To keep up with competition from private colleges, many public universities are spending more money on student aid. While that approach has attracted lucrative out-of-state students, as well as those with financial need or high standardized-test scores, it could cut into revenues at a time of dwindling state support, new research suggests.
Increasing the discount rate, or the percentage of tuition covered by institutional aid from the operating budget, initially earns a public four-year college more revenue per student, according to research being presented on Thursday by Nicholas W. Hillman, an assistant professor of educational leadership and policy at the University of Utah, at the annual meeting of the Association for the Study of Higher Education.
But once the discount rate rises above 13 percent—as it is has done at a number of public colleges, Mr. Hillman says—the financing approach earns less of a payoff.
Mr. Hillman studied 174 public colleges and universities, finding that they had an average discount rate of 12.3 percent in 2008.
Between 2002 and 2008, he found, the money these colleges spent on aid from their operating budgets grew by 47 percent, while scholarships they gave from endowed funds stayed relatively flat.
Mr. Hillman fears that burgeoning aid budgets could push the discount rate past the 13-percent threshold on more campuses. "All these public colleges might really want to offer discounts so they can fulfill their enrollment-management objectives, but in the end they really need to be aware of the financial implications," he said in an interview. "Discounting is going to start to cannibalize revenues."
Comments
1. 11132507 - November 18, 2010 at 06:08 pm
Not surprising that the publics would ape the privates, where the discount rates have already weakened some schools to the point that their future is uncertain. They'd rather sacrifice money than sacrifice enrollments. For years I worked for a VP at a high cost private who would rather get more students, even if it meant an absurdly high discount rate, because x+20 # of students is automatically better than x # of students, even if the extra 20 don't generate enough revenue to educate them.
The question all must ask about discounting - how sustainable is it?
2. archman - November 18, 2010 at 07:21 pm
I really don't think that faculty want more students, at all. Rather the reverse, actually.
Our public colleges are grossly overloaded.
3. physguy - November 19, 2010 at 09:36 am
Here is a brief primer on tuition discounting. The practice began as a strategy for elite private colleges to diversify their student bodies. Affluent students paid the full tab, while needy or particularly meritorious students got a discount, usually labeled as a "scholarship." Once the practice became widespread, however, then nearly all applicants began to expect discounts. Like automobile shoppers, fewer and fewer were willing to pay the full sticker price.
Once tuition discounts became widely established, two things happened. First, schools got locked into the practice, because their competition was doing it. And second, the fiscal impact became burdensome, since the revenue from full tuition-paying students could no longer offset the cost of providing the discounts.
The rationale for tuition discounts is different for public universities than for the privates. While a few elite publics -- those with excess applicant pressure, such as UC-Berkeley -- began the practice to mimic their private competitors and recuit high ability students, for most the practice is strictly economic. Public universities discount tuition in order to recruit non-resident students. The reason, of course, is that state legislatures typically cap in-state tuition, but allow schools to charge a higher market-driven tuition to out-of-state students.
Recruiting non-resident students is seen by many publics as the only remaining way for them to generate extra revenue. With state-imposed tuition caps and subsidy cutbacks, public universities have virtually lost control of their major revenue sources. Increasingly, they see out-of-state enrollment as the only way to prop up their desperate fiscal picture and avoid laying off employees.
The fiscal argument for discounting non-resident students goes like this. The key financial parameter for any university is its per-student marginal cost, which is how many dollars a school spends on every additional student it enrolls. A school compares this number with the per-student marginal revenue it takes in by enrolling a student. If the marginal revenue exceeds the marginal cost, then the school "makes money" on each additional student. If the reverse, then it loses money.
A key point is that a school's marginal cost is the same for both resident and non-resident students, whereas its marginal revenue is not. Typically the marginal revenue for non-resident students is substantially higner than it is for in-state students, even after allowing for the state subsidy in-state students generate. In fact, the difference can be so great that most public colleges lose money on every in-state student, but make up the gap with non-resident students.
The problem, of course, is that all schools understand the math and are now competing for the same pool of non-resident students. Because tuition discounting has become their primary recruitment device, the marginal revenue of non-residents is falling and gradually wiping out their revenue advantage. Thus tuition discounting is, at best, a holding strategy that temporarily defers the day of reckoning. It is not a long term strategy for financial stabiity.
One last point. To recruit affluent full-tuition students, many schools try to make themselves more desirable to upper income applicants. The proliferation of sushi-serving dining halls, posh dormitories, luxurious fitness centers, and the like, although often condemned by critics as over-the-top extravagances, are actually part of a marketing strategy intended to prop up revenues. The problem is that once this strategy becomes commonplace, as it now has, it merely rasises costs without bringing in additional revenue.
The bottom line, therefore, is that tuition discounting ultmately becomes ineffective and counterproductive. It began as a tool for schools to become financially stable, but eventually does more damage than good by locking them into a costly practice from which they cannot escape.
4. drnancylbush - November 19, 2010 at 11:18 am
Response to archman: I doubt, based on my expereince, that what the faculty want is even a minor consideration in this equation.
5. david_brown - November 20, 2010 at 05:52 pm
Very nice summary by physguy. Like their private counterparts (CEOs) university presidents tend to follow the herd. And the herd are all pursuing the same revenue sources: Federal grants and out-of-state students. Unfortunately, these are both costly pursuits, and it remains an open question as to whether this approach pays off for all schools.