Tag Archives: discount rate

Outlet Mall Education

Cartoon of two people talking to each other.  First person says, "I got this snuggie here.  It was like 70% off.  I got it for $20!"  The second person says, "Dude, those are normally 10 bucks.  I'm going to the DMV."Every time the rising cost of higher education comes up, I keep thinking back to particular day during my tenure as Student Government President at College for Hirsute Feminists.  I ran unopposed, so holding that position wasn’t all that impressive, but as part of my duties, I was required to attend the annual meetings of the Board of Trustees.  The topic on everyone’s mind back in 2004 was, of course, the dwindling market share for women’s colleges and strategies for making the school more competitive.   Amid the reams of financial reports each attendee was given, one statistic stood out to me:  the college’s discount rate, the difference between the sticker price of tuition and what the average student actually paid after financial aid and merit scholarships were taken into account, was 60%.  In other words, over half of the tuition dollars paid to the school were essentially rebated right back to the students, though obviously in varying proportions.  Even more astounding was the increase in the discount rate over the past couple of decades.  I wish I could remember the exact figure, but I know that the discount rate for students attending my college ten years earlier was well below 50%.  As one might expect, the actual tuition rate had also been jacked up to compensate for the revenue loss associated with the discount rate.  So yes, tuition at the college had increased astronomically, but that didn’t necessarily mean that everyone was paying more.

A Google search taught me that this is a nationwide trend.  According to a recent article on The Chronicle:

The average discount rate jumped rapidly from 1990 to 2002, rising from 27 percent to 39 percent. But rates had been stable since 2002, hovering around 38 percent.Preliminary estimates for the current academic year show discount rates rising again, to 42.4 percent.

The reasons for increases in the discount rate are pretty complex and are naturally influenced by fluctuations in the national economy, but one reason seems pretty compelling and pretty obvious:  deep discounts look really good to parents and students and encourage more (and better) students to apply and enroll.  I went to my private college on a merit scholarship, which covered roughly half of my tuition (excluding room and board, books, fees, etc.), and that scholarship was one of the reasons why I attended and ultimately stayed at that school (I had considered transferring to a higher ranked but much more expensive school after my freshman year).  My Dad, in particular, felt like we were getting a really good deal.

So basically it comes down to a basic principle of marketing:  everyone likes a bargain.  In fact, everyone likes a bargain, even if it really isn’t one.  Colleges have to make up for the revenue loss somewhere, even if that means sacrificing quality or forcing employees to absorb some of the shock:

“These increases in discount rates, however, have come at a high price for many private colleges,” the survey’s authors wrote, noting that institutions “had to implement salary freezes, hiring freezes, staff reductions, and other cost-cutting measures in order to increase their spending on institutional grants.”

So there’s your job market crisis right there, though the discount rate clearly isn’t the only thing driving the adjunctification of academia.  But even with those cuts, somewhere along the line, colleges have to start raising their tuition rates in order to cover the deficit, which means that those who do not qualify for either need-based or merit-based aid are at least partially subsidizing those who do.  In a way, this is a system that looks remarkably like our health insurance model, in which those with access to employer-based or government subsidized insurance are given rates that are negotiated between insurer and provider, while those without any coverage whatsoever come face to face with instant bankruptcy if they ever break their arm, because they do not qualify for the “group rate.”

I’m sure some people would look at this as a kind of redistributive scheme, in which the rich families pay higher tuition rates so that less rich kids can get financial aid.  But when one considers that merit scholarships are also on the rise and the fact that those scholarships are probably more likely to go to kids who have access to the best schools and test prep programs, I’m guessing it sort of evens out.  The families that get crushed are the ones in between, the lowish-middle class families of average students who don’t qualify for aid but still have to take out huge loans or extra jobs to pay for school, but that’s pure speculation on my part.

And again, if discount rates in addition to the host of other factors involved in tuition inflation keep driving prices up, I’m guessing that we all just wind up paying more.  Thus, higher education has become sort of like an outlet mall, those monstrosities set up in suburbs and small towns promising discount merchandise from brand name manufacturers.  I’m convinced that they are a complete rip-off.  Take, for example, this excerpt from Ellen Rupel Shell’s Cheap, in which the author and a friend visit an outlet mall jewelry store and enter some kind of casino netherworld in which the house always wins by convincing you that you actually got one over on them.  It’s a pretty familiar scenario for an avid shopper like me.  I walk into a DSW and see a sign that says, “These shoes are normally $189, but you can have them for $79.95!”  And the shoes are made of polyurethane and fall apart after a few months and would probably actually be sold in a non-outlet store for about $35.  If you think I’m kidding, just do a Google search for “outlet mall scam” and see what you come up with.

So could this be going on in higher education?  Admissions officers sit down with little Jimmy’s parents and say, “The price of an education here at Scrooge McDuck University is $40,000 a year.  But look!  Jimmy qualifies for $15,000 a year in merit scholarships!  You are getting such a great value!”  I honestly have no idea.  Universities already have such a bad rap for tuition inflation, whereas just about everyone I know still thinks that the outlet mall 90 minutes south of town is The Shiz.  But there probably is a subtle psychological alchemy at work here.  After all, as Historiann points out:

But if the only message people hear is how ridiculous the price of college is these days, by people who have been and are eager to write $30,000-$55,000 checks for their children, no matter how painful it is and no matter how much they b!tch about it, it’s not going to hurt or change the cost of doing business for those top 5 to 10 percent of the nation’s most selective colleges and universities.  Instead, otherwise sensible and responsible Americans become convinced that they’re being taxed too much, and in states like mine, they refuse to pay the real cost for what it takes to maintain decent state universities.

In other words, at least at elite private colleges, sticker shock doesn’t stop anyone from enrolling, and those colleges are able to further entice individual families with promises of deep discounts, and rumors of those discounts spread.  That might explain why a father who wanted me to tutor his son kept ranting about how his kid had to get a full ride at Harvard, and no other outcome was acceptable. I didn’t take that job.  Meanwhile the pressure to discount is creating whole new problems at state universities and less prestigious colleges.

But take a look at this 2005 article from Inside HigherEd, about three small colleges that cut both tuition and their discount rate and saw enrollments and revenues rise:

Diane Hutchinson, vice president and treasurer of Wells, said that the discount rate at her college was a major concern of trustees and accreditors. Before Wells cut its tuition by 30 percent in 2000, to $11,850, the discount rate was 59 percent. “We didn’t want to be perceived by guidance counselors and others as buying students,” she said.

Four years later, enrollment is up substantially (and expected to grow more now that the college has become coeducational) and the discount rate is down to 41 percent.

And, indeed, changing the mindset of parents and students played a huge role in the success of these efforts:

One advantage of lowering tuition and the discount rate is restoring confidence of parents in understanding college costs. James Wilson, vice president and chief financial officer of Muskingum, said that some parents like to boast about what a great deal they got by paying a small percentage of total college costs. But many more parents, he said, feel confused by the system, and that discourages some students from even applying.

Muskingum cut its discount rate from 54 percent to 39 percent in the three years after it cut tuition by 29 percent, in 1996, to $9,850. While plenty of students still need (and receive) financial aid, he said, there is less of a sense of bargaining, especially by middle and upper class parents. Wilson said that the enrollment office at Muskingum boasts of having the “no haggling” strategy used by Saturn auto manufacturers, so that families know what they will have to pay.

I am all for need-based financial aid that gets kids to college that otherwise wouldn’t be able to attend.  I am also all for rewarding hard-working, high achieving students, but more and more, these discounts have seemingly become one more piece of a university’s marketing and recruitment package.  And there seems to be a compelling case for the idea that this strategy is making tuition not only far too high, but artificially so.

Image credit:  H. Christine Richards