This is the time of the year in higher education recruitment when rubber hits the road. Students begin to make the often tough college choice. An important factor in that choice for most is the cost of education. And, the cost of education depends greatly on the *price.
The price of tuition at private, independent colleges has received a great deal of criticism as of late. There are those that feel that tuition prices have escalated far too high as a result of college greed or unwillingness to take into consideration the impact of that cost on families.
First, price does matter. Let’s say you are considering two pair of shoes. A brand name shoe has a price tag of $70 while a no-name brand has a price tag of $35. Quick, which shoe in your opinion represents higher quality? What if the $70 shoe is 50% off? Now, both shoes will cost you the same amount out of your pocket. Does that change your opinion of the quality of the higher priced shoe?
Although I acknowledge that this is a bit of an oversimplification, price is often perceived as representative of a specific product’s quality in the market. While I recognize that there are other impacts on price such as demand, price can be very important in the context of competition in a specific demographic and geographic market. Consider the private, independent colleges in the state of Nebraska. List each college and their respective tuition. Tuition amounts are typically within $2,000-$3,000, and sometimes within less than $1,000. The fact that these colleges have tuition prices so close is not by chance. But this still doesn’t answer the question as to why tuition prices continue to escalate.
Price does matter but the increasing price is not necessarily attributed to a college’s incessant desire to fill their coffers with your money. What is easily misunderstood is a college’s ability to maintain appropriate net revenue to operate (with modest program investments) without increasing the price. In order for a college to operate annually with net revenue from tuition, it must not only consider the price of tuition but also the amount of discounting required in order to meet overall enrollment targets. Essentially, to what extent must a college put tuition on-sale in order to meet or exceed enrollment targets?
Consider the shoe example above. Let’s try to keep this relatively simple. Both shoes will cost the consumer the same out-of-pocket cost. In turn, each company receives the same net revenue. Private, independent colleges can be considered similar to the name brand shoe while a public university is the no-brand shoe. While tuition is high, often the cost is discounted with significant merit aid and grants. This discount is equivalent to a sale. Each year enrollment managers assess the amount of aid required to yield the previous class. Consumers are expecting more and more aid each year. To be clear, this discussion is not addressing state and federal aid such as Pell Grants and loans. I’m simply speaking to the funds provided independently by the institution which are not loans. The amount of average institutional aid (merit or grant aid) for each student divided by the tuition translates into a college’s average tuition discount.
Tuition = $20,000
Average Merit/Scholarship/Grants (provided by institution) = $7,000
Tuition Discount = 35%
Many colleges are discounting tuition at historically high rates in order to meet enrollment goals. If tuition does not increase and the rate of discount increases, a college will lose net revenue and be forced to operate with fewer resources than the previous year. Think about this in the context of a family budget. Fewer resources lead to decisions that ultimately can affect quality of life. At a college, this can affect the quality of the educational program. In order to account for a significant sale (discount) on tuition, the price must increase to protect net revenue and maintain operations with the same consume value expectations.
It’s important to understand that when a college provides a discount on tuition with institutional aid, rarely is that aid actually funded by actual paper money. That’s not to say it never is, but most colleges simply don’t raise enough money annually to off-set the financial aid that they fund. Do some quick math.
(Enrollment) x (Tuition Price) x (Sale/Discount) = Financial Aid Funding Required Annually
1,200 x $20,000 x .35 = $8,400,000 (that is 8 million!)
There are not too many colleges that fundraise $8 million annually to support financial aid. Nor are endowment returns (even on substantial endowments like Doane College’s) enough to support the scholarships/grants provided to students. And, this example uses a tuition discount of 35% rather than upwards of 40% which is becoming more typical for some schools.
So, if the example above holds true, why not decrease tuition by $10,000 and stop discounting? First, let me bring you back to the shoe comparison. There is a strong theory that if a college cut tuition by 50%, it would impact their perception of quality. There are schools that have done this but not without a great deal of research, consternation, and some risk. Pricing may seem elementary on the surface. Unfortunately, it is a significant issue and one that colleges wrestle with each year. The price of tuition is one number while the cost of tuition to a family can be something quite different.
*For the purpose of this post, price is reflective of tuition only.
P.S. Doane College approached tuition pricing a bit differently in 2013.
This academic year Doane College approached setting tuition slightly different than in the past. First, internally administration discussed tuition considering the ongoing debate of increasing prices. Doane considered holding tuition also known as “freezing tuition” for a year. Doane considered lowering tuition, albeit for only a short conversation. Ultimately, Doane decided on a 4% tuition increase but rather than make this decision in February – the customary time – the college’s board approved the tuition in October. This move was an acknowledgement of the importance of financial planning and providing families with definitive costs for which to plan early in the year rather than in late February. In addition, Doane College also modified academic scholarships and increased allocations of merit aid to historic high levels for new students enrolling in fall 2014.