Tuesday, November 03, 2009

Net Cost of College Drops

tl;dr Although sticker prices have risen dramatically at non-profit privates, actual average cost has dropped due to institutional discounting.

The College Board's "2009 Trends in College Pricing" (pdf) is a fact-packed publication worth perusing. The narrative in the popular press is by now well-established: tuition keeps rising faster than the consumer price index. Examples:
  • "The Skyrocketing Costs of Attending College" (October 2009) In this article, one's eye jumps to the dramatic graph, reproduced belowThere is a disclaimer that these prices are not what students actually pay, but that topic isn't mentioned again.
Although that turns out to be true that tuition increases have outpaced inflation, one should pay attention to the fine print (quotes from "2009 Trends in College Pricing"). First the bad news:
Published tuition and fees at public four-year colleges and universities rose at an average annual rate of 4.9% per year beyond general inflation from 1999-2000 to 2009-10, more rapidly than in either of the previous two decades.
The rate of growth of published prices at both private not-for-profit four-year and public two-year institutions was lower from 1999-2000 to 2009-10 than in either of the previous two decades.
Once one goes beyond sticker prices and looks at discounted prices, the price increase (on average, at least) vanish:
Although average published tuition and fees increased by about 15% in inflation-adjusted dollars at private not-for-profit four-year colleges and universities from 2004-05 to 2009-10, and by about 20% at public four-year institutions, the estimated average 2009-10 net price for full-time students, after considering grant aid and federal tax benefits, is about $1,100 lower (in 2009 dollars) in the private sector and about $400 lower in the public sector than it was five years ago.
The excerpted graph shows that the dramatic change in sticker price did not affect net price at privates:
(grey is room and board, light blue is advertised tuition, dark blue is tuition after aid)

Where does the aid come from, that makes the difference between gross tuition and net tuition? In the College Board companion report 2009 Trends in Student Aid (pdf), we learn that private not-for-profits are discounting more heavily:
Institutional grant dollars per FTE student increased by 7%, from $1,718 to $1,840 (in 2008 dollars) from 1998-99 to 2003-04, and by 19% to $2,190 over the next five years.
That 19% figure is pretty dramatic. Note that this doesn't mean that the average discount rate increased by 19%, but we would expect a 4-6% increase. The report doesn't directly track that statistic, unfortunately. There is a chart of all aid sources for undergraduates for perspective:

The institutional grants portion lumps together publics and privates, and so doesn't give a good idea of what the discount rate is for privates. For more on that we can turn to a NACUBO publication "Tuition Discount Metrics," where we learn:
In the 1990s and early 2000s, discount rates jumped rapidly. For example, from fall 1990 to fall 2002, the average tuition discount rate (the share of tuition and fee revenue devoted to institutionally funded grant aid) at four-year independent institutions increased from 26.7 percent to 39.4 percent, and the share of first-time, full-time freshmen who received an institutional grant award grew from about 62 percent to 81 percent.
Discounts have stabilized at that level since, the article continues, pegging the 2007 figure at 39.1%. No data for 2008 or 2009 are given in the article.

Note that average costs and individual costs are different things. So even though net tuition costs have dropped at privates (excluding for-profits), the way that happens affects different kinds of students differently; discounts are unlikely to be evenly applied across the board because this defeats the purpose of the policy, which is to engineer the characteristics of an incoming class while maintaining the revenue stream. Often this can mean discounting prices to high-income families because those students are most likely to have high SAT scores. (see "Money, Genes, and College"). More in that theme after I've had more time to dig through the data in the reports.

The story of dropping prices is apparently not the same at for-profits (quote from College Board cost report):
For students at all income levels, net tuition and fees at for-profit institutions increased 8% to 10% per year beyond inflation between 2003-04 and 2007-08, compared to 0% to 2% at private not-for-profit four-year colleges, 0% to 4% at public two-year colleges, and -6% to 3% per year at public four-year colleges.
Notice that is net tuition, not gross tuition. Aid patterns are different too:
In 2008-09, 88% of students enrolled in for-profit institutions used Stafford Loans, compared to 55% in private not-for-profit four-year institutions, 42% in public four-year institutions, and only 10% in public two-year colleges.
It's not surprising that the business model of for-profits would show up in this kind of statistic, and it underlines some of the politics and attention being paid particularly to federal aid and loan programs for the for-profits.


  1. I recently spoke to a college president who was considering a significant tuition increase to bring his college's tuition in line with competitors in his admissions space. He perceives that low tuition correlates to low quality in the minds of the most highly qualified potential applicants. The expected result is that his institution is not garnering enough interest from this targeted segment.

    To avoid pricing the institution beyond the reach of currently enrolled students (and likely to be competitive with peer institutions who discount aggressively), he intends to raise the discount rate proportionally, discounting most, if not all, of the increase back to students.

    That's an interesting perspective on merchandising higher ed. It contrasts with "freehead" analyses I did in the 1990's aimed at reducing the overall discount rate and targeting institutional aid towards most-desired applicants. Your post suggests that the practice is gaining subscribers.

  2. I am familiar with one upper-middle tier liberal arts school that intentionally did what you suggest for three years in a row (right into the teeth of the recession) in order to push the sticker price up into the range of the next highest competitors. Predictably, it decreased demand and increased attrition, but they're sticking to it.