summarizes

Tuition Discounting Page 2 of 3

By the end of this lesson, students should be able to:

Define tuition discounting

Explain why discounting is used and how it affects enrollment

Discuss the negative effects of using tuition discounting

Discounting is relatively new in higher education. Over the past few decades most private universities have adopted various forms of tuition discounting to fill their classes. The practice of discounting has driven some private colleges and universities out of business and rendered others marginal at best. Reducing the price a student pays by foregoing revenue in the form of scholarships is a concise definition of discounting. Through the years most colleges have offered scholarships that are funded with “hard money” from endowment income and cash gifts. When private colleges and universities started using future revenue to fund scholarships, competition between institutions changed. This change has been manifested in creating demand that otherwise would not have been possible. Universities that manage discounting and strategically use it have flourished. It has been difficult to reduce the level of discounting once the practice was introduced.

Discounting occurs when a college or university establishes their price, takes in money and writes off merit based scholarships with that revenue. Colleges quickly copied each other when their competitors started offering these merit programs or they faced declining enrollments. Discounting can be reduced to a percentage for the purposes of comparison and to facilitate the university budget. There are various ways the discount percentage can be calculated; however, the most commonly used formula is to take the gross amount given out in discounts in one year and divide that number by the gross tuition revenue charged. It is not uncommon for private colleges to give away 60% of its tuition revenue. Most private colleges are very dependent on tuition revenue for survival. When a college gives away 60% or more of their tuition revenue there is too little money left over to pay the bills. Because students enter the institution every semester and others leave it is hard to change the amount given away for various reasons. Students and parents compare year-to-year scholarship levels and are very price sensitive. Also, once a student enrolls it is only the ethical thing for a college to do but give the same amount as long as the student remains enrolled and is making progress towards a degree. It will take at least four years before colleges can phase- in changes to the discount rate as a result.

Private universities must raise money through tuition and fundraising for nearly all of its budgetary needs and capital projects such as buildings. State supported institutions receive money from the government for all of their operations. So, state colleges and universities have not had to rely on discounting until recent years. As tax payers we should all ask questions

Tuition Discounting Page 3 of 3

when we learn that our tax money is being given back to students in the form of discounts because our tax dollars were used to subsidize the college in the first place. Discounting is primarily used for merit aid to shape the incoming class. Private colleges and universities use the merit aid to attract high ability students, to promote geographic diversity and to fill spaces in programs with lower than expected enrollments. This is how the private colleges compete for high ability students who would otherwise attend flagship public universities. Discounting is also used in combination with financial aid to attract and retain students.