Discount rates are a widely misunderstood measure (opinion)

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I can’t think of a metric that’s more misunderstood and misused among college presidents, administrators, faculty, and staff than the tuition discount rate. When a metric is generally misunderstood for its purpose, it becomes almost useless.

Dispelling Myths

What is the Tuition Reduction Metric? Why is this important and what does it really mean? The tuition reduction generally refers to the National Association of College and University Business Officers discount rate, which the organization defines as “total institutional grants awarded to undergraduate students,” captured as “a percentage gross tuition fees and income that the institution would receive if all students paid the full price of tuition and fees.

Each year, NACUBO publishes the results of its annual rebate study. The latest report, just released this week, considers 359 private four-year colleges and universities out of approximately 1,660 private colleges in the United States. From 2012-2013 to 2021-2022, the national discount rate reported by NACUBO for first-year undergraduate students increased from 44.8% to 54.5%. This ratio is a good representation of the general population becoming less willing — and less able — to pay for the rising costs of a college education over time, but it doesn’t mean much more.

Universities often misunderstand and misuse the tuition reduction measure as an indicator of the institution’s financial health. But the tuition discount rate is not an indicator of financial health on its own, nor can it be used as a ratio to accurately compare colleges to one another.

Administrators, presidents, CFOs, and others often think that increasing discounts are bad and lower discounts are good, but that may not be true at your college because a tuition discount rate n isn’t a complete picture of your finances. If we really think about it, on average, the increase in discounts is normal given the low growth in family incomes and the relatively rapid rate of price increases in colleges and universities.

Discount rates are not comparable across institutions

A few short examples may illustrate why we cannot rely on the discount rate as a means of comparing financial health and income. If two colleges have tuition discount rates of 50% and college A has tuition of $50,000 per year, and college B has tuition of $35,000 per year, we can easily see that College A has higher net tuition revenue per student because 50% of $50,000 is $25,000 and 50% of $35,000 is $17,500. The 50% discount rate cannot be used to compare schools because the net income is not the same. If College A had a discount rate of 60%, its net income per student would be $20,000, which is still higher than College B with a 50% discount. The net income associated with a discount rate depends on the amount of tuition charged, which means that the discount itself is not a relevant indicator of financial strength on its own.

One of the most important reasons why the tuition discount rate is the wrong metric for a college to use to determine financial health is that the NACUBO calculation does not distinguish between endowment-funded scholarships. university and those that are not funded. The NACUBO definition treats them the same for its discount rate. This is problematic because unfunded institutional grants and scholarships act more like a price cut, while scholarships and grants funded by endowment income are real money directed to student accounts and act as revenue for the operating budget. For colleges that can fully fund all institutional financial aid through their endowments, discounting means that low-income students contribute (indirectly) to the operating budget in a way that resembles full-salary students.

The following table illustrates how two colleges can have the same price, the same discount rate, and very different net revenues if part of a discount is funded by endowment revenue.

College A

College B

Tuition and Fees

$50,000

$50,000

Room and board

$10,000

$10,000

Global cost

$60,000

$60,000

Total Institutional Grants and Scholarships

$30,000

$30,000

—Funded portion of scholarships and grants

$0

$12,000

—Unfunded portion of scholarships and grants

$30,000

$18,000

Discount rate

60%

60%

Student net income

$30,000

$42,000

When college officials talk about reducing discount rates, they say they want to reduce financial aid provided by the college to students in order to increase net income. Since discounting represents institutional financial aid, fewer students would be able to afford to go to a college that discounts discounting too much. According to US Census data, in households where people are between the ages of 35 and 44, about 19% have incomes of $180,000 or more. A family often needs to earn $180,000 or more to be in the full salary category at an expensive residential private college. This means that in any pool of students, there are approximately 81% who are less able to pay. Access to education is important, and not just for the wealthy.

Net income is a better measure

When people talk about reducing discounts, what they are trying to say is that they want to increase net income. What can be done to increase your school’s net income?

Here are the solutions to consider to slow the growth of the discount rate and improve the net income:

  • Engage with a company that does econometric modeling if you don’t already. There are several reputable organizations that do this work. Econometric modeling optimizes the financial aid needed to recruit a desired number of students from an admission pool. For example, if you typically have 3,000 admitted students and want to have 700 net deposits in a freshman class, the model will tell you how to optimize your allocation to achieve this. If you want 750 students, the model will have to change and you will probably decrease your average net income per student to achieve this increased number. If you’re already working with a company that does econometric modeling for financial aid, don’t fight the system. Your market dictates what students will pay for what they think you are worth. If the econometric model gives you a net income per student of $28,000 per year to get 700 students, don’t expect to get 700 students for a net income of $30,000 per student out of that same pool of 3,000 admitted students. It often happens that having a slightly lower net income per student can yield more total net income, and the econometric model can tell you that.
  • Focus on increasing graduation rates. The average graduation rate from private, nonprofit colleges is 68%, according to federal data. Increasing graduation rates is one of the best ways to increase net income per student because students who stay longer are subject to price increases and pay more over time. Also, when a college increases its graduation rate, that college does not need to have as many freshmen, and students who need more financial aid may be accepted in smaller numbers. . Additionally, rankings are heavily influenced by graduation rates. If a college wants more affluent families and more academically talented students, it needs to show that the investment is worth it, and high graduation rates demonstrate that.
  • Make building endowment funds for scholarships a top priority. It takes time but is one of the best financial solutions. If the financial aid is a funded discount rather than an unfunded discount, it improves cash flow, regardless of your total discount rate.
  • Invest in the growing number of admissions applications to allow the college to become more selective in order to increase its financial strength as graduation rates increase.
  • Reduce other expenses. In my experience, colleges rarely assess and reduce expenses, but they frequently add expenses without checking whether those expenses lead to students graduating or whether those expenses support revenue generation. For example, if you have invested money in efforts to increase retention and over time retention rates are not increasing, you may have invested in the wrong activities and may be redirecting or deleting this expense without too much risk.

You may have noticed that I didn’t mention finding people who are better off to recruit as a solution. Admissions offices are already recruiting wealthy families. If you don’t have a significant number of affluent people committing to your school now, it’s likely because your institution isn’t yet attractive enough to them compared to other colleges. Affluent people can afford to be selective, and they are. For example, if your college has significantly lower graduation rates than your competitors, you won’t be as attractive to wealthy families because your stats aren’t good enough for them compared to your competitors. It’s not about finding wealthy families; it’s about showing that you’re a better option for them.

It makes sense for colleges and universities to find ways to cut costs and increase disposable income. It is not reasonable that they do so at the expense of their clients, the students. Rather than making the mistake of believing your college is giving out too much financial aid by cutting too much, examine the systemic issues that are preventing you from having a better reputation and stronger financial position by raising more funds for scholarships, increasing retention and graduation. rates and with a focus on student success. Your value to students will then improve, as will your net income.

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