Discounting the Bottom Line

Private colleges and universities discounted tuition at unprecedented levels during the recession in a way that slowed down or reversed the growth in net revenue from tuition, according to a new report from the National Association of College and University Business Officers.

The discount that surveyed colleges and universities offered for full-time, first-year students through grants and other forms of need-based and merit aid hit an all-time high of 42.4 percent in 2010, a jump from about 39 percent in 2007. The report estimates that 88 percent of students at the institutions surveyed received some institutional aid, and those students paid about half of the college or university's sticker price.

That increase in the discount rate came at the expense of growth in net tuition revenue. While net revenues grew at about 5 percent for five of the years between 2001 and 2007, tuition revenue dropped 0.3 percent in 2008, and grew only 1.8 percent and 2.8 percent in 2009 and 2010, respectively. That means that institutions did not gain nearly as much revenue as their tuition increases would suggest, and that many institutions saw gains in tuition revenue that lagged the inflation rate.

The association surveyed 381 private, not-for-profit institutions about how they discounted tuition in 2009 and 2010. The survey’s findings include a general trend toward more money being spent on institutional aid and a larger number of students receiving aid, both of which created financial difficulties for some institutions.

The report notes that increases in discounting “have come at a cost to a large number of institutions. Net tuition revenue has recovered for some institutions, but the rate of growth in net revenue remains below the average achieved before the onset of the downturn. Many institutions have implemented hiring freezes and other austerity measures to make up the resulting budget gaps.”

Discounting is part of a tug-of-war that colleges and universities play with their enrollment numbers and bottom lines. They place their sticker price beyond the reach of many potential students but make up the difference between that price and what a student can or will pay through institutional grants and scholarships. Proponents have argued that there are some psychological benefits to having a high sticker price, such as the perception of quality, and high discounting, such as the value a student perceives when he is offered a large package.

The strategy pays off financially when enough students can pay the sticker price. But when too few students pay sticker price, too many students need large aid packages, or enrollment numbers aren’t met, colleges and universities that depend on tuition revenue are put in a tight spot financially. Moody’s Investors Service reported last year that 15 percent of private institutions could face stagnant or falling revenues for the 2011 fiscal year because increases in discount rates outpaced increases in tuition rates.

While tuition discounting is fairly common among private institutions, some colleges have not embraced the high-cost, high-discount model, and have benefited; officials at these institutions say their strategy decreases volatility. And some organizations have begun documenting the drawbacks of discounting. But if a college or university cannot meet enrollment goals without discounting, proponents say it makes more sense to discount to fill the seats and get what revenue they can from discounted tuition.

"It's possible that institutions could have had greater losses in net tuition revenue instead of the small gains this year had they not increased the discount rate," said Natalie Pullaro, manager for research and policy analysis for NACUBO and the report's author.

The report’s findings help illustrate the delicate balance that colleges and universities have to strike when discounting tuition and some of the problems that arise from the practice during tough economic times.

Nearly 88 percent of first-time, full-time undergraduates received institutional grants in 2010, the survey estimates, a jump of about 5 percentage points from 2007 and 10 percentage points from 2001. The report attributes the jump to more families with financial need during the past few years. About 71 percent of institutional aid was given out to students who met financial need criteria, while about 29 percent was awarded on non-need criteria. Some critics of discounting say money is often given to students who don't actually need assistance, and in 2008 almost 42 percent of discounting aid was given without regard to financial need.

Since a peak in 2008, however, the report notes that the average percentage of tuition covered by financial aid per student actually dropped, which suggests that colleges and universities had to lower the amount they gave to each student to help cover a larger number of students.

Between 2008 and 2009, while the total amount spent on institutional aid for freshmen rose, the average amount that institutions spent per student actually dropped slightly. “This finding suggests that during the height of the economic crisis a number of survey participants were shifting their grant dollars away from the larger population of undergraduates to cover some of the increased aid directed at freshmen,” the report states. Colleges and universities could have been shifting money away from upperclassmen to ensure that first-year students enrolled.

In a section of the report where NACUBO shared anonymous comments from college budget officers about how they coped with shortfalls, the responses varied widely. One official noted that his college increased institutional aid 14 percent for 2010-11, while tuition only went up 5 percent. Another official noted that enrollment at his or her college came in above projections. Many say they enacted cuts and hiring freezes and increased tuition rates and enrollment numbers in other areas to ensure that student need was met.

Pullaro said the percentage that most institutions discounted tuition clustered in the high 30s and low 40s, but a few colleges were significantly higher or lower. Baccalaureate institutions tended to discount tuition the most -- an estimated 44.3 percent -- while doctoral/research universities discounted tuition an average of 38.6 percent.

Because colleges and universities did discount tuition at greater rates, the report notes, they likely averted the greater financial calamity that could come with lower enrollment, since many of these institutions are heavily dependent on tuition revenue.

"The survey results do suggest that increasing discount rates may have benefited some institutions," the report states. "Undoubtedly, a number of institutions would have experienced declines in student enrollment if they had not increased grant spending at the height of the recession. That is, colleges and universities may have faced even greater financial difficulties if they had not reacted to the financial constraints facing students and families by raising their institutional grant expenditures."

Because some institutions have increased enrollment or tuition rates to compensate for increased discounting, the report notes that some may have positioned themselves to see greater returns in the future. But the report also observes that "it may be some time before institutions see the year-to-year gains in net tuition revenue they experienced before the beginning of the economic downturn."

The study can be purchased at the NACUBO website. The report costs $29.95 for NACUBO members and $39.95 for nonmembers.