For the many high-school seniors who already have submitted their college admissions applications, the season of waiting for an acceptance letter has begun. For their parents, there’s a different anxiety-ridden waiting game: For the financial-aid offers that will spell out just how much this is all going to cost.
Paying for college is now a lot like buying a plane ticket. You have no idea how much the person sitting next to you is paying because most schools discount their tuition to maximize their enrollment numbers and revenue. It’s no different than the airlines trying to fill as many of their seats at the highest prices.
The average discount for first-year students at private colleges is now a staggering 46 percent. But who gets a discount and how big of one a student gets is less straightforward than ever before. It used to be that colleges awarded their own aid dollars based mostly on a student’s finances: the more your family made, the more you usually paid, unless you were an exceptional student the school really wanted.
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But with more and more colleges widely employing the practice of “enrollment management” during the past three decades, the distribution of financial aid has become a lot less predictable. Now everyone, regardless of income, believes they deserve some sort of financial help. Half of colleges “front-load” their aid, meaning they give more to students the first year of college than in the subsequent years, hoping an emotional attachment will keep students enrolled.
Paying for higher education has turned into a game in which students and parents suspect they’re losing because a college’s pricing structure is rarely transparent. The problem has only turned worse in recent years as some schools have struggled to fill their seats. Those school are offering bigger discounts to students in higher income groups as an enticement to come to campus and bring at least a partial tuition payment with them.
Jane Wellman, an expert on college finances, figures that most of the increase in tuition prices at private colleges since the 2008 recession has gone to pay for discounts.
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Now most colleges don’t call them “discounts.” They wrap them in a prestigious-sounding name: merit scholarships. While some universities use merit aid to attract meritorious students away from higher-ranked schools, many others are awarding it to students just to fill seats, whether or not the students have the academic credentials to justify the scholarships. These discounts are given under the guise of merit aid because schools know that parents like to brag to their friends that “Johnny received a scholarship at X University.” Of course, they rarely say that the award might only cover $5,000 a year in tuition and the family is still shelling out thousands of dollars — or tens of thousands of dollars — in additional payments.
For colleges, finding that right balance between just how much of a discount to offer to attract just the right number or right type of students is a big business. Colleges and universities have outsourced most of that detailed financial analysis work to outside consultants. One of those consultants, Royall & Company, was recently acquired by the D.C.-based Advisory Board Company for $850 million. Obviously, the Advisory Board thinks it’s a big business, too.
Brian Rosenberg, president of Macalester College in Minnesota and a frequent critic of how colleges use merit aid, told me that at many schools the sophisticated discounting formulas are developed so much by outside consultants these days that even the folks running the financial aid office don’t understand them. “It’s really no different than putting a product on sale in order to meet revenues,” Rosenberg said.
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But what happens when that product is always on sale, and for every customer? How is a customer supposed to judge the value of a product if no one wants to pay full price?
The chief financial officer of a small private college in the Mid Atlantic told me recently that a family would have to be “crazy” to pay the full price of attendance at his school — some $50,000 this year for tuition, room and board — because so few students do. Virtually everyone on this campus, he said, gets financial help from the institution, some 99 percent of the student body. Indeed, so much of what’s coming in the door as tuition revenue is going back out as financial aid that the university’s “net-tuition revenue” — the cash they have to spend on everything else — has remained flat since 2008, even as the university’s advertised sticker price of tuition has increased by 4 percent a year.
It turns out that this university is not alone. Since 1999, the share of students paying a college’s advertised sticker price has dropped significantly. At moderately selective colleges nationwide, for example, the percentage of full-pay students accounts for just about 15 percent of the student body, down from nearly 30 percent in 2000, according to an analysis by Robert Kelchen, an assistant professor of higher education at Seton Hall University.
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The message from those schools seems to be that their product is not worth the price. That leaves the handful of parents who are paying full freight wondering why they are, especially since they’re not getting anything extra in return. Meanwhile, a select group of colleges and universities have been able to maintain their pricing power and still have students clamoring to get in. They have been able to prove their value is still worth the full sticker price.
Even if schools wanted to, unraveling their tangled web of discounting is not easy. A few weeks ago, The Washington Post , pulled back on almost all of its merit aid awards to focus more on need-based aid. But most presidents tell me that following Franklin & Marshall’s approach would be too risky for their bottom line.
So it looks like parents are in for another spring of playing the tuition discounting game with colleges. But like on an airplane, they’re not going to know what the person in the seat next to them is paying even though they’re headed to the same destination.
