When can a college slash tuition by almost one-half without losing revenue?

by Tamar Lewin, Charlotte Observer, December 26, 2013.

A higher education riddle: When can a college slash tuition by almost half, without losing revenues? Answer: When nobody much pays full tuition anyway.

When Converse College, a tiny women’s college here, announced that it was “resetting” next year’s tuition at $16,500, down 43 percent from the current year’s published price of $29,000, the talk was about affordability, transparency and a better deal for struggling families.

But of Converse’s 700 undergraduates, only a small number – in the single digits, its president said – paid the full sticker price in recent years. Almost everyone received a tuition discount from the college, along with, in many cases, financial aid from the state and federal government.

Now, like some other small private colleges, Converse is cutting tuition and reducing discounts.

Betsy Fleming, Converse’s president, said the discount rate would drop to 25 percent, well below the national average, from the current 56 percent. The college will still offer aid to talented students but only to the extent covered by its $39 million endowed scholarship funds.

While Converse’s reset was the most drastic, others including Belmont Abbey College in Gaston County, Concordia University in Oregon, Ashland University in Ohio, Ave Maria University in Florida and Alaska Pacific in Anchorage, Alaska, have also recently announced tuition cuts.

Belmont Abbey College President William Thierfelder cited a College Board survey in which more than half of college-bound students said they would rule out schools based on costs alone. The college slashed its tuition for incoming freshmen in fall 2013 by almost $10,000, to $18,500 a year.

“I feel very strongly that a sticker price does not define the quality of the educational experience,” Thierfelder said.

He also decided the time was right to end the spiral of rising costs. Unlike many private schools that are losing students, enrollment at Belmont Abbey in 2012 was at the highest point in its 136-year history. New buildings were going up, program offerings were expanding, and the faculty was strengthening.

Thierfelder hopes the tuition cut will make college accessible to a broader range of students.

“I'm hoping for the kind of diversity that we claim in our mission statement: that they come from all backgrounds,” Thierfelder said. “If somebody is looking for a nice, small liberal arts college, I’m hoping that we're what they're looking for.”

For decades, most private college pricing has reflected the Chivas Regal effect – the notion that, whether in a Scotch or a school, a higher price indicates higher quality.

“Schools wanted a high tuition on the assumption that families would say that if they’re charging that high tuition, they must be right up there with the Ivies,” said David L. Warren, president of the National Association of Independent Colleges and Universities. “So schools would set a high tuition, then discount it. But when the schools in your peer group all have discounts, it becomes an untenable competition for students, with everyone having to increase their discounts.”

At the nation’s most selective institutions, discounts are usually reserved for low- and middle-income students, and one-third to a half of students pay the full sticker price. But colleges without a national reputation pass out discounts, in the form of aid, with a free hand - and not just to needy students.

“About a quarter of students at independent colleges are full-pay, and at institutions with small endowments and small name recognition, it’s single digit,” Warren noted.

Overall, private colleges discounted freshman tuition by 45 percent last year, a new high, according to a survey by the National Association of College and University Business Officers, and the share of freshmen getting institutional aid rose from 80 percent in 2002 to 87 percent in 2012, also a new high.

For all but the top-tier private colleges, these are tough times. Enrollment is flat or declining in many parts of the country. In November, Moody’s issued a report finding that more than 40 percent of colleges and universities face falling or stagnant tuition revenue. With family incomes stalled, many bargain-seeking students are drawn to public institutions. And for colleges that are not well-known, the race to lure students with big discounts is becoming unsustainable.

As a result, many private colleges are rethinking their pricing - whether cutting or freezing tuition, or locking in the freshman tuition for all four years.

“Whether you in fact make it more affordable with a reset or a freeze is not clear, since net revenues tend to come out about the same,” said Richard Ekman, president of the Council of Independent Colleges. “But there’s a public assumption that private higher ed is unaffordable, so anything that gets people’s attention and lets you have the conversation explaining that most people don’t pay full price, that it is within reach, is very important.”

Sewanee, the University of the South, reduced its overall cost of attendance – tuition, fees, room and board – by 10 percent in 2011 to be more competitive with the public universities elsewhere in Tennessee, and in Georgia.

“We’re happy with it,” said the vice chancellor, John M. McCardell Jr. “Our applications continue to grow, our selectivity and yield and retention are all improving.”

True, costs have crept back up, almost to the $46,100 pre-cut level, but Sewanee now guarantees that tuition will not increase during a student’s four years at the college.

With growing sensitivity to tuition increase, such fixed-rate guarantees are becoming more widespread. Just this week, Northland College in Wisconsin became the latest to announce such a step.

Roger Williams University in Rhode Island turned to fixed-rate tuition after some market research.

“When I got here in June 2011, there were so few people paying full price that one wondered why we bothered,” said Donald Farish, the university’s president. “If everybody’s getting a discount, the notion that there is a full price is almost meaningless. It’s a model that makes no sense and makes you feel like you’re in a Middle Eastern souk bargaining with the tourists who just arrived.”

Farish talked to the board about cutting tuition “to present a more authentic number” and hired consultants, Maguire Associates, to find out whether current and prospective families would prefer a campus that charged $23,000 or one that charged $36,000 but offered an average of $13,000 in aid.

To Farish’s surprise, twice as many families preferred the high-cost, high-discount approach, and the consultants warned that cutting tuition would cut the freshman class in half.

So instead, Farish has locked in freshman tuition for four years. This year, the university overshot its enrollment target by 100 students, Farish said, bringing in 40 more freshmen and retaining 60 more sophomores, “which I think was largely because their tuition didn’t go up.”

The consultant who worked with Converse and Concordia, Kevin W. Crockett of Noel-Levitz, said tuition cuts can be useful at colleges where the high sticker price is scaring off students, few pay full freight and the school is reasonably healthy overall.

“If the school’s doing badly, a tuition cut can look like an act of desperation,” he said. “Also, it has to be part of an overall business strategy, emphasizing the program.”

Converse, the nation’s only women’s college competing in Division II sports, met those conditions. After some difficult years, the college is on an upswing, with the largest freshman class in years, a new genetics counseling program, a new field house and a strong music school.

While the reset will have little effect on net revenue per student, Fleming said, the lower sticker price should increase interest in the school. Indeed, both applications and donations have increased.

“We’re taking the fear of the price tag out of the equation on the front end,” she said. “When I think about tuition discounting, it seems deceptive, like a smoke-and-mirrors game. I think a majority of colleges like us could do exactly what we’re doing if they trusted that they don’t have to buy students.”