For the American consumer, there is a good deal of persistent confusion about the cost of higher education. Media reports usually point to the high “sticker price,” which does not reflect the actual cost of an education that most American families pay.
On the public side, it fails to incorporate the subsidy paid annually to public colleges and universities from the state’s annual budget. Indeed, the level of direct and indirect public subsidies often accounts for the difference among states in the level of public sector tuition charged.
Net Tuition Revenue is Key Metric for Higher Education
But the bottom line is net tuition revenue. How much does a college take in after deducting financial aid from the potential revenue received from whatever sticker price they advertise?
This is where the tuition discounts have the most dramatic impact. The average financial aid (tuition) discount at many private colleges and universities is now at 50% of every dollar received. In fact, at many colleges and universities – including some with broad name recognition – this discount has risen to well over 70% of tuition.
Net tuition revenue is flat or declining at many colleges and universities. This is an unsustainable trend.
There are two alternatives. One approach is for an institution to grow, effectively increasing the amount of revenue to offset rising financial aid discounts. The second approach is to find a way to stop the decline of net tuition revenue.
The cold fact is that most higher education institutions are overwhelmingly tuition-dependent, with growth from other revenue like auxiliary enterprises, fundraising, and endowment drawdown extremely limited.
The failure to grow net tuition revenue has become an existential crisis on many college campuses.
Options to Improve Bottom Line May Have Short-Term Success
If the money spigot is turned off, colleges and universities can find temporary measures to hide their institutional financial distress. They can use debt to offset capital and some program expenses. They can turn to temporarily restricted funds in their endowment, essentially borrowing against themselves while they launch new program measures that may provide new revenue to repay the endowment loan.
Colleges can also expand enrollment, grow continuing education, graduate, professional, and online programs, and create new internal efficiencies and economies of scale on campus or through collaboration. All are options to improve the bottom line.
Financial Aid Conversations Feel Like Haggling Over Used Car Price
Enrollment management is as much an art as a science. Colleges run the full spectrum from those with sophisticated, predictive analytical tools to the majority that run their enrollment operations using a financial aid model developed decades ago and modified only at the edges since.
In many cases – especially at colleges that fail to differentiate their mission and programs – the distribution of financial aid is the principal tool through which they close the deal with prospective students and their families to bring in the class. For these institutions, enrollment has become more of an art than a science.
More crudely put, for the American consumer confused by the babble over high sticker prices, college admission is a bargain that looks and feels as unpleasant as the most stereotypical visit to a used car showroom. One can appreciate the pressure on all parties as the negotiations take shape.
Why Do Colleges Charge What They Do?
The crisis over net tuition revenue lays bare one of the biggest cracks in the foundation upon which American higher education rests. Most colleges do not have a clear value proposition that is the groundwork for justifying the price that they charge.
Typically, the language a college uses to explain its tuition and fees sounds like text written from a big accounting firm, explaining incremental increases due to salary increases, rising medical costs, and expanded discounting as the discount rate increases. What is missing in the argument is a case for why tuition is charged, what value a college offers, and what the end product offered is to a prospective student.
What makes this disconnect especially sad is that many higher education institutions provide education of tremendous value. They offer not just technical training but a comprehensive education that goes far deeper than specialization.
The best colleges train students to think by teaching them to write, speak, apply quantitative methods, use technology and work in a collaborative setting.
Colleges Leaders Must Clearly Explain the Value of Higher Education
And here’s the big secret: it’s called the liberal arts. What happens on college campuses in not narrowly political; that is, it’s neither liberal nor about the arts. It’s a way to prepare students of any age for a future in which the specialization they also acquire may matter less because the jobs that they will hold do not yet exist. And we get the added benefit of an informed, educated citizenry that will protect and preserve what we as Americans most cherish.
As Americans’ belief in their political, cultural, and educational institutions continues to decline, we paradoxically offer a higher education system that is the envy of the rest of the world. We must be ever vigilant on matters of cost. But what we need most are advocates who can explain the value proposition before the argument fails to resonate with American consumers.