Tuition Setting: Rationale behind determining price in a time of limited budgets
September 26, 2011
Howard and Matthew Greene
"We believe it is time for someone to change the college pricing game.” So says John McCardell, recently appointed vice chancellor and president of Sewanee: The University of the South (Tenn.) in a video presentation about the institution’s historic move to lower tuition and fees by 10 percent across the board. “The days of high fees and high discount rates are over.” Thus declares the university’s website since the February 2011 announcement, noting further that: “Other institutions might wish to consider whether they, too, might cease the high fee/high discount/bidding war approach to enrolling a freshman class and instead bring the price of the education they offer more in line with a family’s ability to pay.”
How will families react? That remains to be seen. As many college officials and enrollment management administrators are well aware, there is a debate between those who believe lower prices will attract cost-conscious families, particularly in difficult economic times such as these, and those who argue for the “Chivas Regal” effect, where an increase in the cost of a college signifies luxury quality for the buyer (aka the student).
From our vantage point counseling many types of families over the years, it is apparent that neither scenario captures the concerns of parents and students. We believe that colleges dramatically underestimate the level of confusion and lack of knowledge about college costs and financial aid among families. Data also show that many families likely to qualify for need-based aid fail to apply for it. It would be hard to count the number of students who don’t apply to a college, particularly private institutions, due to the deterrent effect of a high sticker price, not understanding that the vast majority of students do not pay full freight.
Sticker Price Confusion
Just last week, we sat in the office with a middle-income family beginning the college search process with their daughter, the eldest of five girls. The father, an independent business owner, frankly exclaimed that though he knew the ins and outs of his business, budgeting, financial planning, capital investment, and so on, he had no clue where and how to start understanding how to pay for college.
He wanted his daughter to have access to a strong education, and was willing to pay what he could. At the same time, he didn’t want to negatively affect the options of his younger children or take on, or have his daughter take on, an excessive amount of debt. In such circumstances, we find ourselves going back to basic first principles in educating both parents and students about how to pay for college, how to apply to a diverse list of institutions offering need- and merit-based financial assistance, and how to access the many free resources available to help them understand and apply for aid.
In this case, the family was definitely considering sticker price as they began the college search. Yet it was apparent, as it often is, that a $5,000 to $10,000 difference (Sewanee’s 10 percent) was not going to be the issue if the student was accepted to a good college for her interests and goals. The biggest issue was going to be the difference between public institutions on the one hand and private colleges and universities on the other. From there, the Total Cost of Attendance would be the final variable they would need to consider, all of which will come as little surprise to most financial aid officers.
Yet the mire of information and process this family—with college-educated parents and some means to afford most of the cost of many colleges—would need to wade through was clearly daunting. Compound that scenario for a first-generation college-bound student, an international student, a family speaking English as a second language, a single-parent family, a returning veteran, or a student at a high school (like many) with little to no access to college or financial aid advising, and you have a substantial array of hurdles blocking or deterring families from considering and applying to colleges they could afford with the right amount of assistance.
There was a lot of press earlier in the year touting the creation of the net price calculators now mandated for every college website. But where is the emphasis on this information now? A Sept. 9, 2011 article in “The Choice”, a New York Times blog, did raise awareness about NPCs, and about some of the challenges families will face in comparing colleges with them. But are colleges putting the calculators front and center on their home page or, at the least, their first admission page, and explaining them adequately? In most cases, we don’t think so.
The adoption of these calculators is a move in the right direction in terms of showing families how much they really are likely to pay at various institutions. This can certainly help those schools with substantial endowments which they are using to defray the high published costs of their education by indicating to the majority of families who apply that, should they get in, they will not be paying that sticker price.
If standardized and clear enough (big if’s at this point), the calculators should allow families to more accurately estimate and compare their out-of-pocket costs, and possible eventual loan debt at various institutions, both those of different types (public, private, two- and four-year, in- and out-of-state, and so on) and those that seem similar in many respects (comparable private liberal arts colleges, for example) but which have significant variance in their pricing and discount models, use of need-based and merit-based aid, and so on. Families will then need to grapple with whether a college is need-blind in admissions and exactly what that means, and whether the college meets 100 percent of need.
This could force institutions to follow Sewanee’s lead and consider the “bidding war” approach they have been taking and either lower their stated price or seek to increase the amount of aid available to more students, or both. Families with younger children should also be able to forecast their college costs more accurately, which, we hope, will lead them to save more, and apply to more institutions they thought to be out of reach. Again, however, it is imperative that colleges and universities make information more readily available and comprehensible to the average family.
Tuition Decision Considerations
Getting back to tuition setting itself, the likely increase in transparency that will accompany the move toward comparable net price calculators should suggest to college and university officials that they reconsider: how they are structuring their tuition and fees; what type or types of need- and/or non-need-based financial assistance they are offering and to whom; and how this will impact the composition of the class they enroll and retain annually. Here are several questions to consider.
Who is involved in tuition-setting discussions?
According to Monica Inzer, dean of admission and financial aid at Hamilton College (N.Y.), colleges should consider the key stakeholders in the budgeting and tuition-setting process. At Hamilton, she works closely with her chief financial officer to function within a framework clearly established by the board of trustees. In Hamilton’s case, that means following a decision made “spontaneously” during a board meeting in 2007 to drop merit-based aid and concentrate on remaining need-blind in admissions and guaranteeing to meet 100 percent of need.
Inzer notes one of Hamilton’s mantras: “We don’t compete on price, we compete on quality.” For the college, that means modeling a variety of scenarios, integrating advice from the faculty’s budget committee, and presenting options to the board and president of the college. “We want to be able to maintain and sustain” what students and graduates expect from Hamilton, says Inzer, with the goal to raise tuition as little as possible, but the awareness that the college needs to do so to continue to “align the admissions process with the college’s mission.” Hamilton, with its long history and success in fundraising, has been able to maintain that commitment.
Jerry Lucido, an experienced enrollment manager and now professor of research and executive director of USC’s Center for Enrollment Research, Policy, and Practice, notes several key questions that should be asked during the tuition-setting process: “Are we supporting our education mission and our purpose with tuition policies or is this an exercise in business operations? Are our ambitions (those that are funded through tuition) in line with our mission or are they driven by externalities (like rankings)? Are we doing what we can to meet the nation’s need for college-educated populations across all race and income classifications?”
What is the picture for need-based financial aid? On the one hand, the federal government, in the Budget Control Act of 2011—which resolved the dispute over the debt ceiling for the short term—increased funding for the Pell Grant program. Seventeen billion dollars of mandatory funding over two years was put on the table, outside of the discretionary appropriations process, increasing the overall amount of aid available for more students, though not increasing the maximum aid award of $5,500 in 2011.
However, subsidization of graduate student loans was cut, as was the small reward for prompt repayment. With more negotiations to come on the budget and debt ceiling, there may be more federal student aid cuts on the horizon. One wonders how federal, state, and institutional aid can keep up with the costs of educating students. All of which is occurring in the face of state budget cuts and continuing economic malaise.
At many colleges and universities, the combination of decreased income from endowment, or a lack of much endowment income in the first place, and increased costs, has put significant pressure on administrators to raise tuition and fees. There also is the desire to set tuition in accordance with a college’s peer group, whether that means not going too high, or going too low and not bringing in available revenue. Heather McCowen, former assistant dean for enrollment and student services at Roosevelt University’s Chicago College of Performing Arts, notes, “There was a definite strategy by the upper administration to bring RU’s tuition more in line with peers. Unfortunately, we started to see a decline in applications and retention once the school went beyond the $25,000 per year point. ... Last year, this resulted in a 6.8 percent hike in tuition, with no increase to the scholarship budget. This had a lot of impact on the retention of students.”
Don Betterton, a college consultant and former long-time director of financial aid at Princeton, points to the increases in tuition and the accompanying discount rates at many private colleges as they try to remain competitive with public institutions. “Loans are going up and up,” he says. “There is earlier planning on a family’s part now, and they are getting more savvy on their college visits to talk with the financial aid office.” That said, Betterton believes that “the economic model of costs going up so much has got to break down at some point.” In the face of higher costs, families are looking to community colleges for two years and programs like NJ Stars in New Jersey to help keep expenses down and find a lower total cost of attendance to earn the four-year degree.
Will lowering sticker price tuition become a trend? It is too early to say. It is clear to us that the message colleges and the federal and state governments are sending—that college is affordable to most families, significant aid is available, and most don’t pay the full cost—is drowned out by the steady drumbeat of data and news stories showing price increases at all kinds of colleges, increases in the proportion of students taking on loan debt at ever-higher levels, and concerns among families about their ability to save and pay for college.
Committing to Lower Tuition Increases (Very few colleges and universities have actually cut their tuition, according to a National Association of Independent Colleges and Universities survey of members released in June.)
High costs, whether perceived or actual, lead further to a questioning of the value of a college education itself, with institutions forced to justify their existence and the value of their “pricey” education and “country-club” facilities. Arguments that even full-paying students don’t cover the total cost of their education, which is subsidized by alumni giving, endowment funds, state taxpayers, and so forth, fall flat with families wondering whether $20,000, $30,000, or $50,000 per year is not only a viable expense, but a worthwhile one.
We wonder whether further transparency will lead toward a significant trend of price decreases, with the actual net cost becoming more commonly or at least closer to the published sticker price. We think this might be inevitable for all but the most elite institutions (and perhaps even there), as even the wealthiest consumers begin to rebel against the logic of paying that much for a four-year degree.
Are there risks in cutting prices and changing the discount model? What about the possibility of a devaluing of a college’s “brand” in the marketplace? We think the external risks are negligible, with the benefits outweighing the risks. Just look at how popular some of the “best value” rankings lists are. In these cost-conscious days, and we are certainly in the midst of some of those, the notion of value investing resonates strongly. Smart families brag about their children attending not just colleges with good names, but colleges that have offered substantial value for the money. Yes, this can include significant merit scholarships and the discount model need not be jettisoned entirely. But here lies an opportunity for those colleges willing to step out ahead of the crowd and lead the way toward a rethinking of the ways in which we structure the costs of higher education.
Taking the Lead
Who should take the lead within an institution? It is clear someone, or a group within the senior leadership, must play a key role in setting tuition. That could be a president or chancellor, but could include a senior vice president for enrollment management, perhaps in tandem with the chief financial officer. The board of trustees or regents can also initiate and foster creative change.
A process inclusive of key stakeholders, from the senior leadership to faculty to front-line admissions and financial aid counselors, from current students and parents to alumni, will help take into account multiple viewpoints and generate the knowledge and support necessary to create policies and carry out changes that are in line with the unique needs and mission of an institution.