Higher education faces tuition disruption

Higher education faces tuition disruption

Experimenting with price at a time when higher education is being viewed as a commodity

Has college tuition begun to go the way of Walmart-style pricing? College administrators are experimenting with cut-rate models by freezing tuition, slashing sticker prices, and rolling back tuition, driven to discover a way to tip the scales toward enrollment growth. So far, results are mixed. Also, the excitement of experimentation is being tempered by the uncertainty of the current college marketplace.

And that uncertainty can lead to missteps. “Tuition reductions have been going on for years and, while it might be good in the short term and generate good press, it’s not a strategy I recommend,” says enrollment management consultant John Dysart, president of The Dysart Group.

Still, some institutions are taking action in this era of tuition disruption. Here’s a look at some approaches and the impact on enrollment and the health of the college or university.

(Related UBTech presentation: Multiple Delivery Methods Reduce Costs

Lock it in

Betsy Fleming, president of Converse College in South Carolina, says this year’s freshman class is 40 percent larger than the current senior class, which started in 2010. And requests for visits to the campus have increased exponentially. To what can they attribute that growth? Fleming points to the tuition being reset to $16,500 for 2013-2014, down from $29,124 in 2012-2013.

“The rollback is stable and we have more control over the aid we offer,” she says. “It communicates affordability up front rather than having a higher sticker price that you then have to explain.” The school can tag percentage tuition increases to family income.

However, Dysart says, the majority of schools lowering tuition are also reducing financial aid by the same amount, so the net doesn’t change. And, historically, enrollments don’t wind up increasing much. “Those colleges are right back where they started from. Some have miscalculated and ended up with a net drop in revenue,” he says.

Perhaps true to his observation, Fleming says the average net cost won’t change dramatically for students. That’s because the school is cutting back on scholarships and institutional aid, which has been adjusted appropriately so it is fully in line with actual endowed funds. Last year’s 57 percent discount rate is expected to drop significantly. When the final numbers are examined, Fleming says room and board rates may rise next year.

Roger Williams University in Rhode Island has an “Affordable Excellence” initiative that includes a tuition freeze and four-year tuition guarantee for freshmen. Freshman enrollment is up 10 percent over target, and the enrollment acceptance rate rose by a half percent.

Freshmen and sophomores have seemingly warmed to the freeze, with a retention rate of 6 percent—the highest in the school’s history—translating to $1.8 million. A consulting firm’s survey found that 63 percent of enrollees said locked-in tuition had a big impact on their choice of Roger Williams. Of those who did not enroll, the chief reason was price.

President Donald Farish says he originally requested a lowered tuition as well as lowered financial aid from the board, but a consulting firm suggested the university would be “committing financial suicide because people were used to getting discounts and things on sale.” In other words, a tuition of $36,000 with $13,000 awarded in aid is more likely to be accepted than a tuition of $26,000 without financial aid.

A 3 percent tuition increase would make a significant dent in the $1.5 million in revenue the school is foregoing. But, he says, “we’d have to turn around and give half of that back in aid.”

Instead, to cover the loss, the school is expanding its summer school, has doubled its philanthropic giving and beefed up online learning.

Yet Farish recognizes that focusing on price alone may have negative consequences. Financial aid was initially created for those who couldn’t afford a private school education, but because admitting high achievers helped improve the ranking and profile of college campuses, in the mid-’90s schools started extending ... merit aid to many students who could well afford the tuition,” he says.

This raised the ire of lower-income families. Financial aid expenditures rose, contributing to today’s high tuition/high discount model. Says Farish, “What does sticker price mean if no one is paying it? Now colleges are likened to the airlines and everyone’s suspicious that they are paying more than the next guy.”

“That convinced us that we had transformed higher education into a commodity,” Farish says.

Alan G. Walker, former president of Upper Iowa University, shares his thoughts on affordability, tuition policies, and challenges facing current higher ed tuition models. 

Make a deal

Whether a postsecondary education really is a commodity or not, Americans enjoy getting a bargain. Concordia University-Saint Paul reset its tuition to what it was a decade ago, dropping it by $10,000 to $19,700 for 2013-2014—a 33 percent drop back to its tuition from a decade ago. Officials discovered that “institutional scholarships are an affirmation of higher performance and parents want to be able to say ‘my kid got a scholarship,’” says Jason DeBoer-Moran, director of marketing and communications.

F. King Alexander, president and chancellor of Louisiana State University, has noticed a ‘let’s make a deal’ mentality. “Parents come to me and say so-and-so school charges $40,000 but is giving me $15,000 in scholarships, so it seems they want my student more than you do.”

Alexander believes that higher-priced schools in particular are implementing tuition rollbacks and freezes because they have “hit the wall, pricing themselves out of the market.” He feels parents have been influenced by what he calls the Chivas Regal effect, referring to what happened when a Southern private school years ago raised its tuition by $10,000 to match competitors in the Northeast, spurred by the idea that “parents think we are too cheap to be any good,” he says.

“You put average whiskey in a fancy bottle and then parents think it looks great but they have no understanding of students’ employability upon graduation; so [students] may have to go to graduate school to get a job,” he says. “Then the debts really start adding up.”

DeBoer-Moran says, “The market is so caught up in the price-equals-value conversation that there is a dissonance.” Concordia’s enrollment was at a high when its tuition was lowered, so it wasn’t a move of desperation. A lot of people said it was a shell game—you are cutting costs and cutting aid, too. We think the high tuition/high discount rate is just as much of a shell game,” he says.

Higher ed strategic change consultant John Stevens, president of Stevens Strategy, advises institutions to not make any “desperate moves.” He affirms that tuition freezes often don’t signify a net price change. “What’s changing is how it’s presented.”

Show them the value

Still, President Obama’s proposed College Scorecard, which would rank colleges based on graduation rates and graduate employment outcomes and salaries, looms large as a way to pressure colleges to reduce tuition so as to increase enrollments. It has been criticized for lacking a value proposition, yet at the same time has opened the door to dialogue.

LSU’s Alexander welcomes the open reporting of data about outcomes and student indebtedness, noting that in the last recession, parents took it upon themselves to look for the best values in higher education. “Many institutions don’t want people to know the actual net tuition, what the average family pays. It’s a secret kept in the secret garden. And you won’t find these stats on any magazine rack or in U.S. News & World Report. Let’s talk about alternative rankings, starting with the term value.”

Carol Schneider, president of the Association of American Colleges and Universities, dubs Obama’s proposal a Rube Goldberg policy, referencing the inventor known for devising complex devices to perform simple tasks.

“We welcome efforts to make net tuition more transparent, but ... it’s an impossible task to find a single algorithm that combines many different kinds of economic data and evaluates extraordinarily diverse institutions,” Schneider says. The College Scorecard, she adds, could actually damage higher education because it would focus student attention, not on student accomplishment or quality of education.”

Instead, it would be based on what economists think of as throughput, which in this case means how quickly students get in and out, she adds.

To further counter Obama’s emphasis on dollar-and cents outcomes, Schneider notes that human service workers such as teachers, social and child-care workers, and artists aren’t generally paid well yet make valuable contributions to society.

Scorecards and ranking systems aside, the key to a sensible pricing strategy is “understanding your position in the marketplace, potential students, and what affects their decision-making,” she says.

Know thy market

At Wilson College in Pennsylvania, understanding the student mix was an essential ingredient in developing a debt buyback policy. Under the policy, students who complete a full four years at the school and meet certain performance criteria may be reimbursed for up to $10,000 of their Federal Stafford Loan amount. Managing the program, starting in 2014, will cost $100,000, but President Barbara Mistick says she expects revenue to rise accordingly.

“Enrollments had been steady, but steady wasn’t enough for us. We needed to grow our enrollments and we think the cost of managing the program will be eclipsed by new enrollments,” she says.

According to Mistick, 40 percent of Wilson’s enrollees are first-generation college students, and understanding tuition prices is difficult for first-time families. “Price really makes a difference for our students to come and stay here,” she says. “We saw families leaving every year because of the cost and we didn’t want to discourage them from looking at us because our price was too high.”

The new policy takes some of the mystery out of the pricing and borrowing aspects of college, Mistick says. “It’s our job to have that borrowing conversation in advance instead of waiting until students are sophomores, when families are prone to signing any kind of loan at that time” without thinking ahead to the deferred debt.

Be honest

Indeed, unplanned debt is the biggest issue for families, says Sundar Kumarasamy, University of Dayton (Ohio) vice president for enrollment management and marketing. The school implemented a four-year net tuition guarantee for freshmen beginning in 2013-2014.

“We are smoothing the curve by not surprising students with fees, but with consistency over time,” Kumarasamy says. Parents appreciate that tuition bills are simple, with only room and board as additional line items. Kumarasamy says families often underestimate their borrowing needs, and that colleges have a moral responsibility to help students reduce debt.

Dayton officials, like at other private institutions, are concerned about losing students to low-cost options. And private institutions are facing the hard reality that people may reject higher education as an investment.

There also may be a downside to the four-year transparency plan. “The truth is scary to some people,” he says.

“Frankly, I’d rather have those people choose another school that fits them financially.”

Prepare for more change

Kevin Crockett, president of Noel-Levitz, says colleges are under more pressure to reset sticker prices, partly because of a contraction in the number of graduating high school seniors. He predicts the student market will be challenging over the next five years.

Institutions had fairly stable tuition discounts until 2008, and colleges could raise prices up to 6 percent and incrementally cover operational costs. Since 2008, the average annual tuition increase is only 2.8 percent, and more discounting has crept in.

“In response, some schools are cutting their rate of growth or implementing tuition reduction strategies,” Crockett says. “On the other hand, the higher tuition strategy breaks down a bit when schools are facing less people paying full price, so it becomes rational to question the high sticker price.”

Crockett has seen a decline not only in the ability to borrow, but also in the willingness of families to borrow for college. “I think we have scared the public a bit. A college education is still the best investment a person can make. We need to remind people of those benefits,” he says.

“There’s a lot of hype out there that schools are desperate,” Crockett adds. “And the notion that [current tuition trends are] a ‘last gasp’ is untrue.”

What is true is that tuition resets are still in the experimentation phase. As Mistick of Wilson College puts it, “If you don’t try these kinds of programs, you won’t know if they will work or not.”

Ellen Berman is an Atlanta-based freelance writer.


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