Universities in the U.S. and many other countries are struggling with rising costs and diminished revenues (Johnstone & Marcucci, 2010). On the cost side, human resources-related expenses – including, in the U.S., those associated with consistently higher-than-inflation increases in health care costs – consume the majority of institutional budgets (“About HEPI,” n.d.), while on the revenue side, governmental support for both private and public institutions is declining. Institutions have pursued a number of strategies to compensate, such as, on the cost side, employing a greater proportion of faculty on a part-time basis, and on the revenue side, seeking donations from alumni and corporations, and recruiting full fee-paying international students. Another popular strategy among U.S. institutions is tuition discounting, defined by the Lumina Foundation for Education as “the art and science of establishing the net price of attendance for students at amounts that will maximize tuition revenue while achieving certain enrollment goals.” (2003, p. 4) As Lumina and others have discovered, however, while tuition discounting has been effective for some institutions, it also has a number of pitfalls that need to be understood by institutions considering using it.
There are a number of reasons why tuition discounting has become, according to Lumina (2003), standard practice for most U.S. colleges and universities. Initially a means used by some institutions to compete on price during a time of falling enrollments starting in the late 1970s (Goral, 2003), as well as to ease the financial burden on selected students on a need basis during a time when government funding to institutions was being cut and institutions were therefore increasing their tuition rates (Parrott, 2008), discounting rapidly became a means for many institutions to strategically allocate financial aid (ibid). Institutions identify their optimal student mix, which might be based on merit, class, racial, gender, or geographical diversity, and so on. Then, “the most desirable students are offered higher discounts in the hopes that the resulting lower net cost relative to the competition will entice them to enroll at the institution.” (Parrott, 2008, p. 263) In theory, if institutions can systematically collect and analyze data on student enrollment, they can build a predictive model that allows them to fine-tune the discount amount in order to enroll a particular student at a rate that is sufficient to attract the student but not so much that it wastes institutional funds (Parrott, 2008). The resulting increased enrollment should boost overall net tuition and therefore revenue. For institutions, there is a clear advantage to using discounting to strategically enroll students and maximize revenue, as compared with, for example, charging a flat fee to all students.
Tuition discounting carries with it a number of pitfalls, or, as Lumina (2003) referred to them, unintended consequences. The first is a tendency for greater competitiveness among institutions over students. Goral (2003) described a process in which the early adopters of discounting gained a market edge, which they subsequently lost as more and more colleges adopted the practice. As a result, colleges tended to offer deeper discounts to gain a price advantage, and an “all-out arms race” (ibid.) followed. Parrott (2008) speculated that this situation is creating a generation of higher education consumers who shop for the best value education, and this, combined with the increase in opportunities for cross-border education, may lead to increasing numbers of students seeking the best-priced education in other countries, thereby “dramatically chang(ing) the global landscape of higher education.” (Parrott, 2008, p. 267) While an increase in competition among higher education institutions may be considered a positive development for higher education as a whole (if competition is a driver of quality), institutions that are not adapted to a competitive market may struggle to survive.
Ironically, given the increased need to be competitive, a second consequence of tuition discounting – especially given the discounting “arms race” - can be a diminished ability to compete on quality because discounting may require the diversion of tuition revenue from instruction, student services, facilities, and so on, to the financing of the enrollment strategy. Goral (2003) cited Redd’s demonstration that schools had increased expenditure on aid by a greater amount than they had raised tuition. The shortfall was made up by cutting back on student services and facilities, and as a result student retention suffered. Tuition discounting was therefore self-defeating in many cases. In order to be successful, institutions need to find ways to fund discounting in such a way that institutional quality does not suffer.
A third consequence of tuition discounting in the U.S. – though it is by no means an inevitable one – is that it has failed students in the greatest financial need. The Lumina Foundation’s (2003) report described how the allocation of aid by private institutions had benefitted students from higher-income households than those from lower-income households. As a result, the ability of less financially able students to choose between private and public institutions was diminished. Private institutions may consequently come to be seen as (or in fact actually become) ‘elite’ schools for the wealthy; higher education opportunities for students may come to be governed by relative wealth. Lower-income students bear a greater share of the burden of tuition increases. The Lumina report (2003) argued that offering aid to the more affluent is, in any case, an ineffective use of funds, because, “financial factors do not significantly influence the college choices of many affluent students to whom discounts are directed. Colleges offer many tuition discounts, or larger-than-necessary discounts, to students who would have enrolled anyway.” (p. 24)
As reported in the Chronicle of Higher Education recently (Labi, 2011) , British universities, which are now free to set tuition rates up to a limit of 9000 pounds, are for the most part announcing fees close to or at this upper limit, news which has met with a negative reaction, especially from student groups. A Universities UK spokesperson is quoted, “Much of the media debate has focused on a possible average fee level, but this doesn't take into account some of the fee waivers that will be on offer to students from poorer backgrounds.” (ibid.) Thus, it appears that British universities may be heading down the road to tuition discounting with very much the same rationale as U.S. universities has in the 1970s. While the Lumina report (2003) acknowledges that discounting has been successful for some colleges, the leaders of British universities should understand the potential pitfalls of the practice. Specifically, they will need strategies to fund discounting other than from non-tuition revenue sources; to articulate their market niche to prospective students in order to participate successfully in a more competitive, consumer-oriented education market; and to safeguard against slanting the allocation of aid toward the more affluent. This is sound advice to any institution considering tuition discounting.
References
About HEPI. (n.d.). . Commonfund. Retrieved from http://www.commonfund.org/CommonfundInstitute/HEPI/Pages/default.aspx
Davis, J. S. (2003). Unintended Consequences of Tuition Discounting. New Agenda Series. Lumina Foundation for Education.
Goral, T. (2003). Is Discounting Dangerous? University Business, (August), 22-26.
Johnstone, D. B., & Marcucci, P. N. (2010). Financing Higher Education Worldwide (Kindle Edition). Retrieved from Amazon.com.
Labi, A. (2011, April 21). Universities in England Seek to Charge Highest Fees They Can. Retrieved from http://chronicle.com/article/Universities-in-England-Seek/127224/?sid=gn&utm_source=gn&utm_medium=en
Parrott, S. A. (2008). Tuition Discounting to Optimize Enrollment and Revenue. Tertiary Education and Management, 14(3), 261-268.
