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 True Cause of College-Tuition Inflation?" (April 2009)

• "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.

• "College Costs Keep Rising, Report Says" (October 2009) refers to the College Board source article at the top, but chooses to underline sticker prices rather than net prices.

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.

However,

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.

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.

The Power of Discriminant Pricing

Imagine that every time you went shopping, prices of the items you bought depended on your ability to pay. If you were flush with cash, a cheeseburger might be $7, if not, you might get it for $5.50. It sounds terribly unfair, doesn't it?

Now think of the same question in a different context. The public schools that our kids attend typicially get a large portion of their funds from property taxes. But this tax depends on the value of the property, which is a good proxy for ability to pay. Rich folks live in McMansions and pay a lot more than the owner of a more modest home. Is this fair? It's the same question.

It's easy to see the downside (unfairness) aspect of this discriminant pricing, and perhaps that is psychological. But think for a moment about the inherent cost of fixed pricing. Imagine that you want a soft drink, but only have $.50 in your pocket. The machine requires $.55. It won't give you the time of day unless you pay full price. Suppose, however, that it were sentient, and you could negotiate with it. You could sometimes pay a little more and sometimes a little less, perhaps averaging around $.55. Wouldn't that be more efficient for all concerned? You get more soft drinks when you want them, and the vendor has a steadier cash flow. If this were done to all consumers, not just you, the average price of the soda could perhaps even be lowered because of the increased volume and attendant economies of scale. Let's say it's possible to decrease the average cost to $.50.

Taking this one step further, there will be people who can always pay more, and will always be paying, say $.55 for each fizzy beverage. They are no worse off than before the smart vending machines arrived, but lots of people are better off than before. Is this situation not fairer than the one where everyone pays the full original price? That point is perhaps debatable, but it seems a bit mean-spirited to deny the discount to those who benefit most from it.

In practice, this kind of thing goes on all around us. Store issues coupons and have limited-time discounts. Those with less money to spend are more likely to pay attention to these opportunities than those with more money, for whom their time is perhaps more valuable than the savings. The same thing applies to where you shop. If you want an upscale shopping experience, plan to pay more for the same items (or functionally similar, anyway) than you would at Wal*Mart.

The same principle applies to institutional aid. I wrote an article about this some time ago, but had to present these ideas recently in meetings, and so I did a rethink to try to make it more comprehensible. It's hard to explain average probabilities and demographic slices--it all sounds too theoretical.

Imagine that we look at a sample of applicants to our institution and have insight into their willingness and ability to pay for costs of attendance. This is represented in the graph below. Each bar represents an applicant, and the higher it is, the more cash they'd be be willing to cough up to come to our fine university. Generally this will likely look like a power law distribution, but I didn't try to hard to reproduce that here. It won't matter.


In the ideal case, we could use individually tailored aid packages to collect 100% of the area in those bars if we wished. We'll ignore the marginal costs per student in this exercise and just think about revenue. So the total revenue possible is the sum of all the bars, which could only be attained through discriminant (i.e., individual) pricing. What happens if we have a fixed-price model? The graph below shows two variables that depend on the price we set.


If we set the price at zero, everyone can attend. This is the blue line, which starts at 100% on the left, and decreases as the price increases. This is an obvious effect--the higher the price, the lower the attendance with fixed pricing. Revenue (the tan line) is more complicated because it's enrollment times price. This increases to an optimum price, and then decreases again as enrollment drops toward zero.

Notice that the maximum amount of revenue that's attainable in this fixed-price example is between 50% and 60% of the total. That is, by using fixed pricing, we cut our possible revenue by almost half. This is a powerful demonstration of the cost of the inflexibility of a single-priced model. If you think about the kinds of things you can buy for thousands of dollars--real estate, cars, college tuition--these things are generally negotiable. There's a good reason for that, as we've just seen.

The discount rate is the usual way to talk about how much institutional aid is being given. It may be assigned for reasons other than to increase attendance or revenue. For example, applicants seen as particularly desirable may be given 'merit' awards. The discount rate is the amount of unfunded aid given divided by the cost to attend.

A 2006 report from Noel-Levitz puts the average discount rate for private institutions at about 33%. You can also use the IPEDS comparison tool to compare your college's institutional grant average to a peer group you choose (and a lot more).