Tuition Discounting

The article on increasing tuition discounting (Discounting Grows Again) in the Tuesday edition of Inside Higher Ed was no surprise whatsoever. As noted in the article, the average first year discount rate increased in 2014 from 46.4% to 48% and though the increase is modest, the yearly increases in the discount rate continue unabated. We are used to focusing on the freshmen discount rate but the reality is there are also transfer discount rates, and various graduate discount rates covering areas as diverse as Education, Law, and Business. In many of these areas, there has been and continues to be escalating discount rates. When will this escalation stop and when will we reach a maximum discount rate?

The common wisdom has been that we will not cross the 50% threshold but the reality has too many examples already of institutions that have already ventured into and above the 50% level, both undergraduate and graduate. And such decisions may still make sense, especially if the net tuition revenue increases.

In simple economic terms, product differentiation and price are two critical factors in the effort to successfully recruit an incoming class. The more unique a program is, the less subject it is to price competition. But uniqueness is not that easy to establish—we all tend to talk, often in common terms, about the quality of the education provided, both the in class and the out of class experience. And we all tend to talk about how supportive and nurturing we are. Absent that uniqueness, price becomes a much more important factor. 

And we are all dealing with uncertainty—uncertainty about the overall economy, and especially uncertainty about the behavior of institutions who are our peer or aspirant schools. Not knowing what other institutions will do, not knowing for certain how the economy will behave, we tend to be insurers in our effort of recruiting the class of the size and quality we are looking for. As an insurer, and not certain about the factors noted above, we tend to increase the discount rate slightly simply because other institutions are likely to do so, and not to prepare for this could easily result in an adverse impact on the incoming class. 

Is there anything to be done that will reverse or stabilize the discounting trend? Reverse is highly unlikely. And even stabilization, short-term, is a challenge. High school guidance counselors and families are very much focused on the size of the scholarship and ultimately the net price is making their enrollment decisions. Often these families are deciding between not-that-different private and public institutions. And to be the successful institution in that decision making process requires a competitive discount rate or a competitive net price. However, if we are mindful of net tuition revenue, we still have a built-in safeguard. And if we are not focused on net tuition revenue as a long run necessity, we have indeed descended on a very slippery slope.

The opinions expressed are solely those of the author.