A study released by the USA Group Foundation reveals that, although more private colleges and universities use tuition discounting to attract a student body that can raise institutions’ academic profiles and national rankings, overwhelmingly this strategy fails. In fact, the study shows that discounting may lead to large losses in net tuition revenue, prompting schools to cut spending on instruction and other services to students.

Discounting Toward Disaster: Tuition Discounting, College Finances, and Enrollments of Low-Income Undergraduates was directed by Kenneth E. Redd, Director of Research and Policy Analysis at NASFAA, and published by the USA Group Foundation. The study is available here.

This study uses data from the National Association of College and University Business Officers’ (NACUBO) Institutional Student Aid Survey and the U.S. Department of Education’s Integrated Postsecondary Education Data System (IPEDS). Redd examines changes in tuition discount rates (the percentage of tuition and fee revenue used to provide institutional grants to undergraduates), tuition and fee revenue, total undergraduate enrollment, and enrollment of low-income undergraduates from 1990-91 to 1996-97.

"Many institutions try to meet their enrollment and retention goals through the strategic use of tuition discounting," Redd said. "This study did not review individual campus objectives. While some institutions are able to meet their goals through discounting, the results from this study demonstrate the pitfalls of this financial aid strategy. In light of these findings, campus administrators should examine their tuition discounting objectives, losses, and results to make sure that their discounting initiatives maximize the campus’s long-term objectives."

During the 1990s, many four-year private colleges and universities turned to the practice of tuition discounting to meet their enrollment and revenue goals. Under tuition discounting plans, colleges provide institutionally funded grants to undergraduates to help them pay all or a portion of their tuition and fee charges to attend their higher education institutions.

Colleges and universities have several distinct (and sometimes conflicting) goals for using tuition discounts: to increase enrollments of low-income and other under-represented students; to raise enrollments of students with high academic achievements or other talents; and to increase revenue from tuition and fees. The discounts may be awarded to students based on their demonstrated financial need, or may be based on students’ academic merit or other criteria established by the institutions. Campus administrators hope that tuition discounts can attract more of the "best and brightest" undergraduates to their campuses. Thus, discounting is seen as a way to help institutions raise their academic "profiles" and ranking in college guidebooks.

Discounting is a major departure from past uses of institutional grant aid. In prior years, institutional grants were awarded primarily on the basis of students’ demonstrated financial need, which was based on formulas and methodologies used by financial aid administrators at colleges and universities. Increasing enrollments or providing scholarships for the "best and brightest" students was not a major consideration. However, under tuition discounting, campus administrators use a portion of their grant dollars to fund academic merit scholarships and other "non-need-based" grants to attract meritorious students. Financial need is not a key criterion for merit-based grants, and competition among colleges and universities for high-ability students is often fierce. Thus, tuition discount dollars are sometimes provided to the students even if they and their parents could pay the full cost of tuition and fees.

Increasingly, higher education analysts have become concerned with the growing use of tuition discounting. Between academic year 1989-90 and 1995-96, institutional grants to students attending four-year private institutions jumped by nearly 70 percent in inflation-adjusted value, from $3.7 billion to $6.2 billion. Many analysts believe that, as a result of discounting, more of these dollars have gone to students from higher-income families. In the 1989-90 to 1995-96 period, institutional need-based grants to undergraduates from higher-income families grew by 79 percent, while the number of recipients from low-income families rose by just 1 percent. The number of academic merit scholarships and other "non-need-based" grants to middle- and upper-income students grew by 23 percent, but the number awarded to low-income undergraduates fell by 11 percent.

Use of tuition discounting thus brings many questions: Has the increasing use of tuition discounting helped to raise tuition revenue at private colleges and universities? What effect has discounting had on enrollments of low-income students, particularly at private colleges and universities with selective and highly selective admissions criteria? Has the use of discounting increased the academic "profile" of admitted and enrolled students, as measured by admission test scores? This study used data from the National Association of College and University Business Officers’ (NACUBO) Institutional Student Aid Survey and the U.S. Department of Education’s Integrated Postsecondary Education Data System (IPEDS) to answer these questions.

The databases were used to examine changes in tuition discount rates (the percentage of tuition and fee revenue used to provide institutional grants to undergraduates), tuition and fee revenue, total undergraduate enrollment, and enrollment of low-income undergraduates from 1990-91 to 1996-97. The results show that at least one quarter of the four-year private colleges and universities used discounting strategies that resulted in large losses of tuition revenue.

During the study period, the institutions with the greatest increases in discount rates raised their spending on institutional grants by $3,375 per full-time equivalent (FTE) undergraduate, but their tuition and fee revenue grew by just $3,069. Thus, these institutions lost at least $306 per FTE in net tuition revenue as a result of their increases in spending on tuition discounting. Some highly selective and selective institutions lost more than $800 per FTE in tuition revenue. Due to the large losses in revenue, these institutions had smaller increases in the funds they devoted to academic instruction and other educational services to students, and had declines in spending on maintenance of campus buildings and other facilities. The institutions with the largest increases in spending on tuition discounting also saw their total undergraduate enrollments decline by 5 percent and had lower six-year graduation rates. These results occurred because discounting strategies are often focused more on increasing enrollments of first-year students than on retaining students toward graduation.

Discounting strategies also do not appear to have significantly affected the academic "profiles" of admitted undergraduates, when measured by changes in median admissions test scores of entering first-year students. Data from the College Board show that the median composite Scholastic Aptitude Test (SAT) scores of first-year undergraduates who entered college from 1990-91 to 1997-98 grew by less than 3 percent at institutions with the largest increases in tuition discount rates. In the same period, the scores of freshmen who enrolled at institutions with the smallest increases in discounting grew by 10 percent. Among colleges and universities with less-selective admissions criteria, median SAT scores fell by 2 percent at institutions with the largest increase in tuition discount rates.

However, tuition discounting does appear to have helped institutions to increase their numbers of low-income undergraduates. The number of students who received Federal Pell Grants (grant aid targeted toward students with the greatest financial need) grew by 20 percent at institutions with the largest increases in discount rates, and by 16 percent at colleges and universities with the smallest increases in discounting. These results suggest that tuition discounting was more successful at helping institutions achieve their goals of providing greater access to higher education for low-income students than at attracting more academically talented freshmen.

The increased use of tuition discounting does appear to have made it possible for more students from all income levels to enter higher education. Unfortunately, at least one quarter of the private colleges and universities paid a steep price for this achievement. The rapid use of tuition discounting led to large losses in net tuition revenue and have resulted in decreased spending on instruction and other services to students. Four-year private colleges and universities should improve their retention programs and other programs for undergraduates before even more institutions follow this precarious financial path.