Posts Tagged “tuition discounting”

What Will it Take for Higher Education to Adjust to Market Conditions?

In our new book, How to Build a College: A Practical Guide for Trustees, Faculty, Administrators and Policymakers, Dr. Joey King and I argue that the sky is not falling around higher education. By and large, colleges and universities are nimble and resourceful institutions, most of which will prosper in the 21st century.

However, college and university operating models that rely overwhelmingly on tuition and debt for their revenue are broken and unsustainable. Change – whether determined internally or forced by outside conditions – is coming.

Many institutions are making changes to adapt to their new realities. The question is: Is this change systemic and sustainable enough to strengthen America’s colleges and universities over the long term?

Trimming costs around the edges doesn’t change campus climate

It’s increasingly clear that college stakeholders are creating new efficiencies and shifting some financial responsibilities across their operating budgets. This a good first step, one that has been going on for at least 20 years at the better-managed institutions.

Further, many colleges and universities band together through cost sharing to develop new efficiencies in programs and operations. But these admirable efforts are first steps. They do little to change campus climate.

Higher ed investments limited by flat or declining tuition revenue

Most colleges and universities report stable or decreasing net tuition revenue. At tuition-dependent colleges, particularly at smaller privates and second- and third-tier publics, the impact is effectively to shut off the most reliable source of support.

At public institutions, the inconsistency and uncertainty of state and local contributions further exacerbate their problem. The effect is to limit investment, except through the issuance of new debt and fundraising, upon which many of these colleges and universities depend to make upgrades that keep their programs and facilities attractive.

Cost and risk of new academic programs can be high

Another solution is to sponsor new academic programs. These programs are often a good idea since many respond directly to local and regional workforce needs. But they incur substantial start-up costs, require a multi-year commitment, and sometimes draw upon already scarce resources.

Fundraising for new programs can help a little. But most colleges and universities will increase the draw from their endowment – if they have one – or turn to temporarily restricted funds to execute and assess their new programs. This can be a solution, but it depends on the quality of the market analysis, the strength of external partnerships, and the commitment from the faculty and staff.

Colleges often sponsor these new programming efforts by expanding the areas of their outreach. Specifically, they build new or expanded continuing education, graduate, and professional programs.

The danger is, of course, that these programs become cash cows of poor quality with a limited shelf life. Unless implemented thoughtfully, they may detract from the mission of the institution and diminish its reputation and standing.

Often staffed by adjunct faculty, many new programs lack the depth of services that supports student retention, especially for traditional students at residential liberal arts colleges. They can be a temporary fix, but they seldom reach their full potential.

Online programs are promising but not cure-all

The newest wrinkle is the push by many colleges to offer online programming. Innovative colleges can make a credible case for online programs. The inflow of cash is desperately needed to build out new academic programs and bolster existing ones that may not support themselves financially. But there are basic concerns that must be diligently addressed:

  • Does the college have the in-house expertise to support online programs?
  • If not, is their choice of an online partner a good one?
  • Can the college compete effectively in a world where large research universities with broad brand recognition play on the same field?
  • Is there an opportunity for a cooperative venture between different types of institutions?

Improving bottom line requires re-imagination of operating model

In the end, colleges and universities often face limited choices for improving their bottom lines. It is most likely that some combination of heightened internal efficiencies, cooperative ventures, and a re-imagination of how a college’s operating budget is put together that provide the best recipe for a path to sustainability. This will require two changes at most institutions.

The first mandates a review of how colleges operate.

  • Is it possible, for example, to imagine real estate as an asset?
  • Can colleges and universities think more realistically about what a fully-owned facilities footprint might look like?
  • How much of it can be its own land with facilities operated by third parties that are better equipped to operate in the security, food service, or hospitality business?

Perhaps the more greater challenge is that higher education institutions must look outside their own industry for possible solutions to their current dilemmas.

  • What lessons can be learned from other industries facing similarly rough transitions from 19th century program and facilities models?
  • Are there new analytical, financial, financial aid, insurance, and student life programs and products that can be developed to suit 21st century needs?
  • Can working relationships emerge with new partners, especially on the corporate side, that add value to support well-defined college missions?
  • In doing so, does the case for higher education change in ways that resonate better with American consumers while still retaining the underpinning of the liberal arts?

Change is coming. Higher education must shape its future or be washed over by the cultural, social, and technological changes swirling around it. Our bet is that American higher education will find its way.

Who Should Public Flagship Universities Educate?

Many public research universities face a dilemma: How do you balance a commitment to educate in-state students with the value that out-of-state applicants contribute to the university?

As Nick Anderson illustrates recently in the Washington Post, the facts are clear. Public (and private) research universities contribute mightily to a state’s economy, providing a better educated workforce and serving as a principal economic engine, an incubator of new ideas and industries, and a contributor to the social and cultural climate of their states.

In a knowledge-driven economy, the role of research universities has become even more important strategically to states seeking to adapt their citizens to the demands of a global workforce.

Out-of-State Students Help Keep Costs Lower for In-State Students

Anderson notes that out-of-state students: “ . . . diversify campuses, bringing fresh perspectives and life experiences. They fill seats in states with stagnant or declining population. And of course, they pay more.” The latter is especially telling given declining state support for public colleges and universities in the 21st century.

As Mr. Anderson reports: “Those from elsewhere bring revenue that helps support that discount (enjoyed by in-state students) . . . College Board data shows that tuition and fees for in-state students at public universities this year average $9,970. For out-of-state students, the average is $25,620.” This $16,000 difference is significant but also carries with it some obvious political drawbacks.

Declining Share of In-State Students Can Be Politically Difficult

In a number of states, there is ongoing discussion about giving too many seats away to out-of-state students or even students from economically advantaged sectors of the state. In Virginia, this decades-old debate regularly extends to how many students to accept to the University of Virginia from Northern Virginia — specifically, Fairfax, Loudon, and Arlington counties — where well-prepared applicants seek admission.

It may be that public sector leaders are incrementally changing their enrollment recruiting policies based on their need to find revenue lost in recent state appropriations.

This practice can create an optics problem for public universities where wealthier students typically do less to contribute to socio-economic diversity than those receiving Pell grants. Anderson reports, for example that the University of Michigan serves almost 29,000 undergraduates but only “15 percent come from families with enough financial need to qualify for Pell grants.”

At the same time, Michigan’s in-state share of freshman has declined from 64 percent in 2006 to 51 percent ten years later.

There is an obvious benefit, especially if states retain college-educated graduates after commencement, including those from out-of-state. It certainly improves the employment outlook for prospective employers and those seeking to remain, expand, or relocate to the state.

Larger Decreases in In-State Freshmen from Disproportionately Smaller States

It may also be that public sector recruitment policies depend on where you sit at the table. In the Washington Post story, those with the largest decrease in in-state freshmen were from disproportionately small states – Vermont, Alabama, North Dakota, Delaware, New Hampshire, Mississippi, Rhode Island, West Virginia, South Carolina, Oregon and Arkansas.

When you combine small or stagnant population growth with erratic state appropriations, it makes sense to tap students from neighboring states or even nationally where there is a much deeper prospective student applicant pool.

Larger States Aim for More Balance of In- and Out-of-State Students

There also appears to be a second group seeking to maintain a 50/50 balance in their entering classes. These states often have large research universities and complex state political environments. They include states like Michigan, Colorado, Pennsylvania, Arizona, Indiana, Wisconsin and Kansas.

If all politics is local, it may be that many of these public research universities face an optics problem since the purpose of public universities historically was to provide first-generation students with access to a college education. Today, there is no significant socio-economic differentiation in first-generation students, whether at public or private colleges.

Outliers. like the University of California system, the University of Texas, the University of Florida, and the University of Georgia, seem to be more a response to the size of their large in-state applicant pool or the development of unique scholarship programs that encourage in-state students at public universities. State programs like free college tuition in public universities may further change the mix in states like New York and Tennessee. It’s simply too early to tell what the long-term impact of these new programs might be.

Whatever the future holds, there are a number of conclusions.

  • First, state policies vary widely and are further affected by demographic changes occurring within the state.
  • Second, in most states, the optics matter as public universities continue to wrestle with how to provide reliable, sufficient access for in-state applicants to public universities, especially flagship research institutions.
  • Finally, the impact on higher education, including private higher education, is unclear as public universities broaden their applicant pool with strategies and tactics to support them that mirror the recruiting strategies of their private counterparts.

In the end, change is inevitable. It will be important to watch the impact on non-flagship publics, community colleges, and private institutions as a multi-dimensional chess game plays out in a declining applicant pool.

Colleges Must Change Financial Model to Avoid Death by a Thousand Cuts

American higher education is a complex, decentralized, and interlocking network of institutions that provide education to a disparate group of learners. Historically, many of the fundamentals build around an applicant cohort of 18- to 22-year olds. The demographics of the 21st century predict that this group will not be able to support a robust pool of potential students into the future.

For many colleges, the choice is to expand the pool, both geographically and to better reflect shifting demographics. College administrators, seeking an admitted student population that mirrors the ethnic, gender, race, and religious characteristics of the country, generally work to open fresh applicant streams from among historically disenfranchised groups.

It is new territory for many schools in which campus culture supports these efforts intellectually but wrestles with the cost, preparedness, and internal dynamics of the cultural change required to maintain recruitment standards and retention and graduation rates.

Student Recruitment, Retention Costs Growing

Those colleges relying upon the 18-22 year old pool of applicants have little choice. From a financial perspective, these institutions have always relied upon wealthy, full-pay families to provide much of the revenue to support financial aid for needy and deserving students.

The problem, now growing into a crisis over the past twenty years, has been that the recruitment and retention costs for each class now exceed the capacity of the institution to balance full-pay revenue with the needs of less fortunate students.

College Discount Rates Sap Schools’ Financial Strength

A dramatic rise in unfunded aid – translated into the college’s discount rate – has sapped the financial strength of many institutions. The hard truth is that a college operates with fixed costs – heavily tied to labor, land, debt, and financial aid – that permits little left in an annual budget for discretionary moves that might offset these alarming trends. At a growing number of institutions the discount rate is now over 70 percent.

What industry – or any financial enterprise – can operate on 30 percent or less of the revenue that it advertises as its sticker price for the product that it delivers?

Colleges’ High Sticker Price Make Affordability Arguments Nearly Impossible

Another problem vexing colleges is the sticker price. Trinity College (CT) just announced a comprehensive fee (tuition, fees, room and board) of $71,660 for next year. Trinity is an outstanding college where students receive an exceptional education. But the optics look terrible for those colleges and universities that cross the Maginot Line of $70,000 per annum.

It is difficult and sometimes impossible to argue affordability when the sticker price is confused or equated with with the bill that students and their families actually pay. Does a high sticker price limit the size of a potential pool regardless of a college’s policy on generous financial aid?

There are at least three approaches to combat this trend:

The first is to increase the financial aid budget to offset increases in a college’s sticker price. This seldom works, especially over the long term. It is difficult to be less generous to successive classes without an enrollment strategy that matches financial aid to changes in enrollment practice. The most nimble colleges have a well-delineated financial aid model that links their enrollment practices to where they want to be in out years. But most institutions seldom follow through, effectively decreasing net tuition revenue over the long term and raising the discount rate higher.

A second option is to shift the financial burden to students, generally in the form of increased loans. The problem is that many students see debt as a responsible way to pay for an education, whatever the level of debt incurred. The result is that many students unskilled in handling debt become subject to it. The result is disastrous and often leads to higher default rates among students, many of whom fail to graduate, who work at jobs that do not permit them to repay debt that they did not understand when they agreed to its terms.

A third option is to rely on support from states and the federal government. The trends work against students here. Government support for student aid and debt relief has been – put kindly – spotty at best. Further, governments at all levels are losing their discretionary ability as pressing fiscal and political priorities affect their discretion. There may be a point at which discretion and government regulations intersect with hard choices ahead for those who seek state and federal aid.

What’s the alternative?

America’s colleges and universities should assume that any solution must be organic and come from within the higher education community. The discount rate at many colleges is now approaching a tipping point.

It’s not that colleges and universities face massive, wholesale closures. It’s more like death by a thousand cuts in which closures increase steadily but without a classic catastrophic event that shakes the college and university community to produce the next generation of operating changes necessary to survive.

It feels a little like being the lobster in the pot brought to a boil. When you fully recognize the danger, it’s already too late. The task ahead is to plan for an orderly review of how to prepare for an uncertain future and how best to pay for it.

American Higher Education Has a Serious Revenue Problem

Painting a grim picture for American higher education, Moody’s Investors Service recently changed the industry’s outlook from “stable” to “negative.”

This return to negative ratings reinforces a number of trends that bear close review.

The facts are clear and inescapable:

  • The comprehensive fee – tuition, fees, room and board – will approach $70,000 a year at a number of high sticker-priced colleges and universities.
  • Students and their families are voting with their feet, with 46 percent of first-time students beginning or having had some experience in community colleges.
  • Politicians sensitive to anecdote or polling or simply worried about the price of a higher education degree, promote policies that reinforce this optic.
  • Recent efforts to tax wealthy endowments to skew higher education spending priorities, often towards demands for moderated tuition or increased financial aid, illustrate this point further.

Higher education has taken some steps. Efforts have been underway to trim rising costs and achieve basic efficiencies since the Great Recession. These efforts vary widely depending upon the urgency felt within an institution, its level of creativity and nimbleness, shifting demographics, and the relative strength of the net tuition revenue it receives.

Trimming costs or enrolling more students, however, cannot cure what higher education faces. America’s colleges and universities have a revenue problem.

Fixed costs in land, labor, and debt repayment and rising costs in health care and financial aid largely determine a college’s operating budget. Labor alone might be sixty percent of a typical small college’s budget.

Most colleges are heavily tuition dependent. There is little or no discretion in the operating budget. For some of them the financial aid discount rate now approaches seventy percent. Dorms will be full until the institution, desperate for revenue, closes, merges, or is acquired.

Many of these colleges rely on other sources of support. Auxiliary revenue sources like residence and dining hall fees cover some of the territory lost to declining tuition revenue.

Endowment income also helps, but most colleges do not have sufficient endowment revenue to make a significant difference. Comprehensive campaigns and research grants and contracts address longer-term needs but do little to fund short-term revenue problems.

College Operating Model is Outdated, Unsustainable

The truth is that colleges rely on an older, archaic operating model where tuition increases historically matched expenses to balance an annual budget, often aided by auxiliary services revenue. For many schools, it was that simple. As new financial, cultural, demographic, consumer, and program pressures build, these “Mom and Pop” shops do not have the flexibility or capacity to meet the new demands.

What’s the path forward?

There are a number of changes that must be made immediately to offset this growing crisis:

  • College governance is weak and ineffective and must be immediately adapted to meet new oversight demands, with the faculty playing a more important role in creating an innovative educational enterprise.
  • Colleges must understand the institution’s value proposition, if the mission is still relevant and differentiated from its peers, and where the college wishes to be in out years. Why should the college exist in the 21st century?
  • The “Mom and Pop” operations must give way to a newer, more flexible model that accounts for changes in how colleges use tuition, re-imagine underutilized real estate assets, re-configure capital campaigns to meet shorter-term needs, re-think the use of temporarily-restricted funds, and seek additional partners to produce new revenue streams.
  • Higher education institutions must set aside older enrollment strategies in favor of newer financial aid analytical models that differentiate academic programs, emphasize student life, expand when practical the traditional 18-22 year old applicant pool, and focus on outcomes through stronger career counseling networks that create a lifelong affiliation.
  • Stakeholders must work much more aggressively at retention and graduation strategies, using student life, including athletics, as an enrollment tool to increase student fit and the level of satisfaction.
  • Colleges must determine what facilities footprint the institution can afford. Its leadership must grow/shrink the college to create a better fit among people, programs and facilities.
  • Institutions must get out of those business arrangements that are eating up financial capacity for which there are better service providers. If the college can use its legal, accounting and student life teams to create a robust residential life program, for example, does it really need to own its housing, with its corresponding debt, that might otherwise go to academic support?
  • The campus community must think of technology as an ongoing operating lease rather than a draw against remaining levels of debt capacity.
  • Its supporters must remember that a college is both an educational enterprise and an economic engine for its region, and seek strong public private partnerships to mutual benefit.

Despite the dismal forecasts, the decentralized and complex higher education system remains a cornerstone of American ingenuity, creativity and promise. The task ahead is to imagine the possible.

This op-ed first appeared on The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education.

New Thinking Needed on How to Pay for College

Swirling around the debates over the high sticker price of higher education is a deeper conversation about the broken financial model that most colleges and universities continue to use to pay their bills. While the largest universities have more options based on the scale of their endowment, fundraising prowess, and research support, most public and private colleges are heavily tuition dependent.

State governments have been withdrawing their historic support for public colleges and universities. These institutions now increasingly rely on tuition, fees, and room and board to pay their bills. Each passing day, their finances look more like private colleges.

That’s not a good thing if higher education is to develop a sustainable financial model. Private colleges rely heavily upon a tuition model that presumes that a family pays based upon their ability to do so — that is, wealthy families should not expect to receive financial support from the college that their child attends.

The stated goal behind the model was to improve access and encourage diversity in all its forms by making college more affordable for students who qualify for support. They do so through financial aid discounting practices that places the burden of support on full-pay families to pay for the discount.

College Financial Aid Model No Longer Useful

Today a new reality has set in, based principally on the fact that the student financial aid model has run to the end of its useful shelf life. Until the early 21st century, it was possible for financial aid administrators to cobble together financial aid discounts, state and federal support especially for public colleges, and loans of various types to make a case to families about how they could afford to pay for college. But cracks began to appear in this practice as the gap widened between what colleges could piece together and what families could afford to contribute.

At some colleges and universities, including often those of very good reputations, the financial aid discount now exceeds 70 percent. It is possible to imagine a scene where their student residence halls will be full but the comprehensive fee received will no longer sustain the enterprise.

The number of “full-pay families” — those who can pay the full comprehensive fee — is decreasing along with the willingness of families to send their children to high sticker-priced colleges. Many of these colleges did not meet their fall enrollment targets in September 2017. Further these institutions often rely on merit scholarships, now extending into the wealthier income brackets. Wealthier families brag about the merit scholarships they receive to encourage their child to attend the college they selected.

When admissions officers calculate financial aid offered to the “set asides” for Division I athletes, academic programs, and special circumstance candidates of various types, there is very little flexibility remaining in a financial aid budget.

Tuition and Fees Aren’t Enough to Cover College Expenses

This aid budget depends on the institution’s ability to meet general college expenses through tuition and fee increases. But this is where the crisis occurs because American consumers have turned against high tuition sticker prices, especially since so few families pay the full price today.

When elite universities charge $65,000-$70,000 annually, the media focus on the extreme rather than on the more moderately-priced institutions that form the majority of America’s colleges and universities. But it is an open question whether the sticker prices over $40,000 resonate with the American public anymore.

It’s a mess with few supporters backing the old financial model upon which American higher education has historically depended to finance the enterprise.

America’s colleges and universities are certainly aware that they face a crisis of confidence, credibility and economics ahead of them. The question is how well and how quickly will they respond to this crisis.

Three things must occur:

The first is that higher education must recognize that its colleges and universities – whether public or private – face a situation that will not be ameliorated by outside factors like an improving economy or rising wages. The fact is that most American families believe that college is a right and not a privilege. They are less likely to devote the personal resources necessary to have skin in the game.

The second is that higher education must have an open, prioritized conversation about how to pay its bills. It is unlikely that a single partner such as the federal government will step in like a white knight on a singular mission to save higher education. A better policy is to determine the range and level of funding sources available to colleges across its historic funders. This includes both operational and capital support from all sources. The most important decision will be whether to keep the decentralized higher education system in place with reinvigorated and better-defined missions and purposes.

Finally, higher education must imagine the possible. It is likely that America’s colleges will see a wave of mergers, closures, and acquisitions over the next 50 years. If so, how will this be managed? For those institutions that have achieved sustainability, what are the terms that bring people, programs, facilities, and technology together to foster common agreement on what higher education contributes to America?

America’s colleges and universities have evolved successfully for nearly 400 years. They are nimble, creative and distinctive. Higher education must go forward with transparency, purpose and urgency. To begin, it must demonstrate its willingness to change and adapt.

Will Mergers and Acquisitions Dominate the Future of Higher Education?

A hotly debated topic making the rounds in higher education now is whether American colleges and universities – public and private – face a round of mergers and acquisitions over the next several years.

There are a number of reasons that the discussion of this topic had gained momentum.

Tuition discount rates are creating revenue squeeze for colleges

First, many colleges, especially small private colleges, are seeing their tuition discounts — now at 50% on average for every tuition dollar received — rise while their net tuition revenue remains flat or continues to fall. In fact, there are some colleges where the tuition discount now approaches 70 percent.

Financial health of many schools is questionable

Second, federal composite credit scores, which reflect the overall relative financial health of institutions along a scale from -1 to 3, have shown a good number of institutions to be in questionable financial health. A score greater than or equal to 1.5 indicates the institution is considered financially responsible. Colleges with scores of less than 1.5 but greater than or equal to 1.0 are considered financially responsible, but require additional oversight. These schools are subject to cash monitoring and other participation requirements.

The Chronicle of Higher Education reports that 177 degree-granting private colleges failed the U.S. Education Department’s financial-responsibility test, which seeks to quantify the financial health of proprietary and nonprofit institutions, for the 2014-15 academic year. That’s 18 more than failed the year before.

Further, of the 177 failing institutions, 112 (63%) are nonprofit and the rest are for-profit. For the previous year, 58 percent of the 159 failing institutions were nonprofit.

Third, Moody’s has revised its outlook for U.S. four-year higher education to stable from negative, reflecting the expectation that the sector’s business environment will neither erode significantly nor improve materially in the next 12-18 months. Until this latest ratings change, higher education had received a negative rating since January 2013.

Moody’s rating suggests that higher education is at best treading water and not in a robust recovery from the impact of the Great Recession.

Fourth, there is growing anecdotal evidence of a struggle over financial health. Nearly four of ten private colleges reported that they still had available seats in their upcoming admissions class last year. On the public side, some states are considering closing or merging small and underperforming (often rural) campuses. The number of students entering community colleges is also dropping. Years of underfunding public sector institutions have produced problems like the collapsing infrastructure and structural deficit issues at respected institutions like UMass Boston.

In addition, much of the public discourse over projected closures like Sweet Briar College, failed merger attempts, and persistent rumors of financial distress continue to feed the higher education gossip circuit.

The cumulative effect is to pit trustees, staff, faculty, students, and alumni against one another as the blame game over failed efforts at transparency and worse indications of poor stewardship shake higher education’s foundations.

Free tuition at public schools could be detrimental to private institutions

The newest wrinkle addresses the likely impact that variations in the free public tuition proposals might have in the 35 states where such proposals have arisen. In New York, for example, a number of private college and university presidents with whom I have spoken recently wondered what will happen when the state uses the program to encourage New York State families to vote with their feet for four-year public colleges. The impact on the state’s private and community colleges could be detrimental, lasting and severe.

There’s little question that American higher education is now going through a period of chaos and uncertainty that is upsetting the otherwise glacial pace by which higher education has historically evolved.

But history also tells us that there have been at least two other periods characterized by the same level of disruption. In each case, higher education grew and adapted but did not suffer from an agonizing collapse. It is possible to imagine the possibility and to see the potential amidst the chaos, even if some of it is self-inflicted.

Disruption in higher education may spark creative, positive change

And perhaps this is ultimately the point. Higher education will need to change the way that it operates. Leadership at all levels must modernize and re-think financial models, operating principles, and governing structures. It is likely that American colleges and universities will not be able to rely on traditional state and federal partnerships in the way that they have in the past.

It is essential that institutions begin to imagine broad cooperative efforts that cut across rigid but now outmoded divisions as “public” and “private,” research and teaching, and two-, four-, and graduate-level institutions. Education must be a seamless, lifelong pathway.

The most important change will be to build an aggressive, unapologetic defense of what higher education represents, why what it does is important, and how its colleges and universities contribute in unique ways to American society.

Disruption makes anything possible. Now is the best time to think about how to manage this disruption rather than simply react to what’s coming.

Perilous Path to Financial Sustainability in Higher Education

The results of the most recent Tuition Discounting Study from the National Association of College and University Business Officers (NACUBO) are telling and worrisome. The study, released last week, examined how much colleges and universities awarded students in scholarship and grants and how deep tuition discounting has become.

The NACUBO study found that the average institutional tuition discount rate for first-time, full-time students hit an estimated 49.1 percent in 2016-2017, up from 48 percent the previous year. The discount rate was highest at small institutions, where the first-time, full-time freshman rate was 50.9 percent for 2016-2017. And perhaps most troubling, more than 25 % of the institutions surveyed have rates well above 50 percent.

Why Does College Tuition Discounting Matter?

Why does this matter?

As Inside Higher Education’s Rick Seltzer points out, the tuition discount rate is defined as institutional grant dollars as a percentage of gross tuition and fee revenue. Translated, a discount rate of 50% means that fifty cents of every tuition dollar never makes it to the college’s bottom line because it is dedicated immediately to financial aid. All but a handful of American colleges and universities are highly dependent on tuition, although they also work to supplement tuition revenue through fundraising in areas like student scholarships.

The problem is that endowments do not fund much institutional grant aid. In 2015-2106, for example, endowments funded only 12.4 percent of institutional grant aid provided to students. In general, 79 percent of aid awarded went to meet need, regardless of whether that need was classified as need-based or merit-based.

Need for Financial Aid Increases but Tuition Revenue is Flat

Mr. Seltzer notes that as tuition prices continue to increase, the share of students with financial need will also likely rise. What’s especially concerning is that the percentage of first-time, full-time freshman receiving institutional grants is estimated to be 87.9 percent in 2016-17. That doesn’t leave much space for the tuition from full-pay students to make much of a dent in the financial aid budget.

The overriding fact is that net tuition revenue per full-time freshman – the cash that supports the college after financial aid — is essentially flat, rising only 0.4 percent in the past year. Worse yet “well over half of survey respondents, 57.7 percent, reported a decline in total undergraduate enrollment between the fall of 2013 and the fall of 2016.” Further, just over half of schools surveyed reported a decrease in enrolled freshmen. The respondents blame price sensitivity, increased competition, and changing demographics as the primary reasons for this decline.

That leaves many colleges in a precarious position. If net tuition revenue is flat, discount rates are rising, the economic headwinds are blowing against them, and their enrollments are declining, financial options are narrowing at most colleges and universities.

A college or university can no longer depend on rising tuition or increased demand to grow its way out of what is now a systemic financial problem.

Discounting Strategies Aren’t Sustainable; Schools Know It but Few Admit It

Yet the most curious result in the survey was on the question of sustainability. In the IHE study, 44 percent of schools reported that their discounting strategies were not sustainable over the long term. Of the remainder, 32 percent said that they were sustainable over the short- but not the long-term. But only 9 percent “were willing to say that their strategies were not sustainable.” They presumably believe that some combination of new programs, better recruitment, and improved marketing strategies could work to improve their competitive position.

Financial aid is a complex question. Many of the colleges now suffering from their discounting practices have increased their discounts, for example, in an effort to serve more financially needy and diverse students. There can be time-specific reasons as well like the development of major new program initiatives.

But the inescapable fact is that American higher education continues to rely on outmoded and archaic financial strategies that used their primary source of revenue – tuition, fees, room and board – to balance out their expenses.

It’s an expense-driven model in which most of the large expenses – financial aid, cost of labor, technology, health care, and debt on capital expenditures – determine the revenue needed, effectively setting the tuition. Any institution increasing tuition much above the cost of inflation, now running at less than two percent, is effectively kicking the can down the road.

Despite the worrisome results of the NACUBO survey, many of us are still betting on American higher education to thrive. It must change how its financial pieces fit together and think imaginatively about how it can finance itself. It is likely that colleges will abandon long-time efforts to finance their capital expenditures exclusively on debt. It is possible to explore creative ways to manage targeted capital campaigns and rethink annual fund efforts. Change will require consortial efforts that move beyond paper and library purchases to see what can be accomplished in common on health care, retirement benefits, and technology.

The NACUBO study forces three conclusions upon us:

  • Higher education must evolve more rapidly.
  • The broad philosophical debates among staff, trustees, and the faculty must be about institutional sustainability.
  • There is only so much time left to take the first big steps.