Slashing Prices

Tuition discounting reached record high levels at private colleges and universities in 2008, and the largest share of that aid was awarded without consideration of students’ financial need, according to a report released Tuesday by the National Association of College and University Business Officers (NACUBO).

The average discount rate for full-time freshmen increased from 39 percent in fall 2007 to 42 percent in fall 2008, and the average award covered more than half – 53.5 percent – of the “sticker price.” The discount rate represents the share of tuition and fee revenues colleges use to award institutionally funded aid.

Despite lamentations from some college presidents, tuition discounting has become an increasingly common practice at private institutions. Standard discounting involves placing the sticker price of attendance beyond the reach of many families, only to effectively slash that price by offering institutionally funded financial aid to many or, more typically, most students. Critics say it steers too much aid toward students without financial need, and it also forces high-tuition colleges to defend sticker prices students seldom actually pay.

NACUBO began its survey in 1994, but this year’s report is the first to show how much aid really goes toward students based on financial need. Unsurprisingly, the report found that about 41.5 percent of the discounting aid – the largest percentage share of dollars – was given based on non-need criteria like academic merit. Need-based aid made up 36 percent, and 22.5 percent was awarded on a combination of need and non-need criteria, the survey found.

While the NACUBO data does not yet capture what happened with discounting in fall 2009, the association's preliminary estimates show the average will increase to 42.4 percent.

“Discounting in the form of institutional grants is on the rise,” said John Walda, NACUBO president. “I think this is likely to continue, as long as family income and family wealth is down [compared to] historic levels, and as long as institutions can afford the effect on net tuition.”

Between 2007 and 2008, as discounting levels increased by 3 percentage points, colleges reported an average decline in net tuition revenue of 2 percent.

There are risks and rewards to discounting, and much depends on which students ultimately enroll, according to college presidents. If a sufficient number of lower-aid recipients accept their offers, then colleges can meet their revenue targets. On the other hand, there’s a risk that too many high-aid students will enroll and disrupt the financial model.

Those risks have not deterred colleges from engaging in discounting, however. The average discount rate for full-time freshmen was 37.7 percent in 2000, NACUBO reports.

This year’s survey also provided new data about the extent to which endowments provide the aid used in discounting. On average, about 12.1 percent of the funds for discounting came from endowments, but wealthier institutions drew more heavily from their endowments to finance the practice. Of those colleges with endowments greater than $1 billion, 33.8 percent of the funding for discounting came from endowments. By comparison, colleges with endowments of $25 million or below only financed 5.7 percent of their institutional aid through endowment funds.

NACUBO surveyed 1,050 four-year private nonprofit colleges and universities among its membership, and roughly 355 institutions, or 34 percent, responded.

To purchase the study, visit the NACUBO Web site. The report costs $29.95 for NACUBO members and $39.95 for nonmembers.