More Private Colleges Are Likely To Change Their Pricing Strategy As The Tuition Discount Rate Reaches 53% And Financial Stress Escalates

The latest data from the National Association of College and University Business Officers indicates that new freshmen at private colleges and universities in the fall of 2019, on average, received a discount of 53% on tuition meaning that students paid less than half of the published price. In addition, 89% or almost all of the incoming freshmen received aid from the college or university that they were planning to attend and the average award equaled 60% of the published price. This represents a significant change in the pricing policies in higher education over the last 30 years. In 1990, the discount rate was only 27% and only 63% of new freshmen received institutional aid; thus many students paid the list price for college and the average award was less than half of the published tuition price.

Over the last 30 years, the discount rate has almost doubled, while the percent of students receiving institutional aid increased 41% and the average award increased 36%. While intuitions have significantly increased the aid they provide over this period, their strategy has been to spread the aid to almost all students while tempering the size of the awards. In part, this is because most students and their parents want a “deal;” thus tuition schools have continued to increase their price and increase their financial aid almost as much. The increases in tuition during much of this period have resulted in only small increases in net tuition revenue at many of the private colleges and universities.

Freshmen discount rates are highest at baccalaureate institutions where the median rate was 57% in fall 2019 compared with 56% at master’s degree institutions and only 48% at doctoral granting institutions. Doctoral institutions, where the average freshmen enrollment is almost three times higher than at baccalaureate institutions, are able to attract students at prices closer to their published tuition than smaller schools. The greater market power of larger schools has held over the last thirty years ago, small colleges had average freshmen discount rates of 28% in 1990 compared with large schools whose discount rates averaged only 20%.

Fewer than 25% of the private colleges and universities have average freshmen discount rates that are less than 40%. At baccalaureate institutions, a quarter of the institutions have freshmen discount rates that are 65% and higher while only a quarter of the doctoral institutions have a discount rate above 56%. Getting financial aid is much more likely at smaller private institutions.

Most institutions have been following a strategy of annual increases in tuition and have experienced only small or no increase in the net tuition revenue per student because of the increasing discount rate each year. In addition in fall 2019, like many recent years, almost half of the schools experienced declines in their freshman class. Many schools are coming to the conclusion that the strategy of continually increasing tuition along with increased financial aid has not resulted in either the desired size for their freshman class nor the total net tuition revenue that they need. This has led schools to begin to try different tuition strategies.

In the last three years, twenty private colleges have reduced their tuition in an attempt to bring the published price much closer to the net price that students are actually paying. This is a strategy that is expected to increase the number of applicants as more students will look at schools with lower sticker prices because they are more affordable to them. Reducing sticker price also has the advantage for many heavily discounted schools of bringing their tuition much closer to the tuition of their public competitors and public institutions are usually the most serious competition for private colleges. Other schools have frozen their tuition, guaranteed their tuition for four years either with no increase or increases related to inflation, some have provided free or heavily discounted summer school courses as well as a variety of other strategies to reduce their net price. Despite the disappointing results that many schools experience, most choose to continue with their strategy of increasing tuition and increasing their financial aid awards hoping each year that the results will be more positive than the prior year and most have not had particularly positive experiences.

The actual discount rate for the 2019-2020 year is likely to be higher than what is reported here as it is based on awards made in the fall. Many students have been experiencing financial hardship with the pandemic and schools have tried to provide some with additional financial aid. There is tremendous uncertainty about what pricing and net tuition revenue will actually look like next fall. Most four-year schools are projecting enrollment declines and increased demand for financial aid given the pandemic and the current economic situation. In addition, schools are considering what they will have to do with their price if they are online in the fall as most students indicate that they will be unwilling to pay the net price that was expected of them if they were on campus.

I would expect that we will see lower net tuition per student and lower total net tuition revenue next fall. The decreases are likely to be significant enough at some schools to force them out of business as revenues at many schools will decline much faster than adjustments can be made to expenses. These are challenging times and smaller institutions will have much more difficulty surviving than larger institutions

Source: Forbes – Money