Pricing Pressures Escalate

The second economic crisis in a dozen years could take a bite out of colleges' ability to set prices, but pressures were mounting long before the coronavirus arrived.

April 27, 2020
 
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The coronavirus outbreak placed sudden downward pressure on the price of attending college this spring, as students being sent home from on-campus programs demanded room and board refunds and in some cases filed lawsuits seeking partial tuition rebates.

At first glance, it may look like a short-term disruption that will resolve itself once the public health threat is over and students can go back to campus. Some of the immediate pricing pressure stems from questions about whether students are willing to pay as much for temporary online substitutes as they will for an in-person education.

But as the crisis stretches on and prospects for in-person education this fall remain shrouded in uncertainty, it’s becoming increasingly clear that the pandemic is exacerbating a larger squeeze on college prices.

Even before the coronavirus hit, many colleges and universities were finding it difficult to collect enough money from students to meet rising costs. The traditional bread and butter for four-year campuses, wealthy white high school graduates, were expected to decline in number in parts of the country in coming years. And many families struggled to pay full price for big-ticket items like higher education after the uneven recovery from the Great Recession failed to lift all incomes equally.

Now, families face a second massive economic disruption in a dozen years, even as colleges don’t know when they’ll be able to say for sure whether they will be continuing remote education in the fall or bringing students back on campus. Speculation runs rampant that student behavior will change, with some sitting out the year and others enrolling in low-cost options or colleges close to home.

The disruption comes shortly after a federal investigation prompted changes to admissions counselors’ code of ethics -- changes that on their own were expected to significantly increase recruiting competition. That leaves many colleges scrambling to provide financial aid packages large enough to keep existing students enrolled or to convince new students to enroll for the first time in the fall, whether or not campuses open.

“We’re just being inundated with conversations coming at us in waves,” said Bill Hall, founder and president of Applied Policy Research Inc., a consulting firm based in Minnesota. “‘What do we do about the rest of the spring term? How do we prepare ourselves for any wave of money which we’re adding into packaging? Then what are the criteria we use for taking an appeal?’ And then, finally, we’re at the point where people are asking, ‘What if this goes into the fall?’”

Last week, the pricing pressures burst into full view as several colleges and universities across the country announced actions ranging from tuition freezes to steep cuts to options allowing students to defer tuition payments until well after the fall semester.

The College of William & Mary announced it would roll back a planned 3 percent increase for new in-state undergraduates arriving in fall 2020. Instead, the prestigious college in Virginia expects to hold tuition and mandatory fees unchanged for all students next year. Halfway across the country, Kansas City University took a similar step, announcing a tuition freeze and killing its own planned 3 percent tuition increase.

Christopher Newport University in Virginia announced it will not increase tuition, fees and room and board for 2020-21. Delaware Valley University in Pennsylvania froze undergraduate tuition and fees.

The University System of Maine launched a program targeted at students affected by the coronavirus outbreak. Under the program, called the Maine Welcome, the system promised resident tuition status to “any successful U.S. college student or law student displaced by a COVID-19-related permanent closure of a U.S. institution of higher education.” In Ohio, Franciscan University of Steubenville rolled out a plan covering 100 percent of fall 2020 tuition for new on-campus undergraduates, after scholarships and grants.

Davidson College in North Carolina unveiled an option allowing students and families to defer payment for the fall semester for up to a year. The prominent college in North Carolina will issue bills for the fall semester in July, but all students except for seniors will be able to defer payment until August 2021. Seniors who are graduating next spring will be able to defer until April 1.

Perhaps more significant than any other move was one announced by Southern New Hampshire University, a private nonprofit with massive online enrollment and scale.

It announced plans to cut tuition for campus-based learning models by 61 percent by 2021, down to $10,000 per year. Southern New Hampshire is also offering scholarships for all incoming freshmen enrolling on campus that will cover the full cost of their first-year tuition.

Those incoming freshmen are expected to live on campus but take courses online, allowing them to participate in the experiential side of the institution. Then they can continue with the $10,000 on-campus rate in their sophomore years, when new models based on online, hybrid or project-based modalities are expected to be ready.

‘We’re Looking at Everything’

Southern New Hampshire University looks like few others because of its size, scale and online capabilities. In normal times, the private nonprofit reported 3,000 on-campus students and 135,000 students studying online.

That massive enrollment helps make possible pricing experiments that might be difficult for smaller colleges and universities. Still, Southern New Hampshire’s tuition changes are connected to the larger environment.

The university is acknowledging that freshmen are enrolling in an uncertain time by providing full-tuition scholarships for those enrolling in on-campus programs this fall.

“We really de-risk for those first-year students,” said Paul LeBlanc, Southern New Hampshire’s president. “We think this turns out to be exactly the right strategy at exactly the right time.”

Southern New Hampshire had been working toward rolling out the new model in 2023, LeBlanc said. Then the pandemic hit. Current high school seniors don’t have the luxury of waiting a few years, so the university accelerated its plans.

“It’s not our timing of choice, but it’s what we need to do,” LeBlanc said. “This is not a response to the challenges of September 2020. It’s actually much more a response to the recession and this astonishing level of unemployment.”

LeBlanc cautions against seeing Southern New Hampshire’s announcement solely as a single-year pricing move. It’s paired with significant efforts to improve pedagogy and rethink assumptions about the way on-campus education works. Even though it’s being put in place on an accelerated schedule, the university has been laying the groundwork for quite some time.

“We’re looking at everything,” LeBlanc said. “We’re looking at the whole student life cycle. How do we leverage the kind of technology and platforms that we’ve built? How do we think differently about the structure and term of the academic year? Could we move to a 12-month academic year? Could we contemplate the student going around the calendar and graduating in two years, which removes two years of opportunity costs?”

That parallels something experts often say about pricing conversations: a college’s price is best considered in concert with market position, long-term strategy and developments in the broader higher education environment.

“There is downward pressure in pricing, but what we’re seeing is that what each institution should do is idiosyncratically different from what every other institution should do,” said David Strauss, a principal at Art & Science Group, a Baltimore-based consulting firm. “If you can’t afford to study and get the right answer, it’s usually the wrong answer over the long term.”

‘You Have to Be a Very Good Listener to the Market’

Signs of pricing pressure existed long before the coronavirus crisis exposed them.

The National Association of College and University Business Officers conducts an annual Tuition Discounting Study that looks at the sticker prices four-year private nonprofit colleges and universities post, the amount of financial aid they provide and the tuition discount rates that reveal what percentage of sticker prices institutions never actually collect from students. That study has also examined net tuition revenue -- the amount of money institutions do collect from students.

Net tuition revenue was largely flat in recent years, according to the 2018 discounting study, the most recent available. Across all types of private institutions in the study, net revenue per first-time, full-time freshman rose by just 0.4 percent without adjusting for inflation in 2018-19. It fell by 0.8 percent in 2017-18.

“I think there’s been downward pressure on price now for some years,” LeBlanc said. “It’s been a little bit masked for many privates because of the way it’s manifested in the discount rate. They have been effectively lowering their price without saying it publicly across many institutions.”

Even so, the current crisis is accelerating that pressure. Research is showing that students and families are thinking about staying closer to home than they normally would, according to Stephanie Dupaul, vice president for enrollment management at the University of Richmond.

“This is already the safety-focused generation; this will just increase that focus,” she said in an email. “And cost has become a significant factor as these high school students are now watching their parents go through a second economic crisis.”

Even well-off students seem likely to try to minimize risks in this environment, said Allen Koh, CEO of Cardinal Education, an education consulting firm that caters to wealthy families seeking admission to elite institutions.

“You’re going to start seeing an unprecedented number of kids who are going to college in the fall who will do summer school at a community college to try to get some general education requirements cheaply,” he said. “You’re going to see a lot more students take three years to graduate, and you may even see this impact medical schools and law schools.”

Different admissions officers and experts have theorized that well-off families could hedge their bets by putting down deposits at multiple colleges. Doing so would allow them to select the best option of price, prestige and location once the extent of pandemic-related shutdowns becomes clear for the fall, all while dodging traditional spring commitment deadlines.

It would also throw enrollment, yield and summer melt models into disarray over the summer, leaving some colleges without their most lucrative students on short notice.

Some experts also believe gap years could become more popular if students don’t want to take the risk of enrolling at all in an uncertain environment. Other students may scrap all plans to attend college, particularly if mounting financial troubles make higher education seem unattainable for first-generation students or those with little savings. Data show declining completion rates for the Free Application for Federal Student Aid, indicating that at least some students may be rethinking college attendance next year.

At the same time, students who would have been likely to attend prestigious second-tier institutions are now focused on entering the Ivy League, Koh said. Families that continue to have a large amount of wealth -- those that pay the full cost of tuition -- are always sought after. But they’re even more valuable to colleges today, when less wealthy students have larger financial needs and rising coronavirus-related costs are stretching budgets across the board.

In other words, wealthy families suddenly enjoy even more leverage than they had before. The most prestigious institutions in the country are most able to choose their students, so they are most able to shield themselves from pricing pressures.

“Very prestigious schools and schools with strong endowments, they won’t do anything on pricing for at least this admissions cycle, maybe two,” Koh said. “It’s hard to raise prices after a massive deduction. Plus, universities just have too many fixed costs.”

Still, universities of all types could feel at least a net revenue pinch because of uncertainty in international student enrollment. As wealth levels and the number of traditional high school graduates have leveled off in the United States, many colleges and universities leaned heavily on international enrollment, which produces a large number of students paying high prices.

Now, Koh asks if international students will be able to fly to the United States to attend college in the fall. Will the federal government grant them visas? Will they want to come?

All those pressures translate to difficulty for institutions that would normally be considered safe from enrollment and pricing shocks. That makes moves such as Davidson’s tuition deferral worth watching closely.

The deferral option at Davidson applies to tuition and fees as well as room and board for the fall. All or part of family contributions can be postponed. Davidson left open the possibility of expanding the deferred tuition option to the spring 2021 semester.

A Davidson spokesman declined to provide any estimates of financial costs associated with the deferral option being offered to students because of uncertainty. In emailed responses to questions, he emphasized the college’s community.

“The option to defer fall tuition springs from the sense of community that makes Davidson distinctive,” the spokesman wrote. “We share in each other’s celebrations and support each other in our struggles. This is an expression of who we are. The option to defer payments is an act to help our students and their families, to make it easier for students to return to -- or start -- their educational experience at Davidson.”

Depending on how it’s structured, such a deferral program could carry risks for students, families and colleges. It could mean families facing not one but two tuition bills next year, experts pointed out. If families can’t pay, any college offering a deferral plan will be left with a financial hit.

Even so, it’s one way to shift billing and address short-term market shocks.

Other colleges and universities that rely on the on-campus experience to attract students may not have the financial resources to spot families the cost of tuition for a significant period of time. Tuition-dependent small private liberal arts colleges that tout small class sizes and intimate campuses are scattered across the country. What happens if they’re unable to leverage that close community to attract new students in the fall?

What happens if the pandemic prevents students from returning to campus in the fall, prompting rising sophomores or juniors not to re-enroll? What if those students reason that paying a liberal arts tuition for an online experience makes no sense when they can just as easily pay a lower price point at a fully online college?

Melody Rose was the president of Marylhurst University outside of Portland, Ore., when it closed in 2018. She is now working on a book tentatively titled Achieving Graceful Transitions in Higher Education and is a senior consultant for the Association of Governing Boards of Universities and Colleges.

“I think if you’re a small private or public regional institution without a lot of investment capacity in an online pivot, and the very reason people select you -- the community, the intimacy of small in-person classes -- is gone, then you may be facing an existential crisis by fall of 2020,” Rose said.

Should the coronavirus force campuses to remain closed in the fall, long-term questions about pricing pressure may fade into the background in lieu of the newly burning question of for what, exactly, students at traditional campuses were really paying. Was it credit hours or the full in-person experience, rich with living among fellow students, taking part in activities and receiving a full slate of support services?

As much as some administrators may want to argue that students will be willing to pay full cost for a short-term remote learning substitute, the spate of class action lawsuits filed after students were sent home this spring suggests other scenarios.

For now, however, that question remains part of a larger environment of uncertainty that continues as spring admissions season enters its critical phase. Hundreds of universities have postponed decision day, when deposits are due, from May 1 to June 1. Coming days and weeks will still be crunch time, when many high school seniors will decide where to attend college after summer’s end.

“It’s difficult to feel very confident about how some of these key value points might play out, and that’s especially true in that competition for students,” said Peter Stokes, managing director at the consulting firm Huron’s education strategy and operations group. “You have to be a very good listener to the market in order to compete effectively in a highly dynamic situation.”

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