Don't (Dis)count Them Out

September 21, 2009

The summer headlines had private college trustees sweating. The bottom had fallen out of the economy, tightening credit markets spread fear about the availability of student loans, and students’ parents were getting pink slips in record numbers. As concerns grew about the prospect of faltering enrollments, many small, tuition-driven colleges decided to ratchet up a tried and true strategy: tuition discounting.

College presidents frequently lament that they have to engage in tuition discounting, but they say it’s a necessary evil to remain competitive. The increasingly common practice typically involves placing the sticker price of attendance beyond the reach of many families, only to effectively slash that price by offering institutionally funded financial aid to many or even most students. The practice is often criticized because much of the aid goes toward students without demonstrated financial need.

Between the early 1990s and 2007, average tuition discounts for first-time freshmen grew from 27 percent to 39 percent, according to the National Association of College and University Business Officers. While there’s no survey data available for 2009, many college presidents say they offered even larger discounts this year -- convinced that it was necessary to double down at a time when affordability was such a concern for families.

Photo: Marymount Manhattan College

Judson Shaver says a lower discounting rate has proven effective at Marymount Manhattan.

Increased discounting may have looked like an appealing strategy this year, but trustees at Marymount Manhattan College resisted. The college slowed its tuition increases, and also held down its discounting to an average of 21 percent -- about half the rate of the 2007 NACUBO average. The 21 percent rate was only about a percentage point higher than last year, and despite what some might have predicted, Marymount didn’t take it on the chin. On the contrary, the college expects to enroll 1,766 students this year -- 93 more than Marymount’s best-case-scenario projections.

The college’s expected enrollment levels don’t just exceed this year’s expectations -- they exceed 2013 expectations. Last year, the board approved a five-year strategic plan, calling for enrollment to reach as high as 1,750 in five years; Marymount eclipsed that goal in one year.

“We’re still in the low price, low discount arena, and that’s consistently been our strategy,” said Judson Shaver, the college’s president.

"Low price" is in the eye of the beholder. Marymount, a college known for its arts programs situated in a cultural mecca, will charge $22,700 this year -- a 4 percent increase over last year. That's higher than nearby public institutions in the City University and State University of New York, but some of Marymount’s overlap institutions charge more than Marymount. Tuition at St. John’s University, Marymount’s number one competitor, is $29,350 this year.

By holding discounts to a relative minimum, Shaver says there’s less volatility in the budgeting process. High discounting is a high-risk, and potentially high-reward, business that Shaver says he’d just assume stay out of altogether. Big discounters ideally enroll a large number of students who qualify for relatively small aid packages, boosting their total tuition revenue. Discounting can be a dangerous game, however, because revenue can take a dive when just a few more high-aid recipients than expected accept the offer.

“You could hit your enrollment number exactly, but your yield rate -- if it was off five points [higher than expected] on those groups [who qualify for high aid] -- you wouldn’t have the net revenue that you’re looking for,” Shaver said.

So how did this discounting get started? Some believe the high tuition, high aid model creates a Chivas Regal effect. So named for a high-priced Scotch whiskey, the Chivas effect suggests that people weighing the merits of two similar institutions will tend to think the more expensive one is superior. There’s also a compelling case to be made that students and their families are apt to attend high-discount institutions because they’re flattered by the offer of aid and perceive the large discount as a good deal.

While there may be some psychological gamesmanship at play in tuition discounting, the bottom line is that it can be lucrative for universities that enroll a large number of students who don’t qualify for high aid packages, Shaver said.

“Our strategy is just a more conservative one, and it suits us because we don’t have a great endowment to fall back on, and we just feel better managing things more conservatively,” he said. “As a consequence, we have no variable debt. We don’t need a line of credit; we’re hiring faculty, hiring staff, and we have more students than we planned on. We feel like it really works.”

If there’s a knock on Marymount’s approach, it’s that smaller discounts mean less aid for needy students. The college, which gives discounts to about two-thirds of its students, has budgeted $8.9 million in aid this year. Of that aid, only about half of will go toward students with demonstrated financial need. While other colleges are more heavily invested in merit aid, Shaver has heard criticism before that the college’s model doesn’t serve as many needy students as it could.

“We serve very high-need, fairly high-risk students; and we serve some of the children of very wealthy families,” he said.

“I remember once having a conversation with one trustee who made the argument others have made that our approach subsidizes wealthy students,” he added. “That individual trustee was readily persuaded that he and I would rather sleep well at night [with low discounting] than to try to do that kind of social engineering.”

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