Odd Tuition System: Big Sticker Price, Big Discounts

Tuition pricing for college is a strange business, combining a big sticker price (which few people actually pay) with big discounts in the form of institutional grants (which most people should know enough to negotiate).

College pricing is even stranger than the car business. Automobile dealerships aren’t likely to give one customer a sales discount of 50 percent and another customer a discount of 10 percent off the sticker price.  Not so for colleges and universities, where the tuition discounts can differ by tens of thousands of dollars between one student and the next.

Institutions do in fact discriminate on pricing depending on two primary factors that (in theory) determine an “optimal” return to institutional wealth.  Relatively wealthy students who scores off the charts on their SAT’s – thus enhancing the institution’s reputation  if enrolled– will get a tuition break on the basis of “merit.” But this student’s discount for merit is counterbalanced by his or her lack of financial need.  By contrast, high-need students must shine brightly to get admitted, and the university is likely to offer a deep discount to enroll them.

If this isn’t complex enough, consider how the state of the larger economy affects the calculations universities must make to optimize their pricing. In fact, according to the most recent annual report  by the National Association of College and University Business Officers (NACUBO), the Great Recession has forced colleges and universities to offer the greatest tuition discounts in the past few years than at any time since the organization has tracked these numbers.

“The study results suggest that the economic recession that began in late 2007 and continued until summer 2009 caused a rapid rise in tuition discounting,” the NACUBO report stated. The average discount rate (defined as institutional grant dollars as a share of gross tuition and fee revenue) for first-time, full-time freshmen jumped from about 39 percent in 2007 to an all-time high of 42.4 percent in 2010.”

For many institutions, the discounts forced by the recession came at a great price.  The NACUBO reported that institutions cut deeply into operating budgets in order to maintain enrollments and optimize composition of their freshman classes.

One survey participant said, “To lessen impact of economic conditions upon families, we increased undergraduate tuition at a lower rate (approximately 2% lower) for the second year in a row. We increased our first-year enrollment goal, continued previously instituted energy conservation initiatives and utilized more online materials and email communication to cut printing and mailing costs. We delayed decision on annual salary increases 4 months until fall enrollments were finalized as well.”

Many other survey participants echoed this sentiment. Like this one: We have had to increase our financial aid package (increase discount rate) to help students through this economic crisis. We have also had to institute wage and benefit cuts, staff and faculty reductions, and other expense cuts to counteract the economic downturn.”

Thus, the picture painted by the NACUBO report amounts to a fairly straightforward tale of how institutions struggled with optimal pricing in the face of a severe economic downturn that challenged many families to make ends meet, let alone send their kids to a college that, according to published prices, would burden many families with college costs that amount of a frightening fraction of household income.

A somewhat more nuanced analysis of recent trends in college pricing can be found in a recent report by the College Board, “Tuition Discounting: Institutional Aid Patterns at Public and Private Colleges and Universities, 2000-01 to 2008-09.” In spite of the recession, the College Board study says, the rate that private institutions offered discounts going beyond student financial need actually jumped in 2008-2009.

In 2007-08, 7.6 percent of institutional grants were more than the amount dictated by student financial need. By 2008-09, 8.4 percent of institutional grants were over and above what students needed to pay for college. Then consider need-based grants. In 2008-08, 21.1 percent of grants met student financial need. By 2009, that inched up insignificantly to 21 percent, according to the College Board.

This means that, at a time when private colleges and universities were slashing operating costs, including resources devoted to teaching and learning, they were still playing the college rankings game by offering hefty tuition discounts  to encourage the enrollment of relatively wealthy students with high SAT scores.

While colleges and universities call these discounts “merit” scholarships, the label disguises the true nature of this “meritocracy,” which is powerfully rooted in the social and economic class of students and families. One need only glance at the powerful correlations between SAT scores and parent education and income levels to understand this.

Consider the average tuition discounts at private colleges and universities by median SAT scores — which is the prime measure of admission selectivity. Colleges offering the highest percentage of non-need based aid — 9.8 percent — were rather modestly selective institutions, with SAT scores averaging 1050-1099, according to the College Board.

Among private colleges with median SAT scores of 1200 to 1299, 8.5 percent of grants were based on “merit.” Such institutions might be considered “strivers,” willing to take relatively risky bets with house money in order to enhance their reputations in the mighty college guides, such as U.S. News & World Report’s annual ranking of “America’s Best Colleges.”

Then, consider the most selective and desirable private colleges and universities, with median SAT scores of 1300 and above.  Such institutions are above the fray when it comes to striving for a higher position in college rankings guides. They’ve made it, they know they’ve made it, and students and families amass at the gates of such mighty institutions in order to be admitted to an exceedingly selective club.

Because such colleges and universities don’t have to entice high-scoring students to enroll, they don’t really play the merit scholarship game. Indeed, among colleges with median SAT scores of 1300 or greater, an average of just 2.7 percent of institutional grants were based on merit — a fraction of the striving institutions’ devotion to merit grants.

It’s no surprise, then, that these rich and highly selective colleges were much more likely than strivers to offer need-based grants. In 2007-08, grants based on need alone amounted to 27 percent of institutional aid among the most selective colleges. By contrast, among the modestly selective colleges with SAT scores in the range of 1050 to 1099, just 17.7 percent of grants were based on financial need.

Recession or no recession, colleges and universities need to get their priorities  straight. That means doing more for needy students and less gaming of the college rankings.

Peter Sacks

Peter Sacks

Peter Sacks is an author, economist, essayist and social critic.

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