Tuition resets have been a hot topic of conversation lately in higher education. In the high-price, high-discount world of most private colleges, a tuition reset can seem like an intuitive choice. If the list price is turning students off, but few (if any) students actually pay the list price, why not reduce list price and financial aid? Wouldn’t a lower discount rate be more sustainable? And couldn’t the university enroll more students at a slightly lower price?
Despite their intuitive appeal, our analysis suggests tuition resets are only infrequently effective.
The appeal—and the reality of tuition resets
While there are those who would argue that tuition resets are done for the sake of price transparency or even reducing costs for students, most universities that opt for tuition resets do so because of concerns about tuition revenue. They worry that the sticker shock of high list prices deters students from applying, even though those same students might actually be able afford the often much lower net price that results from financial aid. These institutions believe that by lowering list price and adjusting aid accordingly, they can make college more affordable for more students—and thus grow tuition revenue by enrolling more students at a slightly lower or similar net price.
However, our analyses of 27 schools that have executed 28 tuition resets suggest that this practice rarely has the kind of impact schools hope for. Only 27% managed to sustain gains of even five percentage points of first-time, full-time (FT-FT) enrollment through five years after resetting tuition, and only 33% sustained similar gains with transfer students. In short, the resets did not consistently grow enrollment.
Nor, as it turns out, did they consistently work to grow revenue. Only 29% of schools that reset tuition were able to meet the 3% annual revenue growth target on net tuition revenue per capita of FT-FT students.
5 reasons why price resets are not consistently effective
We've identified five reasons why most resets are unsuccessful:
- For many students, list price seems to signal quality.
List price is the first sign many students receive about the quality, value, and prestige of the institution. Because students often equate high price with high prestige, they may lower their estimation of an institution when its price drops.
- The PR gains of a tuition reset fade fast.
The marketing push for a tuition reset only works in the first year. After that point, the institution has low tuition but without the exciting buzz of a new initiative. It’s often difficult to get a lot of media attention for maintaining that low sticker price.
- The psychology of big discounts is real.
Resetting tuition reduces the size of scholarships awarded. When your competitors are able to offer scholarships of significantly larger size, recipients often believe the college offering larger scholarships values them more (i.e., that the college is willing to “pay” more to get them to enroll).
- Changing too many variables throws off predictions from the statistical model.
Because the statistical model for aid awarding and yield estimation is based on historical data, its predictive power is diminished when foundational conditions change significantly—as in the case of a reset. It’s hard to know how students will respond to an entirely different list price and aid awarding schematic. Furthermore, the change in list price may have changed the institution’s competitor set, further altering the behavior of prospective students.
- The issue of revenue loss.
Returning students tend to be a revenue pillar, and they bring less revenue in the year of the reset and beyond.
Why returning student revenue is a major problem
The issue of loss of revenue from returning students often gets the least attention, but is perhaps the most important.
When list price is substantially reduced, the university almost always reduces financial aid awards for returning students. This is a tricky balancing game. Because a reset is usually marketed as an affordability initiative, the net price for returning students is lowered.
The revenue challenge is that returning students often represent a significant source of rising tuition revenue for universities. The list price typically goes up 2-5% per year, and, because financial aid typically stays flat for returning students, this large population pays the full amount of the price increase. When a university decides to reset tuition, not only does it lose the additional revenue from the tuition increase on returning students, it reduces their contribution.
While the hit to revenue from returning students is greatest in the year of the reset, the potential revenue from returning students is diminished in future years as well. If we assume that tuition increases continue to be measured in percentages, 3% of $50,000 is significantly higher than 3% of $35,000. To recoup the same gains from returning students moving forward, the university will have to increase tuition faster than it did previously.
None of this is to say that a tuition reset is a categorically bad idea: There are times a reset can work. But institutions must fully appreciate their complexity and build a comprehensive long-term strategy to recoup the large revenue losses that ensue in the first year of a reset and navigate a new market identity and competition pool.
There is a small handful of universities whose resets could be considered a success. For most, however, this practice should be considered with caution.