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A price just for you

Popular tuition pricing practices come under scrutiny as some colleges choose reform

A price just for you

(RyanKing999/iStock (Modified by WORLD) )

Reprinted with permission from P.J. Rine (2016). A Shell Game by Any Other Name: The Economics and Rationale behind Tuition Discounting. Minneapolis, MN: jCENTER for Innovative Higher Education.
Reprinted with permission from P.J. Rine (2016). A Shell Game by Any Other Name: The Economics and Rationale behind Tuition Discounting. Minneapolis, MN: jCENTER for Innovative Higher Education.

Nestled between Philadelphia and Valley Forge, Pa., sits a small liberal arts school founded by Catholic nuns in 1921. Rosemont College features a carefully manicured, 56-acre campus built around a 125-year-old stone mansion that looks fit for British royalty.

It’s easy to see why a prospective college student would want to study in such a setting, but until recently cost was a frequent objection: Tuition alone carried a $32,620 price tag in 2015-16. While most students didn’t pay full freight, the starting point scared away many without even a campus visit.

“Over half of our potential applicant pool will not look beyond sticker price,” President Sharon Latchaw Hirsh recently recalled telling her vice presidents in 2014. “There’s a lot of very confused people out there who do not understand this high publish price and high discount.”

After a yearlong study, Rosemont announced it would no longer participate in what some have called the “merit-aid arms race.” The school slashed tuition 43 percent—down to $18,500 for the 2016-17 academic year. Applications jumped by 64 percent.

“We achieved what we set out to do: We successfully got on the radar screen of middle-income families,” Hirsh said. “At open houses families said, ‘You’re the only private college we’re looking at.’”

Rosemont is part of a trickle of schools now dumping tuition discounting—the widespread practice of inflating the college sticker price in order to give big aid packages to prospective students. Although the number of schools choosing reform remains small, it’s growing amid increased scrutiny and an emerging consensus that the “high-price, high-aid” model is unsustainable.

Until the 1980s, nearly all financial aid was need-based and straightforward: Students from families who earned less, paid less. But so-called merit-based scholarships proliferated as the price of tuition and fees skyrocketed—up 1,225 percent between 1978 and 2014, according to a Bloomberg analysis.

In many cases institutions award merit scholarships for academic achievement, but “merit” could constitute anything a school finds meritorious. It’s a strategy designed to recruit desirable students: Institutions publish artificially high sticker prices, then offer deeper discounts to the students they want most and lesser discounts to less desirable students. The high price allows almost everyone to receive a discount.

“Colleges are desperately looking for ways to avoid further increasing the discounts,” said Mark Kantrowitz, a higher education consultant and financial aid expert. “The problem is you’re competing with other colleges that are doing it, so it’s very hard to step away from it.”

Tuition discounting is most pervasive among private colleges and universities, but many public institutions now follow the practice. Total tuition discounts ballooned from $30 billion in 2007 to $50 billion in 2015, according to the College Board.

Among private institutions, last year 88 percent of first-time, full-time freshmen received a tuition discount and 78 percent of students overall received one, according to a National Association of College and University Business Officers annual survey. Of those, the average discount was 49 percent for first-time, full-time freshmen and 43 percent for all undergraduates.

“They tend to front-load grants,” Kantrowitz said. “That generous financial aid package you get as a freshman may not be as generous and shift to more loans in your sophomore, junior, and senior years—sort of like a bait-and-switch.”

The perceived benefits of discounting are numerous: People associate quality with high price (the “Chivas Regal effect”), big-number discounts make prospective students feel that they’re valued and receiving a bargain, and schools can engineer more academically gifted and diverse student populations.

The benefits of reform can also be significant. At Rosemont, even though decreasing the tuition price meant the school also had to reduce financial aid, students still saved an average of $815 this academic year. Lowering the sticker price allows Rosemont to compete with bigger schools like Villanova University—which sits a stone’s throw away—on favorable metrics such as class size (12 to 1, compared with 22 to 1 at Villanova).

Other schools have found similar success. Last year Utica College in New York announced it would reduce tuition from $34,466 to $19,996 for the 2016-17 academic year—a 42 percent cut. The result? Transfer applications rose 65 percent, first-time freshman enrollment hit a record high, and financial aid needs dropped.

“It’s actually exceeded our expectations,” Utica President Laura Casamento told me. Student academic profiles improved, she said, and freshman and sophomore retention increased almost 5 percent: “I attribute that mostly to affordability.”

Even as nationwide college enrollment declines, Utica is formulating plans to build a residence hall and add classroom space.

Tuition resets do not always work, but in a study of eight colleges Lucie Lapovsky, a respected economist of education, indicated they usually do—and the positive effects endured long term. Although the publish price goes down significantly, Lapovsky found net tuition revenue often holds steady and can even increase.

Casamento, who wrote her doctoral dissertation on schools that were ill-equipped to reset tuition, said she receives weekly inquiries regarding Utica’s successful experience. She said resetting tuition is a good option for schools that can do it from a position of strength, but warned it “sends the message of a fire sale” at struggling institutions: “You can’t do it as a gimmick.”

Among numerous unintended consequences, a 2014 Education Commission of the States report found tuition discounting is driving up costs and decreasing higher education access for low-income students, because it makes more aid available to those with less financial need. It has also driven down the value of government grants and privately backed scholarships—which now account for only 14 percent of all student aid. Donors have the false impression that funded scholarships aren’t needed and are more likely to give toward building campaigns.

WHILE INSTITUTIONAL CONCERNS HAVE dominated the conversation around tuition discounting, critics frame it in terms of transparency: Many students and their families don’t understand how the game works. When they receive an institutional “scholarship,” they generally believe it comes from a pot of money somewhere. Instead, these particular scholarships are unfunded, existing only on paper.

“While tuition discounts are marketed as scholarships in a student’s financial-aid package, they are not really scholarships,” Jeffrey Selingo, former editor of The Chronicle of Higher Education, recently wrote in The Washington Post. “Rather, the scholarship money was diverted from another student’s tuition check.”

Discounting can result in the same bottom line for institutions, but for those students who pay the sticker price or close to it, the practice means they overpay—and often incur sizable debt. Some 42 million Americans carry a collective $1.3 trillion in student loan debt. (Worse: More than 40 percent of students who enroll at a four-year college don’t earn a degree.)

At Georgetown University, roughly 80 percent of more than $150 million in student aid is unfunded—although unlike most schools, Georgetown distributes discounts based only on need, not merit. Students there told me they could accept subsidizing needy students, but they would like more detailed explanations of what their tuition dollars fund.

“It’s a little unclear where money is going when tuition goes up,” said sophomore John Larkins, 19, a pre-med student. “Being more transparent across the board would benefit everyone.”

The story at Christian institutions is similar to secular private schools. In 2014 Bethel University collected data from 80 institutions in the Council for Christian Colleges & Universities and found the median amount of funded student aid was only 3.8 percent.

At Liberty University, the world’s largest evangelical institution (though not a CCCU school), the most recent public data (2013-14) show the school disbursed some $178 million in unfunded aid and only $213,628 in funded aid (about one-tenth of 1 percent). The average cost for tuition, fees, room, and board was $31,538, but the average price for those who received financial aid was $23,367—a closer measure of actual cost.

‘While tuition discounts are marketed as scholarships in a student’s financial-aid package, they are not really scholarships. —Jeffrey Selingo

Emily Hensler, an economics major, said her father died last year and her mom’s annual salary is roughly equivalent to the cost of one year at Liberty. Hensler, in her third semester, has more than $6,000 in merit scholarships (tuition discounts), but they have not prevented her from incurring $15,000 in debt.

“All of it helps, but not enough to replace a parent dying,” she said. “I don’t know how I’m going to pay for school next semester.”

P. Jesse Rine, assistant provost at Grove City College—one of the few institutions that do not use unfunded aid—published a recent critique of tuition discounting titled “A Shell Game by Any Other Name.” Rine argues the high-price, high-aid model encourages artificial cost inflation: “The tuition sticker price has become little more than an opening value for price negotiation between colleges and the students they seek to recruit.”

Rine’s analysis found the ratio of unfunded to funded aid grew from about 2-to-1 in 1997 to almost 5-to-1 by 2014. He said schools should compete based on educational quality and student outcomes, not paper discounts.

For many schools, especially those that don’t have room to accommodate the needed growth that accompanies a tuition reset, options for reform are limited. Kantrowitz, the education consultant, said right now one to three institutions close or merge with a larger one each year, but he predicted that number will grow to six or seven annually over the next two decades.

Ironically, smaller, tuition-dependent institutions that have used discounting the most could be hit the hardest if free college tuition at public schools ever becomes a reality, as Democratic presidential candidates Bernie Sanders and Hillary Clinton have proposed. Research shows private institutions would face major enrollment declines as students flocked to public schools.

Kantrowitz said the government receives a good return on its investment and should spend more on higher education. He has released a plan to make college tuition free but readily admits the political will to implement it does not exist.

Conservative solutions involve encouraging foundations and private donors to give more toward student scholarships.

Rine said at the very least schools should be more transparent about their discounting practices: “No matter the sticker price, colleges have an ethical responsibility to disclose how much of a student’s tuition payment will be used to support a classmate’s unfunded financial-aid package.”

J.C. Derrick

J.C. Derrick

J.C. is WORLD’s deputy chief content officer and WORLD Radio’s managing editor based in Dallas. Follow J.C. on Twitter @jcderrick1.

Comments

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  •  Brendan Bossard's picture
    Brendan Bossard
    Posted: Fri, 10/28/2016 02:04 pm

    This is an interesting insight into how schools calculate how much tuition to charge.  It is very much like our blessed government.  It certainly seems much simpler, and more just, to calculate tuition rates the same way that a grocery store calculates its prices.

  • Nat Manzanita
    Posted: Mon, 10/31/2016 09:05 pm

    This seems eerily similar to the current health care situation: terrifying sticker prices get negotiated down by a completely non-transparent process, resulting in bills that are less ridiculous but still cause major hardship for many families. The lack of transparency means it's awfully hard to make wise decisions and contingency plans.

  • jclark53
    Posted: Tue, 11/01/2016 01:04 pm

    While it's nice to be able to give discounts, if there are not clear guidelines it opens the door for discrimination, and it isn't fair to students either. My daughter applied to two schools but one gave her numbers to count on while the other dawdled. She chose the first because the deadline to accept the 2nd was imminent. Yet 2 months after the deadline the 2nd finally gave her numbers which were lower than the first school's. She needed to know that BEFORE choosing a school, not pick the school gambling the fees would be manageable.