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“This institution charges $50,000 for tuition. We have 2,000 students. That’s $100 million. Where is it? What did the administration do with all that money? Can someone just explain it to me?”
All across the country parents, students, alumni, faculty and staff concerned about and frustrated by the price of education utter similar statements. But the fact is that not all students (and in some cases, not even a majority) pay the full price of tuition.
Wait, what? Yes, the math is correct, but the numbers in the equation are incorrect. Why? Two words: discount rate.
In 2020 the National Association of College and University Business Officers surveyed 361 private nonprofit colleges and universities and found tuition was discounted an average of 53.9 percent for first-time, full-time, first-year students in 2020-21. Meaning: a tuition price of $50,000 is an average of $23,050 per student after discounts (scholarships). The purpose of a discount rate is to net the budgeted revenue and yield the number of students an institution can accommodate, and make sure each student is willing and able to continue for all four years.
Many people understand how buying and selling goods works. A car manufacturer has 2,000 cars to sell. There are different types of buyers: those who want the car and are willing to pay full price, some who need an incentive to purchase the car, and some who wish to buy it but can’t afford it. So, a car’s initial sticker price is $50,000, but the average sales price over all is targeted at $26,950 per car.
Some cars are sold at full price when the model first becomes available, later an incentive is offered to encourage buyers and when a new model comes out, last year’s model is further reduced. The goals are to ensure that all the vehicles are sold, new cars continue to be manufactured and some profit exists to pay for the rising production costs (materials, labor, et al.) and expand the business.
Higher education uses a related financial model. The following represents a very simplified scenario for the sake of clarity.
Let’s say an institution has the capacity to serve 500 first-time, first-year students. In order to net $23,050 per student, the price of tuition is set at $60,000 per year. After the recruitment process occurs, 4,000 students apply. Applicants who don’t meet the minimum admission standards are omitted from the pool, which leaves 2,000 prospective students.
Of those students, the likelihood of enrollment and success at the institution is evaluated. For example, if a student wants to study engineering but the institution doesn’t have an engineering program, the prospective student isn’t considered. Another factor may be the availability of space in a particular department. Perhaps the institution’s nursing program just opened and needs students; the focus becomes admitting potential nursing students. There are many steps in determining which students are offered admission.
After the pool is narrowed, the institution admits more students than necessary to meet revenue goals because not all will accept the offer of admission. Scholarships reduce the tuition price (or discount the price) to varying degrees. Some students pay full price because they can and they really want to attend. Some students who can pay full price and are highly qualified may receive a scholarship as an incentive because they have other choices. For students seeking assistance, financial aid packages are created to increase the student’s likelihood of accepting the offer. If calculated accurately, the optimal number of students will accept the offer and matriculate and, on average, will pay the price necessary to meet budgeted revenue.
Without a doubt an education has far more value than a car. However, the financial model used to sell cars and other goods is similar to discount rates in higher education. While this statement may lead to questions about the corporatization of higher education, the value of education and whether or not discount rates are sustainable, it is essentially how tuition revenue works today.
And the answer to “what happened to all the money from tuition?” is simple.
Nothing happened to it. It never existed in the first place.
