Tuition Discounting – Does Anyone Pay Sticker Price?

A review of the book Why Does College Cost So Much? talked about one factor for the rapid rise of college tuition (cost disease). But today, I’d like to look at another factor the author’s take on: the practice of tuition discounting.

College costs are already subsidized for most students in one way or another. For example, the cost of educating students attending a state college or university is covered partly by the state (in the form of a state appropriation that goes to pay for part of the cost of running the school) and partly through tuition.

As states struggle with their budgets, due to increasing costs of things like healthcare and limitations on revenue due to economic fluctuations and tax revolts, their contribution to school budgets has shrunk dramatically. But, unlike other things states spend money on (like prisons), state schools have an option to make up this shortfall by increasing tuition and fees charged to students.

But such subsidies – which impact all students – are not the same as tuition discounts (which travel under the name of grants or scholarships) which impact individual students differently. While some of these grants are based on financial need and other on merit (such as academic achievement or athletic prowess), they all boil down to students paying different net prices to attend the same school.

Keep in mind that it is “sticker price” (also called “list price”) that gets all the headlines in stories regarding the skyrocketing cost of education. But as the authors of Why Does College Cost So Much? explain, discounting has a dramatic impact on what such list prices must be.

A simple example they use throughout the book is a 100-student college that costs $2,000,000 a year to run. If that school gets a $1,000,000 subsidy from the state or its own endowment, that means it must raise the other $1,000,000 from those hundred students.

One way they can do this is to charge each student the same $10,000 a year in tuition and fees. But if the school wants to give half its students a $1000 grant, then it must raise its sticker price to $10,500. Why? Because the 50 students who now pay $9500 (the new sticker price minus the grant) combined with the 50 students who pay full price ($10,500) add up to the same $1,000,000 the school needed to balance its budget.

Similarly, if the school wanted to be more generous and give half the student body a $2000 grant, then sticker price must go up to $11,000. In other words, the more schools provide scholarships and grants – need-based or merit-based – the more list price must go up to ensure no net loss in total revenue.

This means that one way schools could reduce tuition price (i.e., sticker price) immediately would be to end the practice of subsidizing some students through scholarships and grants and make all students pay the same (lower) list price. But schools are loath to do so for a variety of reasons.

Most importantly, scholarships and grants provide schools the means to influence the type of students who make up each class. If a school is interested in income and demographic diversity, for example, targeting grants to students who might otherwise not be able to afford to attend is a priority. And if a school wants to attract talented students who have a choice of which college to attend, merit-based scholarships are one of the few sets of levers schools have to influence an individual student to choose them.

In 1949, over 90% of college students attended schools in their home state. Today, that number is likely less than 50%. This means that each school (particularly elite schools) must now compete nationally over the same student “talent pool.” And while the authors don’t mention this factor, I suspect that things like the common application (as well as automation) means motivated students are applying to more schools, increasing the chances that they will have a choice that can be influenced by the “aid package” (i.e., price discount) they receive from each school where they are accepted.

But any increase in school grants, whether caused by the desire to keep admissions “needs blind” or a discounting arms race to attract the best students, will result in an increase in sticker price – even if fewer and fewer students ultimately pay list.

I must admit that I have not yet thought about the wide disparity between the list and net price in discussions that have so far centered on the skyrocketing costs of list. But given that I’ve got one kid heading to college in three years and another one four years after that, it seems worth it to explore what the “real” out-of-pocket cost for attending school might be for my own kids (assuming they don’t enroll in the University of MOOC which I’m guessing will not be operational by then).

To ground this discussion in reality then, I plan to dedicate the next few newsletters to exploring what the net cost for my kids might be as they reach college age, but do so in a way that is generalizable for anyone else staring down their own upcoming tuition bills. So sign up now (using that box to the right) as I dive down the tuition rabbit hole, starting tomorrow.