As the graduate of a Minnesota private, nonprofit college, I worry, as many others do, about whether it will be affordable for my grandchildren to attend a private college. This past year I approached several higher-education leaders to better understand current college costs. I was astonished to learn of a disquieting disconnect between how private colleges market their tuition rates and financial aid to the public and how the system is understood within higher education circles.
Here is what the Minnesota Private College Council, a consortium of 17 private, nonprofit colleges in Minnesota, reports to the public:
The average published rate for tuition and fees among their member colleges for the 2017-18 academic year was $39,611. With room and board, the average total cost was $49,418.
These private colleges also report more than $613 million annually in institutional grants and scholarships to undergraduates. About $100 million more comes from federal and state grants for low-income students. Some 94 percent of first-year students are reported as receiving grants and scholarships that do not have to be paid back. Still, the median (not average) debt of their graduates is $28,019.
You might assume, as I did, that a college’s published tuition rate reflects the total tuition revenue the college reasonably needs to collect per student to balance its budget. You might also reasonably assume from the reported financial aid statistics that our Minnesota private colleges enjoy massive endowments from which to provide institutional grants. Neither assumption is correct.
Years ago, everyone was indeed charged the same tuition rate, with scholarships and state and federal grants aiding those who needed help most. But today most private colleges hike their stated tuition rate substantially beyond what they need or intend to collect to meet their budgets.
By inflating their published tuition rate, private colleges have found they can charge different tuition rates, student by student, based not just upon financial need but upon a variety of other, non-need factors. Publicly, they explain that they are awarding students institutional financial aid to reduce their tuition costs. Internally, they acknowledge that what is happening is nothing more than discounts off their inflated price.
So how much difference can exist between the published price of tuition and the amount colleges actually budget and intend to collect per student? The National Association of College and University Business Officers for years has tracked the average tuition discount rate among 411 participating private, nonprofit colleges across the country. They estimated that for the 2016-17 academic year the average institutional discount was 49.1 percent for a full-time freshman, the highest level in the history of their survey.
This means the average tuition “sticker price” has been inflated to almost twice what colleges actually intend to collect per student to meet their revenue needs. This ought to shred the myth, perpetuated in media and college websites, that private colleges have a wealth of funds to offer as institutional financial aid.
Tuition discounting is nothing more than charging vastly different prices to different students for the same service. It has all the appearance of a shell game.
And what of public higher education? According to the College Board, public universities also discount some of their prices, but to a much smaller extent than private colleges. My attention has been focused on the privates.
Private college marketing and financial statements obscure enormous discounts. For the Minnesota Private College Council’s 17 colleges to provide actual institutional scholarships and grants of $613 million per year, they would need aggregate scholarship endowment funds of some $13 billion. They hold nothing remotely close to that amount.
So why would any college purposely double its published tuition rate from what it needs and intends to collect? The answer appears to be that most lack sufficient resources to cover the growing financial needs of their students. So by raising their sticker price and giving some of it back through discounts they hope to collect more than enough money from some students to cover some of the financial needs of other students.
Discounts unrelated to need also are used to compete for students and sold as “merit aid,” often a misnomer. Colleges will reduce prices to compete for high academic achievers and to attract a mix of gender, ethnicity, socioeconomic status and intended fields of major. Less well-defined are discounts for demonstrated leadership and service. An alumni referral, a student with a prior graduate in the family or a first-generation student might merit discounts. Add price reductions resulting from appeals, negotiations over competing college offers and filling empty seats with less-qualified students, and the picture emerges of a variety of tuition breaks uncorrelated to need.
The competition today for a shrinking number of college-ready 18-year-olds is particularly challenging for less-endowed, less-prestigious colleges. Charging many different prices to attract enough students is complex. A college needs to charge some students the full sticker price and others a very low price, with many varied price points in between. High sticker prices cash in on a consumer tendency to equate higher price with a more prestigious school and a better education. Meanwhile, large discounts (presented as generous levels of “aid”) suggest a great and flattering bargain.
Using business and behavioral pricing theories, colleges want to avoid leaving “money on the table” by giving too much of a discount to those who might be less price-sensitive. Meanwhile, inadequate discounts could mean missing enrollment targets, with devastating financial impact. Many colleges today use outside vendors with sophisticated software and algorithms to assist them in making these pricing decisions.
Colleges realize there are problems with all of this. Higher-education leaders are not in agreement that discounts are the best or most effective means to promote a more diverse mix of students.
As sticker prices increase, colleges have found it increasingly hard to fill the gap of financial aid for lower-income students as federal Pell Grants and state grants have not increased as fast as tuition rates, leaving low-income students with considerable debt.
Less needy students now expect merit aid. One Minnesota college touts that 92 percent of its students are now awarded some amount of merit-based aid, and another college claims that 59 percent of its students now receive only merit scholarships. Ethical questions arise, both publicly and privately, about merit- vs. need-based aid. Some worry that discounting has diverted aid from those who need it most to those who need it less. Even with all of this discounting, students from a broad range of family incomes continue to leave college with significant debt.
Should it surprise anyone that when a college doubles its sticker price beyond what it really needs, it creates a larger financial need, not only for low-income students but even for many middle-class students? Colleges fret that some who are shocked by their sticker prices (and are less informed about how the system works) will not even bother to apply. Ironically, colleges now struggle with how they might market a great education at a significantly lower tuition rate, but without the discounts they have encouraged students to expect. They also worry that a sizable reduction in sticker price would signal a college in trouble.
Inflated tuition rates obviously result in some students paying for the tuition cost of their own education plus all or a portion of another classmate’s — known in the industry as classmate subsidies. The magnitude of these classmate subsidies is unreported but probably large.
Alumni donors are saluted for their generous gifts to their alma mater. Yet nowhere do you find recognition for classmate subsidies, this hidden, non-tax-deductible contribution that current students and families are being compelled to make.
The public angst over high tuition costs and student-debt levels is understandable. My appeal to private colleges is to open up this conversation to a wider community. There is much to suggest that policies of high, inflated tuition rates and extensive, varied discount prices have failed. Focusing on providing the best education for the lowest price for everyone, with federal and state grants and college endowment and donor funds used only for the most needy, is timely and worthy of a wider discussion.
The current presidents and trustees of our Minnesota private colleges inherited this pricing and discount system, but they are maintaining and expanding it. Privately, though, many wish it were not this way. The Chronicle of Higher Education recently confirmed that 80 percent of college leaders surveyed think tuition discounting is unsustainable. Their survey research also found that college officials overestimate public understanding.
Of families surveyed, 40 percent reject a college on the basis of its sticker price and 60 percent are unaware of tuition discounting. At least one Minnesota private college, Concordia University of St. Paul, in recent years has unwound this pricing practice with notable success.
As a former CEO of a private business, I have great respect for the daunting challenges the presidents of our educational institutions face today. I have been assured that these pricing and discount practices are an important topic of discussion among the leaders within each of our Minnesota private colleges. The presidents and boards of trustees of these institutions are dedicated and thoughtful. But if this pricing policy is broken, my appeal to them is to engage their students, alumni and civic leaders in finding better solutions.
In my conversation among private college representatives, I often hear expressed the need for colleges to be more business-savvy, to adopt modern marketing techniques and to be pragmatic. I agree. But I have always countered that truth matters more. If telling the truth is bad marketing for a college, then savvy marketing loses my support.
This past year I appealed to all the presidents of our Minnesota private colleges through their consortium: Whatever you do, be transparent. Do not disguise grants and scholarships as financial aid, or “gift aid” as you sometimes hear, when no such funds exist and it is simply discounting your inflated price.
Colleges have an obligation not to mislead the public. Even car dealers have not resorted to the fiction that they are providing you “financial aid” when they cut you a deal off a sticker price. Do not represent that you have one tuition rate when you have many vastly different tuition rates. Be truthful with your alumni.
Truthfulness as a core educational value should not begin when a student is admitted to college. It should start with the college’s invitation.
Gary M. Johnson is a retired partner of the Dorsey & Whitney law firm, retired CEO of the Dorsey & Whitney Trust Company and a 1969 graduate of Gustavus Adolphus College.