Keeping Trustees Up To Speed

Keeping Trustees Up To Speed

Trustees need to know more than just the trends in the tuition discount rate.

Because trustees are responsible for the long-term future of the institutions they serve, not the day-to-day management, it is often difficult to know how much detail to provide on critical topics, such as tuition discounting. To begin, trustees need the institutional context of capacity in order to know what to focus on. If not at capacity (defined as the ideal maximum enrollment that could be handled without significant additional fixed costs), the focus needs to be on generating the maximum possible net tuition revenue (NTR) by discounting wisely (e.g., through data analysis). As William Bowen and David Breneman explained so eloquently in a 1993 Trusteeship article, "so long as the 'net revenue' contributed by (students who will come only for a discount) exceeds the marginal cost of enrolling them, it is to the financial advantage of such colleges to provide price discounts." If at capacity, then discussions need to focus on trade-offs between NTR and other enrollment goals such as quality profile, program mix, etc. For example, at the handful of elite institutions (read Ivy) that could meet their enrollment goals with no discount to their sticker price, financial aid truly is an expense, rather than a means of generating additional revenue to cover fixed costs. Trustees need to understand to what extent your institution is using aid to make the class versus to shape the class.

Providing all the gory details about need analysis would result in confusion.

Certainly data on trends in the overall discount rate (the percent of tuition revenue going back to students in the form of financial aid) is an important financial indicator that is commonly included on institutional "dashboards." And yet, it tells only a fraction of the story. If the discount rate is the only data point your board sees related to financial aid, don't be surprised if that is the data point on which they focus, without the appropriate context. On the other hand, providing all the gory details about need-analysis, the plethora of sources of financial aid, and institutional packaging policies would result in confusion, rather than a clear focus on the most essential factors driving the discount rate.

So how do you find the right balance between too little information and too much? A recent Trusteeship article by Nathan Dickmeyer posed 10 questions for board members to ask related to tuition pricing and financial aid strategies. Interestingly, eight of the 10 questions had to do with the impact of pricing and financial aid policies on students and their families (e.g., trends in net price to families, net price to average family income ratios; average "out-of-pocket" costs to families; average unmet need; unmet need by income level; average debt burden; ratio of debt burden to starting salaries of graduates; and trends in the financial need levels of families). While it is certainly important for trustees to have some understanding of the ability of their enrolling students/families to pay, it is equally important for them to understand the market's willingness to pay for the education being offered by this specific institution. To that end, some data to provide trustees, in addition to trends in the financial aid discount rate, would include:

Information on trends in the freshman discount rate as well as the overall discount rate. The overall discount rate is primarily influenced by past policies. The only discount rate that the institution can effectively influence in the short term is the freshman rate. Moreover, it is this rate that best reflects the current market's price sensitivity. Consequently, it is important for the Board to know about trends in that rate. In addition, it is the freshman rate on which national benchmarking data is available through the National Association of College and University Business Officers (NACUBO) annual Tuition Discounting Survey.

Information about the institutional sticker price, discount rate, and relative prestige ranking compared to that of key competitors. Often, an institution compares its sticker price and discount rate to a set of peer or aspiration institutions, with little consideration given to whether these institutions are actually its competitors. The most relevant price comparisons, however, are with other institutions that are most frequently in the choice sets of students who are part of your applicant pool. Furthermore, you need to be sure that you compare your institution to competitors on factors other than just sticker price. Across the country, we have found a statistically strong correlation between sticker price and prestige, as measured by such factors as mid-50 percent SAT/ACT scores; selectivity; and rank in U.S. News & World Report. A sample benchmarking report can be found in Figure 1 which clearly shows this correlation. Trustees need to understand whether or not your institution's relative price and prestige positions are in synch, as that will influence your prospective students' willingness to pay your costs.

Trends in applications and yields on nonaided students versus those receiving institutional aid. Another measure of your market's willingness to pay is whether or not you are able to attract and enroll students who will pay your full sticker price. Many institutions are now providing some level of discount to nearly 100 percent of their incoming freshmen, and have very low yields on students who are not offered institutional financial aid. In contrast, some Ivy League institutions are now offering significant financial incentives to students from families with lower incomes because they believe they are out of balance the other way. For them, high-need students are at a premium. It is important for trustees to understand where your institution falls on this continuum.

Differences in the net tuition revenue generated by desirable subpopulations. Board members frequently discuss goals for "shaping" the class without being provided the necessary information or taking the time to understand the financial implications of those goals. In many cases, the groups whose enrollment is most desired (e.g., students with impressive academic credentials; out-of-region students; etc.) are those who are least willing (or able) to pay the full price, and consequently generate the least net tuition revenue. Providing a simple chart showing differences in average net tuition revenue generated by different groups will help trustees better understand the costs of changing the freshman class profile. (See Figure 2 for a sample chart)

An understanding of the trade-offs between enrollment goals. Econometric modeling can help institutions understand the maximum net tuition revenue they could generate with their current applicant pool, and simulate how much NTR they would forgo in order to achieve institutional goals for quality, diversity (racial/ethnic and geographic), program mix, etc. This information provides the best measure of where an institution lies along the continuum of financial aid as expense versus revenue generator. Such information can be presented to trustees in a table format that makes the trade-offs clear. (See Figure 3 for a sample simulation summary table.)

To summarize, trustees need to know more than just the trends in the discount rate; they also need to understand the key factors driving that discount rate. Market position, changes in student willingness to pay, the socio-economic profile of enrollees, and institutional enrollment goals themselves are all contributing factors. Trustees need to understand the relative importance of each in driving the engine behind the "dashboard."

Kathy Kurz and Jim Scannell are partners in the enrollment management consulting firm Scannell & Kurz, Inc. (www.scannellkurz.com).


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