Discounting the Recession

Has the demand for the products of higher education risen or dropped during the recession? There are suggestions from some quarters that shoppers are more discerning, and don't take for granted that loans for an education may be worth the cost (see here for example).

The Lawlor Group, an educational consulting outfit with a snazzy website, advises in their recent publication "When Market Conditions and Public Perception Collide," by Amy Foster:

Forget what you thought you knew about supply and demand.

As for supply, the article shows a map of the United States with projected change in high school graduates over then next decade. This picture varies dramatically from state to state. A section showing the southeast is reproduced below.

In opposition to the numbers of college-seekers is the price of higher education, which as we know from unrelenting media coverage has been on the rise: 4.6% in recent years, compared to the consumer price index of 2.2% per annum. Much of the cost is deferred:

The amount of loan debt carried by the typical graduating senior has more than doubled over the past decade, from $9,250 to $19,200—that represents a 58 percent increase after adjusting for inflation. (pg. 11)

The debt load has been exacerbated, the author argues, because of low savings rates and stagnant earnings.

Financial aid policies make no sense in many cases. There is an over-emphasis on merit aid over need-based aid:

[M]eritbased aid is more efficient in attracting high-achieving students—the type of student body that can make a college appear more elite in national rankings like U.S. News & World Report’s America’s Best Colleges. (pg. 17)

If you follow the research reports in Postsecondary Education Opportunity you won't be surprised by this--it's been a trend for a long time for universities to bid up the price of the "best and brightest" and perversely throw more and more money at those who can best afford college to begin with. Socio-economic status correlates with attractiveness in the admissions funnel.

I've argued that low-SAT students are disproportionately under-priced because of this effect, and that using indicators like non-cognitive variables, we can find excellent students, build a diverse student body, and feel a lot better about how our institutional aid budget is spent.

With this as background, some numbers from Noel-Levitz are very interesting. In their "2009 Discounting Report" they analyse the financial aid strategies and outcomes for 121 private colleges that partner with the company. The data set is from 2007-8. Among the highlights, they note that:

• Tuition rose 6% on average
  
• Unfunded aid increased by about 10%
• More aid is going to meet need
• Discount rates increased 1%
• Freshman enrollment increased 2.7%
• Net revenue increased 8% !!!

Here, Net Revenue = Enrollment * Tuition * (1-Discount rate). The net revenue per student is the real cost passed onto the student on average. Charts in the paper show that while discount rates have remained largely stable at about 33%, the actual cost to students has risen dramatically from $13,065 in 1999 to $19,660 in 2008, an annualized increase of 4.17%. The enduring strategy seems to be to raise tuition 6% and give two thirds of it back as discount, for a 4% net increase.

What is not spelled out in the article, is a fact that a careful reader can discern from the juxtaposition of the two sources for this post: that low-income students subsidize higher income students. This is because the former don't get as much merit aid because of lower SAT scores and other common predictors of success. They may get more need-based aid, but those sources has not kept up with the rising real cost of education. So they take out loans so that (in effect) colleges can bid up the price of the most attractive students, and secure a place in the US News report. This is a bit cynical perhaps, but not far from the truth.

This strategy is unsustainable. With the factors at play in the economy, this rate of cost increase will inevitably falter. Net revenue increases will have to shift from cost per student increases to enrollment increases. Institutions with excess capacity should benefit from this, if they take advantage of it by tailoring aid packages to meet need at an appropriate level, and by ignoring what US News has to say about their SAT scores.