurz, an enrollment consulting firm, said several factors could be driving the increase in the discount rate. For one, several states have reduced state aid programs that helped students at private institutions cover tuition costs, so those colleges are now having to help those students cover the difference. There has also been an increase in the amount of need that families are demonstrating, so while institutions might not be changing their aid policies, they may be forced to give out more in aid. Finally, private colleges and universities are facing increased competition from public institutions, which are offering competitive merit scholarships to lure students.

Institutions that accepted more than 50 percent of their applicants tended to have higher discount rates than did institutions that accepted fewer than 50 percent of applicants. An even clearer relationship existed between yield -- the number of admitted students who choose to enroll -- and discount rates. Institutions with higher yield rates saw lower discount rates than did institutions with lower yield rates, showing how important discounting is for securing enrollment numbers.

There is significant diversity of opinion among institutional leaders about how large a problem rising discount rates are, both for their own institutions and for the sector as a whole. Some higher education finance officials argue that as long as institutions continue to increase net tuition revenue -- or the institution’s per-student revenue after aid is awarded – by increasing tuition, high discount rates are not necessarily a bad thing.

Others argue that the continuous increase is a problem, particularly when institutional aid goes to students on some basis other than financial need.

In a survey of college and university business officers conducted by Inside Higher Ed last summer, about 28 percent of private college and university business officers said rising discount rates was one of their two biggest concerns, and almost 50 percent said the current discount rate was unsustainable.

Regardless of whether it is a problem, the leaders of most tuition-driven institutions have tended to view discounts as a necessary strategy to enroll the number of students required to fund their operations. But the findings of this year’s survey raise some concerns about whether that strategy will continue to be as effective as it has been in the past.

A majority of institutions reported that they experienced declines or no increase in first-time, full-time freshman enrollment for 2011, and about 45 percent said they saw no growth or declines in overall undergraduate enrollment. While those statistics include many colleges that have maintained a consistent enrollment level for years and have no plans for growth, the report noted that about 35 percent of institutions reported enrollment declines of at least 5 percent, a decline that could have a dramatic effect on the budget of a tuition-dependent institution.

“[The institution] raised tuition while attempting to lower our discount, hoping that our academic investments would be enough to attract students who would be willing to pay more for our offerings. This strategy failed, leading to our smaller entering class,” wrote one survey respondent.

The NACUBO study was not the first to report enrollment declines for 2011. A Moody’s report from earlier this year found that 41 percent of private institutions reported a loss in total full-time-equivalent enrollment between fall 2010 and fall 2011. A survey by Sallie Mae found that, on average, families spent 9 percent less on higher education in 2010 than they did the previous year. Higher education finance officials said this could be an indication that the recession drove families to shop around more than they did in the past. More students from high-income backgrounds are looking for less expensive options, and private colleges have to compete with that.

In anonymous replies included in the report, many business officers noted ways they were trying to lower their discount rates, such as recruiting more full-pay students. “We emphasized/recruited lower need families from out of state and reduced institutional aid to lower academic ability students,” one respondent wrote. “We reduced our incoming student discount rate by 1 percent.”

Measuring the discount rate and net tuition is always tricky because changes in the rate do not have the same effect on all institutions. Two institutions might have significantly different tuition prices but spend similar amounts educating students, so a higher discount rate might simply indicate a different enrollment strategy. Many institutions with large endowments fund a significant percentage of their aid from endowment returns, and increases in endowment spending do not have the same impact on an institution’s bottom line as does discounting tuition outright.

So for the first time, the NACUBO survey looked at what percentage of discounting came from endowment. The survey found that only about 10 percent of institutional grant aid is funded from endowment returns, meaning most institutions do not have a dedicated revenue source for funding aid. Institutions with endowments larger than $1 billion reported covering the largest proportion of aid through endowment returns, averaging 33.9 percent. Institutions with smaller endowments funded almost none of their discount through endowment returns.

Many college officials have said in recent years that increasing their endowments for aid purposes is a major component of current fund-raising campaigns.

One positive note from the report was that few colleges this year said they had to put in place austerity measures such as hiring freezes to maintain discounts and enrollments, meaning that some of the pressure placed on institutions during the economic downturn is starting to lift.

The study can be purchased at the NACUBO website. The report costs $50.00 for NACUBO members and $200.00 for nonmembers.