Price Points

July 13, 2011

TAMPA, Fla. -- Discussion of discount rates, a prominent topic in higher education finance circles for so long, seemed almost nonexistent here at the annual meeting of higher education finance officers, but not for the reason many might expect.

Historically, college and university business administrators have worried that the discount rate -- put simply, the difference between their sticker prices and what students pay, on average, after accounting for financial aid -- was slowly creeping up to a level that was undermining institutions' revenues. The recession drove that rate to an all-time high of 42.4 percent in 2010. In a recent survey by Inside Higher Ed, 34.1 percent of chief financial officers said their current discount rate was unsustainable. These percentages were particularly high at private master's (54.4 percent) and baccalaureate (51.4 percent) institutions and public doctoral universities (31.9 percent).

While that concern was reiterated during discussions over the last four days at the annual conference of the National Association of College and University Business Officers, it wasn't the main reason the term was so out of favor.

Rather, a group of finance officers and consultants argue that "discount rate" is too simplistic an idea, especially during the recession. Tuition, financial aid and enrollment are too complex and intertwined to be filtered through a single metric like the discount rate, they say, and they fear that doing so could undermine institutions' financial health by driving down enrollment. This has been an issue for the past few years at colleges that refused to raise their discount rates to cope with increased financial need during the recession, which caused many students to drop out or decide to go to other, more affordable schools.

These officials prefer to focus on "net tuition revenue" -- the amount of money derived from each student after aid is subtracted from sticker price. They want to shift the conversations away from the discount rate toward a more integrated approach to tuition, literally striking "discount rate" from strategic plans, and make the concepts of net revenue and the actual price of college more apparent to the public, lawmakers, and potential students.

Their general argument is that colleges and universities that are heavily dependent on tuition revenue to cover expenses -- a group that is growing as states cut support, donations lag, and endowments show smaller-than-expected returns -- are going to have to ensure greater collaboration between enrollment and finance officers to make their bottom lines. It is separating the two departments, or trying to accomplish goals in one realm without taking the other into account, that is actually the unsustainable practice.

"You need chief financial officers who care about the head count and chief enrollment officers who are guardians of the bottom line," said William Hall, who runs a tuition consulting company called Applied Policy Research.

Hall, who organized two sessions on tuition at NACUBO's conference, is a champion of greater integration of business and enrollment functions. He views sticker price, financial aid, and enrollment as three corners of a triangle. Shift one, and the other two will probably have to be moved as well. If a college wants to raise additional revenue by raising its tuition, its officials need to understand what that will require from the financial aid office and how the change in sticker price and financial aid are going to affect enrollment.

"We know that more financial aid means more opportunity," Hall said. "More opportunity means more students, and more students should mean more money. You're probably better off getting that extra dollar where you can than losing a student."

And to better manage their head counts and bottom lines, admissions and financial aid offices are going to need better data than what they're currently working with.

Mary Piccioli, an enrollment management consultant with Scannell & Kurtz, who organized a different session on how the recession affected tuition, said colleges and universities need to develop better tools to analyze how changes in sticker price, financial aid, and quality all interact. Databases that show how net tuition breaks down among different student demographics -- such as test scores, high school performance, gender, or ethnicity -- can help show how advancing one enrollment goal might affect others. She gave an example of a college where students with low standardized test scores paid higher average tuition than higher-performing students.

"SAT scores can go up, but you're going to pay for that quality," said Samantha Veeder, director of financial aid at Nazareth College, who presented with Piccioli.

Changing the Conversation

Hall is a big proponent of stripping the language of "discount rate" out of planning entirely, and encouraged both Valparaiso University and the College of St. Benedict to do just that.

Valparaiso's previous strategic plan included the goal of "lower[ing] the unfunded discount rate by judiciously reducing the amount of unfunded aid." Unfunded aid refers to any aid dollars that don't come from a restricted source; at many colleges it is just tuition money that is taken in and earmarked for aid, often based on academic or other kinds of "merit" rather than financial need. Most measures of a college's discount rate include money that comes from endowed scholarships or other forms of institutional aid, even if that money can't be directed toward other uses.

Valparaiso officials are hoping to increase these sources of aid, which would correspondingly increase the university's discount rate, but still bring in more revenue over all. Under the new plan, which makes no mention of the discount rate, “VU will develop a net tuition revenue model matching enrollment growth and tuition revenue to sustainable levels of unfunded aid by striving to increase funded aid.”

St. Benedict made one of the goals in its most recent strategic plan to "annually increase net revenue per student" without focusing on the discount rate. For the upcoming year, it raised its tuition rate 6.5 percent -- more than most colleges of its size -- and correspondingly increased financial aid. In the end, the college increased net revenue.

Not only do the conversations on campuses need to change, presenters said, but also how college and universities sell the idea of net tuition to prospective students and their families.

In a speech to convention attendees, Jim Collins, who has written several books on business practices, stressed that it is time to worry when the price of something divided by the consumer price index is greater than one. In higher education, tuition hikes have grown at about five times the inflation rate.

But unlike sticker price, net revenue has held fairly close to the consumer price index. That doesn't matter, presenters said, if nobody knows it. "Here we talk about sticker price as if it doesn't matter," said Tom Weede, vice president for enrollment management at Butler University, who joined Hall and others for a presentation. "The only thing the public knows is sticker price! If the net rate is only going up by the inflation rate, then we should tell peoplethat."

Like Weede, several of the presenters stressed the need to have transparency in the aid process and to make it clear to students that sticker price is rarely what they end up paying. When presenters asked the audience if their colleges provided net price calculators, as will be required by the federal government starting in October, only about a quarter of the hands went up. While these tools may make the process more transparent, presenters worried that they may be too complicated for many families or too difficult to find, and said that other steps would need to be taken.

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