Discounts at For-Profits?

A new scholarship from Strayer University will trim about 30 percent off the cost of a degree for qualifying students. And other for-profits have also increased institutional grant aid, suggesting that the industry may be warming to the tuition discounting that is so prevalent among traditional colleges.

For-profits have several reasons to consider discounting, observers said. They have been battered by steep enrollment declines, and scholarships can help get students in the door (or online). Some aid programs are also structured to encourage students to get to graduation, which can boost the industry’s much-maligned retention rates.

Scholarships can be used to “recruit better quality students,” Mark Kantrowitz, publisher of FinAid.org, said via e-mail, including both “students with better academic performance who might be more likely to graduate, or wealthier students who are less likely to borrow.”

As a result, scholarship money might help for-profits avoid running afoul of federal regulations. It can be beneficial when coping with gainful employment rules, which are currently on ice because of a court ruling, but will probably make a comeback. That’s because grant aid can tamp down graduates’ median debt levels. (NOTE: This paragraph has been changed from an earlier version that incorrectly discussed scholarship money's possible impact on the 90/10 rule.)

Institutional loans have at times had similar policy benefits, raising the ire of consumer advocates, who might also look askance at that potential use of scholarships.

In addition to Strayer, which this summer launched three new scholarships, Capella University and DeVry University also offer fairly substantial grant aid, said Brandon Dobell, an analyst with William Blair and Company. But Strayer’s scholarship program is the industry’s big kahuna.

“It’s a huge amount of money,” said Dobell.

The largest Strayer scholarship, for example, is worth a maximum $17,000 for new or readmitted students as they work toward bachelor's or associate degrees. Dubbed the Experienced Student Completion Scholarship, it’s worth $1,000 per term and can be used for up to 17 terms.

The total cost of a bachelor's degree in business administration at Strayer is $72,800, according to a new report on the for-profit industry from Sen. Tom Harkin’s committee staff, and $36,500 for an associate. Across programs, Dobell estimates that the scholarship will be worth roughly a 30 percent tuition discount per student.

"Give a little up front and get a lot on the back side," -- Brandon Dobell, analyst with William Blair and Company

As the scholarship’s name implies, students must indeed be experienced, at least academically, to qualify for the scholarship. It requires that transfer students hold 27 previous credits from Strayer-approved institutions. Former Strayer students who have been readmitted must also have 27 credits to qualify, with a cumulative grade point average of at least 2.5 in those courses.

However, many of the university’s students have some college under their belt. Strayer caters to working adults with an average student age of 34. Dobell estimates that 15 percent of the university’s total enrollment, which is currently 51,000, could qualify for the new scholarships.

Strayer officials did not respond to requests for comment. But company leaders have said their primary goal with the scholarships is to improve students’ academic success.

After academics, the company hopes the scholarship program's “ancillary benefit” to the company will be the “financial value per student” through better student persistence, Robert S. Silberman, Strayer’s chairman and CEO, said during a recent call with investors. The reason is that the university can earn more tuition from a student who stays enrolled, and avoid having to spend money recruiting one who might’ve dropped out

“Students who perform better academically continue at a higher rate,” Silberman said. “It’s as simple as that.”

Where Did the Students Go?

Strayer’s enrollment this spring was down 9 percent compared to last year. And some other for-profits have taken even bigger tumbles. New enrollment at DeVry is down roughly 15 percent this year, for example.

So it’s not surprising that for-profits might try new things to stop the bleeding. And scholarships have the potential to help.

The basic idea is to “give a little up front and get a lot on the back side,” Dobell said, by helping increase enrollment while reducing dropouts.

Strayer got relatively good marks in the report from Harkin, an Iowa Democrat who has been a fierce critic of the sector. One sore point, however, was the company's lucrative executive pay, which Harkin's investigation found outpaced that of other for-profits. Garry Trudeau lampooned those pay packages this week in his comic strip, "Doonesbury."

The university, with 95 campus locations and a big online presence, had one of the lowest student withdrawal and default rates among the 30 institutions examined in Harkin’s report. About 32 percent of Strayer students who enrolled in 2008 had dropped out two years later, compared to 54 percent across the sector.

Even so, roughly one in three Strayer students is withdrawing. And the university and other for-profits are moving to focus on retention rather than relying on new student “churn,” thanks to tapering student demand and more scrutiny from Capitol Hill.

Capella has tried a similar tack to Strayer's with its relatively new Learner Success Grants, which are generally tied to specific programs and can be worth as much as $6,000 for students in bachelor's degree programs.

“It’s a combination of helping out from a persistence perspective,” said Steven L. Polacek, Capella's senior vice president and chief financial officer, in an earnings call last month, and to try to “drive enrollments.”

But discounting can be a delicate business. Discount too much and net tuition revenue can slide, as private nonprofit colleges know well. That sector discounts tuition at 43 percent, on average, resulting in only a 3 percent net tuition increase last year, which lags behind inflation increases.

To wit, Dobell estimates that Strayer’s scholarships will reduce average per student revenue by about 2 percent this year, a bit more than the decline predicted by the company. Net revenue could decline further if the company extends the scholarship to more students.

But the gamble could pay off if it gives enrollment a big enough bump, said Kantrowitz.

“The costs at for-profit colleges are high enough that the colleges may be on the wrong side of the Laffer curve,” he said. “So cutting costs might increase enrollment enough that net revenues increase.”

One reason financial analysts said Strayer and other for-profits are reducing costs through scholarships is to try to beat back increasing competitive pressure from nonprofit colleges, some of which have made big strides online in the last year.

But that competition cuts both ways. For-profits haven’t typically gone head-to-head with traditional colleges in online education. And some nonprofits might not relish the idea of squaring off against high-end for-profits that offer scholarships and lower prices.