So two thoughts on the high tuition – high discount (the percent of financial aid awarded as a proportion of tuition) model for private higher education topic. I recently read the David Bushman piece in InsideHigherEd (8-28-23). Also, for those of you who read my last post on dropping off my first kid to college, there is another intersecting story. During move in, her roommate’s dad asked me, “How do you all keep increasing tuition so much?” I am getting more and more of those questions these days…and justifiably so.
More broadly, what is the tipping point for private higher education such that they (or rather "we" as I work in the industry), continue to increase tuition annually? Adding to this, and while the financial aid awarded to new students is often based on current tuition rates, what about after the first year? Meaning in the second, third, or fourth years because most private institutions do not index financial aid (or increase it) as tuition increases in subsequent academic years. Note this is a good question, for those with college bound students, to ask the institution when you are doing a college search with your kid. In other words, in the second year, if tuition increases by 3%, will the financial aid package also increase by 3%? The short answer, at most private institutions, is – no.
So back to the original question about the high tuition – high discount model. The short answer here too is if less than 100% of new students receive financial aid, let’s say 80% of students receive financial aid, those 20% who do not receive aid are, in effect, subsidizing the incremental cost of increased tuition for the institution. In the cases, where 100% of new students receive financial aid, from my perspective, there is not a reason NOT to decrease tuition and the associated financial aid spending rate by the amount of the least discounted or financially awarded student.
Also, if the tuition discount, exceeds 50%, that means the institution is awarding more in financial aid than they are in generating tuition revenue. So how is this sustainable?
There is an important exception here. Institutions where enrollment is growing, despite increased financial aid discounts as tuition increases, are able to capture additional revenue because of this enrollment growth. So while it may not seem to make economic sense to increase financial aid spending as a percent as tuition increases annually, in cases of enrollment growth, the economics can work.
All this said, there is an important point to make. In general, the high tuition – high discount model at private institutions is not sustainable. In the short to medium terms, while student demand via applications received and enrollment increases, this approach can work. However, at the tipping point where demand or enrollment does not increase and the discount rate exceeds 50%, the flexibility to continue to increase tuition and financial aid becomes unsustainable. Student demographic trends, particularly in the Northeast and Midwest, make this phenomenon more real.
So how do private institutions sustain if this model is not sustainable? First and foremost, at the foundational level, having a clearly defined authentic and resonating value proposition that appeals to prospective students and families is a must have for increasing student demand. Communicating this message via multiple social and digital media channels is also critical to meet students where they are.
Next, and of equal importance, developing alternative sources of revenue, outside of traditional new fall student enrollment is critical. For those institutions with the luxury of offering graduate, post graduate certificate, or online programs, this area has lots of potential. At the new student undergraduate level, alternate enrollment start terms – spring and summer, for example, offer opportunities. Developing a pipeline of transfer students (in both the fall and spring) via articulation agreements or flexible transfer credit equivalencies is another opportunity.
One of my favorite opportunities is the development of summer high school programs that attracts high school students to a college campus to take college courses. Not only is this a great way to generate additional revenue for the institution, but it has the potential to grow future student demand as prospective high school students get to experience your campus for a period of time. Tied to this, recruiting outside organizations to your campus, that run summer leadership academies that attract college bound students to the program, is another way to generate additional revenue and future student demand.
Last, leveraging student success initiatives to ensure current students remain enrolled, results in additional revenue. For more information on this topic, see my December 12, 2021 post. As a self-serving shameless plug, you can also come hear me (and some colleagues) present on the topic at College Board Forum in New York in October.
To address David Bushman’s topic, the high tuition – high discount model of private higher education is, to his point, not sustainable in higher education, outside of a few very high market position institutions with multi-billion-dollar endowments. In the short to medium terms, this can work while demand is increasing and where enrollment is growing. However, the long-term sustainable play is to leverage additional revenue via alternate enrollment sources or streams while ensuring student demand via a coherent (shout out to Rick Bailey) authentic resonating value proposition.
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