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Small private colleges steeply cut their sticker price, but will it drive down college costs?

Converse College promotes its tuition cut.
Paper (Tuition) Cuts
September 16, 2013

A spate of small private liberal arts colleges are dramatically slashing their sticker prices in an effort to, they say, tell the truth about the real cost of college, help families and attract new students.

The price cuts – which, for some students, may be more on paper than actual reductions in out-of-pocket expenses – are not a new phenomenon, but the rate at which small colleges are adopting the maneuver, as well as tuition freezes, appears to be picking up speed.

In the past few weeks, two colleges -- Ashland University in Ohio and Converse College in South Carolina – each announced reductions of more than $10,000 a year for students who enroll in fall 2014 and pay full price. They join other institutions that have announced similarly big cuts, including the University of Charleston in West Virginia, where cuts took effect last year, and Concordia University-St. Paul, where cuts took effect starting this semester. These announcements have received considerable attention, with typical headlines for Converse along the lines of, "This college is slashing its tuition by 43 percent."

The colleges each portray the efforts as a path to reducing the financial burden on students. And, indeed, they may, but not nearly as much as at first glance. That’s, in part, because the colleges have reduced their sticker prices to about what most students are paying already, given all the scholarships and aid that colleges give to lure students to high-tuition institutions. Hardly anyone was paying the old sticker price anyway.

The cuts are neither a panacea for small private colleges nor a true solution for the ever-rising costs of higher education in America, according to others who have tried. Some also predict that, done improperly or by the wrong institution, tuition cuts could ruin some small private colleges by decreasing their allure. 

Converse spent about a year and a half looking at its tuition prices and decided to cut them by 43 percent. Officials discovered that most students were paying about $17,000 even though the college’s advertised price is about $29,000.

“We realized just how incredibly affordable we were once you cut through all the published rates,” said President Betsy Fleming.

Some students and families, of course, didn’t realize that either, and so may have shied away from applying. “We looked at it as being very confusing," she said, “saying, Well, we cost this much, but don’t worry, we’ll help you figure out how to make it affordable.”

So, the college said last week it would start charging students what most of them were actually paying. Its fall 2014 advertised tuition for all traditional undergraduates will be $16,500.

Fleming said an end to the “high-tuition, high-discount model” will help attract new students who were scared away by the old sticker price. 

It could also help to retain some middle-class students who were caught in a doughnut hole: too wealthy to qualify for need-based aid and too poor to be able to easily afford college using their own money or loans. “When we announced it to our students there were incredible cheers of gratitude, even tears -- students coming up and saying, 'This is going to help out my family so much,' ” Fleming said.

Fleming said all students will be paying less, while the college does not project any revenue losses because it expects enrollment increases due to the cuts. It is also working to control costs.

In late August, Ashland announced a similar deal. It said it would cut its advertised tuition price by 37 percent in fall 2014 to $18,908 from $30,064. 

Scott Van Loo, vice president for enrollment management, said he did not see the high prices as sustainable.

“If we did lower our price point, the price objection to our model would change,” he said, referring to the scare factor of a high price tag.

Van Loo said while some students and families understood the advertised price was not usually what they would end up paying, others were scared away.

At the higher price, he said, "families would not consider us or students would not consider us and they deemed us unaffordable."

Ashland's students generally paid $20,000 in tuition even though this year's full price tag was about $39,000, including $9,502 in room and board costs. The new sticker price for fall 2014 will be $29,354, including room and board, but officials expect the average student will still actually pay roughly $20,000.

Until recently, colleges had been benefiting from an ever-increasing number of high school graduates and the easy availability of loan money, partially through home equity.

Now, high school graduate numbers are projected to stay flat or fall in most states and, following the downturn, the home equity loans that helped many middle-class families are hard to come by.

To adjust, the colleges making dramatic sticker price cuts are clearly looking to drive up volume by attracting students who thought they were priced out of the institution.

“If an institution sees (enrollment) growth through this type of change, they will see positive revenue outcome," Van Loo said.

That has so far been the case at Concordia, which announced last year that it would cut its tuition price by $10,000 to $19,700 for this year’s students. This fall, Concordia had 104 more new freshmen and 79 more transfer students on the first day of class compared to last year; it also saw an increase in the student retention rate.

“We definitely are filling up classes, that’s for sure,” said Concordia's senior chief of operations Eric LaMott

It’s not clear, though, how well this model will work in the long term, either to attract new students, increase sustainability or really drive down the cost of college.

'Not a Panacea'

The University of Charleston tried a $5,000 cut in sticker price for all new students starting in fall 2012. The change, said President Ed Welch, did not cause a dramatic enrollment increase, though it did attract some new middle-class families.

“My judgment is that reducing the sticker price brings some additional students to look at the institution and then we were successful in converting those additional students, but it was not a panacea that placed us in an entirely new marketing segment,” Welch said. “It seems for schools that aren’t in the high brand category you probably have to reduce your tuition by $10,000 or something really dramatic -- then you’re really competing with the publics without public money.”

Welch and Roger Williams University President Donald Farish both cautioned that colleges could see their price reduction plans dramatically backfire. Both cited the example of J.C. Penney, which had long brought in customers with sale prices. Then a new CEO came along and tried an everyday low prices model. The plan backfired because shoppers used to getting good deals on higher-priced goods were being sold what seemed to be just cheap clothes. The high-discount model does work, they said, citing Jos. A. Bank, which always offers steep discounts on suits; it rarely if ever sells them for the "full price."

“The sad thing is that applies apparently to higher education,” Welch said.

Officials at Roger Williams, which is in Rhode Island, studied doing dramatic price cuts and concluded it could torpedo the institution, Farish said.

The university hired Maguire Associates to check the opinions of students and parents. Would they prefer a $36,000 tuition and $13,000 in aid or would they prefer $23,000 tuition?

By a 2 to 1 margin, parents and students preferred the higher tuition and the chunk of aid.

Farish said the logic is that if $13,000 is the average, parents don’t want to forgo the opportunity of “winning the jackpot” and getting more money.

“The other lesson we learned is, congratulations higher education, you’ve converted higher education to a commodity,” he said.

So, Farish decided to do something else: he would start guaranteeing students four years of the same tuition rate. That doesn’t mean Roger Williams won’t increase tuition on each incoming class – though it has been able to freeze tuition this year and next – but it does mean parents and students know coming in what they will pay going out. The university is also emphasizing its efforts to provide experiences that help students get a job after they graduate.

“Our object is to say, 'We’re in this with you, folks,' ” Farish said.

This fall, the university saw a 10 percent increase in freshman enrollment and a 5 percent increase in the retention rate from freshman to sophomore year.

Because of that, Farish said Roger Williams will bring in more revenue than if it had increased tuition by 3 percent. That would have brought in $3 million in revenue but half of that would have had to go to financial aid, he said. Now, the enrollment and retention increase has netted the college $1.8 million.

David Strauss, who advises colleges at the enrollment management consulting firm Art & Science, said whether dramatic sticker price cuts will help institutions depends on “idiosyncratic” factors.

His firm, for instance, has done modeling for institutions where boards have been interested in dramatic price reductions and dramatic reductions in aid. “We haven’t yet found that institution where it makes sense,” he said.

Instead, his firm found institutions could see their class sizes shrink by half or more because students previously attracted by the higher price would be turned off.

Strauss said there are often short-term bumps in enrollment, but these, he said, may have more to do with buzz generated by dramatic announcements. “Anything in its first year or second year, I wouldn’t pay attention to,” Strauss warned.

Another consulting firm, Noel-Levitz, reached a different conclusion, at least when it advised Concordia and Converse, said its CEO, Kevin Crockett.

He said institutions are charging few of their students the actual sticker price to begin with. At Converse, for instance, only about 1 in 10 students were actually paying the $29,000 the college claimed to be charging. “That always raises a question: Why are we charging a high sticker price if we are not able to achieve that from very many families?” Crockett said.

He said colleges that change their pricing structure may not be able to hang their hats on the change forever for marketing purposes, but the change creates a fundamental change in the institution’s mindset.

Crockett said there are also some colleges where tuition reduction may be unneeded. These are colleges that have more of their students paying full price to begin with.

“Clearly for any school that has the ability to command fairly close to their sticker price from a reasonable number of students – 15 to 25 percent – this doesn’t make a lot of sense,” Crockett said.

At least one institution has long experience with dramatic tuition cuts: Muskingum University in Ohio. The university announced it would cut tuition from $14,000 to $10,000 for students in 1996. To do so, it reduced financial aid.

The cut helped it attract new students and grow from an institution with about 1,050 full-time undergraduate students to about 1,550, said Jeff Zellers, Muskingum’s longtime vice president for enrollment.

Tuition steadily rose, but it took eight years before it was back to where it had been priced before the cuts were made, Zellers said. In the meantime, the university was able to attract more students with its lower price tag and, in part, through press coverage and word of mouth.

“It really did at least result in enrollment growth for us, which is exactly what we wanted,” Zellers said.

Now, ironically, Ashland, which shares some of the Ohio market with Muskingum, is trying the same game, and against Muskingum.

Zellers said that even with the price cuts, Ashland will not be cheaper for each and every student, depending on their circumstances -- because of aid packages.

“They are not trying to be cheaper for every single student – or else they will have to have significant budget cuts,” he said.

And, ultimately, he said the price cuts – which, after all, are mostly on paper – are not going to drive down the costs of higher education in general. Those are driven mainly by personnel costs. 

“This is not the answer to the cost of higher education – it is not the big picture answer, I will fully admit that, knowing exactly how it works and knowing exactly how beneficial it was for us, and knowing that there wasn’t a student that was worse off for coming to us,” Zellers said.

 

 

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