Tuition discounting led to revenue loss at some institutions, study finds

Colleges are starting to see diminishing returns for revenue from tuition discounting, according to a recent study, but some argue the practice has other benefits, Peter Schmidt reports for the Chronicle of Higher Education

Researchers studied about 450 small, private colleges between the period of 2003-2012, using data from the federal government and The Institute for College Access and Success. They did account for inflation and narrowly defined tuition discounting as institutional grant aid to students.

While the institutions studied did moderately increase enrollment, they did not see equivalent gains in tuition revenue because they needed to reinvest 61% of extra tuition revenue back into financing tuition discounts. In a separate analysis, researchers found that colleges that discounted tuition the most actually saw declining tuition net revenue.

Related: Learn how to optimize your financial aid

The researchers argue that the trend toward high tuition discounting among this segment of colleges has encouraged students to change the way they apply. In the past, students were more likely to evaluate costs upfront and apply to a narrow range of schools they believed they could afford. But now, researchers say students are casting a wider net by applying to many more colleges, then waiting to narrow down their choices based on financial aid offers.

Craig Goebel, a principal at the Art & Science Group, says the study's conclusions are "dead-on." He agrees that the sector of colleges studied is seeing diminishing returns from tuition discounting. Goebel says colleges should "do more to differentiate themselves and therefore create greater appeal among prospective students."

Harold Hartley, senior vice president of the Council of Independent Colleges, suggests that the study may be too harsh on tuition discounting. He says colleges are discounting to "keep college affordable for students and their parents." Hartley goes on to argue that some experts have been raising the alarm about tuition discounting for decades, but relatively few small colleges close each year.

Nathan Mueller, a principal at Hardwick Day, a division of EAB, says there are some gaps in the research. "The study draws the conclusion that discounting has resulted in lower revenue per student in some cases and implies that these colleges would have been better off without increased discounting, when the data only show—arguably—that they used to be better off than they are now," he says.

He argues two big questions remain unanswered. First, did the institutions with less net tuition revenue per student still increase net tuition revenue in the aggregate? Second, what would their aggregate net tuition revenue have been if they had not increased their discounts?

"Both the study and article seem to me to follow the fallacy we always run up against: the assumption that comparing to what used to be is the same as comparing to what could be today," he says.

Carol Stack, also a principal at Hardwick Day, adds that each college has a unique place in the market. "The ability of any one institution to extract revenue from the market depends upon a complex mix of reputation, competition, environment and educational success," she says. "Therefore, it is difficult to generalize about discounting as it varies as widely as the attributes of various colleges that employ it," (Schmidt, Chronicle of Higher Education, 4/28).

Read more on recent trends in college pricing

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