The High-Tuition, High-Discounting Model for Higher Ed Looking Unsustainable

Private colleges are offering steeper tuition discounts than ever before –49.1% for 2016’s first-time, full-time freshmen. But the strategy does not seem to be luring students or boosting revenue. The hefty discounts, reports the Wall Street Journal, “signal how pricing power is shifting from schools to students as some grow skeptical about the value of a costly college degree.”

Private college prices, like hospital prices, are increasingly divorced from reality. Only a tiny percentage of households can afford to pay $60,000 a year in tuition, fees, room and board — and only a small percentage pay the sticker price. Private colleges are price discounting aggressively as they compete for a shrinking number of college students. Nationally, undergraduate enrollment fell 1.9% last fall to 16.3 million.

Despite the increase in sticker price, rampant discounting resulted in net tuition revenue only 0.2% higher this year, well below the estimated 1.8% inflation rate for institutions of higher education, the Journal reports.

Said Ken Redd, director of research and policy analysis at the National Association of College and University Business Officers: “The path they’re on may not be sustainable for very much longer.”

Bacon’s bottom line: At Bacon’s Rebellion we focus mainly on Virginia’s public, not private, institutions of higher education. The sticker price for public colleges hasn’t gone as haywire as they have at private institutions, and public colleges don’t discount prices. Not officially. But they do discount through the back door by setting aside increasingly large sums of financial aid for lower-income students.

This chart shows the meteoric rise of financial aid provided by public Virginia institutions between the fall years from 2005 through 2015, based on State Council for Higher Education in Virginia data:

At state institutions push tuition & fees ever higher, the tab becomes ever more unaffordable to lower-income students. So colleges set aside more money for financial aid… most of which comes from tuition… which pushes tuition prices higher.

While the cost of attendance and price discounting are muted in comparison to private institutions, Virginia’s public colleges and universities are facing the same challenge: fighting for a shrinking number of applicants. With continued tuition increases, they are testing the outer bounds of what students will pay. George Mason University increased tuition 5.5% for in-state undergraduates this year, and Virginia Commonwealth University raised its tuition 3.8%. Will students continue to pay such elevated charges?

While elite Virginia institutions may have power to raise tuition with impunity, middle-tier institutions should heed what is happening to private colleges and universities where aggressive pricing combined with a shrinking demand has resulted in declining enrollment and stagnant revenues. This fall, when enrollment numbers are tallied, will tell the tale.

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21 responses to “The High-Tuition, High-Discounting Model for Higher Ed Looking Unsustainable

  1. Higher Ed has an easy way to determine “demand” … and that is how many they turn away…

    I suspect for the private ones -they reached the bottom already…

    but say an institution like UVA or VaTec or VCU or even W&M… if they turn away a large number of applicants.. do you think they’re going to feel pressured to lower their rates?

    I’d also challenge the claim that costs are going up over aid to low income.

    the chart looks like higher tuition in general… and over a large number of institutions… so we need more evidence… and some specifics… or else we’re just shooting int he dark… i.e. .. the other day the high tuition culprit was expensive labs and “star” professors…

    the “brand name” higher ed that have way more applicants than accepted don’t have to reduce tuition.. and it’s quite likely they’ll put that “profit” into whatever things – further increase the number of kids who’d want to attend – thus keeping the demand up..and strong!

    isn’t this pretty much Econ 101? surely we don’t want govt messing that up, right?

  2. >>the “brand name” higher ed that have way more applicants than accepted don’t have to reduce tuition.. and it’s quite likely they’ll put that “profit” into whatever things – further increase the number of kids who’d want to attend – thus keeping the demand up..and strong!

    isn’t this pretty much Econ 101? surely we don’t want govt messing that up, right? >>

    Larry me boy,
    Gov’t already messes it up with such things as Pell Grants in increasing amounts. When gov’t is willing to subsidize universities, universities can and do raise tuition with impunity. Econ 101 has no impact at all. Now, in spite of those subsidies, colleges can no longer even stand by to think about perhaps they can charge more tuition for one simple reason: demographics. The supply of students has decreased.

    Re: Brand name universities. Larry, those universities have endowments that produce more income/money than contained in most countries’ annual budgets. They do their own subsidies.

    As for: >>the chart looks like higher tuition in general… and over a large number of institutions… so we need more evidence… and some specifics… or else we’re just shooting int he dark… i.e. .. the other day the high tuition culprit was expensive labs and “star” professors…>>

    What did you just say?

  3. re: govt subsidies… it don’t really change the dynamics of what each institution will do – to attract more customers and I INCLUDE the for-profit education providers also.

    All that really changes with the subsidies is that there will be more customers overall.. but the “competition” between the education providers in terms of plowing their profits back into things that customers want..

    that IS Econ 101… it works the same way .. it don’t matter if people are spending a tax refund …or a tax-cut.. or GI benefits.. etc..

    in terms of “the chart” and Jim Bacon’s never-ending “quest” to find out where all that extra tuition money “profit” and I assume figure out some way to “stop” it.. I think all of that is futile..

    and it don’t really matter what the charts show in terms of ever-increasing costs… as long as the demand is there.. and continues…

    railing about govt subsidies is just plain pitiful.. anyhow… when the whole idea of govt funding higher Ed (and K-12) is a subsidy also… what are we whining about? anyhow? the “KIND” of subsidy? whether it’s orange or purple? .. Good GAWD Crazy – you KNOW that it’s ALL “subsidy”.. why twaddle about the “type”?

    • Re “what are we whining about? anyhow? the “KIND” of subsidy?” Exactly. Requiring parents to pay not only for HE for their own child but also for a discount for someone else’s child is a tax on them, a subsidy for the other child.

      If it’s our policy to educate all our citizens at government expense, it’s simply wrong to tax just one group of citizens — upper middle-class parents — for it. If it’s our policy to tax regressively, redistributing benefits from richer to poorer, then let’s at least do so transparently with actual tax dollars, not through this hidden tax called “college tuition” discounts, or through government-backed loans no one seems to expect will ever be paid.

      • I totally agree. College tuitions are back-door income redistribution. If we want to make college more accessible for low-income students, society as a whole should carry the burden for this social policy — not students and their parents. Make the entire system transparent so we know how much we’re spending and who benefits.

        • so you are opposed to means-tested entitlements and benefits?

          but I agree with you on the numbers and I’m betting the numbers don’t support you… on tuition… remember you’re talking about tuition – on a wide scale through both pubic and private institutions – across the country.

          are you really going to assert that the reason for the increase in tuition on that scale and timeline is due to national redistribution of tuition from middle income to low income?

          geeze – just last week you were suspecting the problem to be expensive labs and “start” professors… you’re all over the map on the “reasons” why the increase.. of late.. it’s the low income folks..

          how about some data beyond these bogus correlation is causation charts? you seem to be saying – across the board that tuition increases are because of de-facto redistribution… cross-subsides… no matter the university or percentage of low income?

          geeze.

  4. Not dissimilar to an online chat I had with Verizon. I quoted the price offered by AT&T for service and asked what Verizon could do. Charge me about $70 more for the same basic service, but reminded me of the high-quality Verizon network. I replied the Verizon network was not worth $70 more per month.

    How much more incrementally are these degrees worth?

  5. How much? Well, as much as it proves that there is demand for..

    right?

    I think these companies are far ahead of consumers… For every TMT that says it’s not worth it… there’s a ton of others that say it is… and as long as that level of demand is present there is no reason for Verizon (or any other company or institution) to lower prices… and, in fact, if ATT raises prices… chances are Verizon will also if they think their service is inherently better enough that people will pay more for it.

    And there are other miserable “gotcha” things like the fact that your credit card is not only auto-charged.. it’s auto-renewed AND at the end of the year – the basic rate for service – goes up even more.

    If fact, I’m betting that TMT had something along those lines happen to him and now is looking to jump ship… but Verizon is way ahead of him…

    😉

  6. Consider this reflection on today’s juxtaposed posts:
    (1) Agricultural physically-demanding jobs that pay $50,000 a year plus and don’t require a college degree are going unfilled because the kids would rather work at Walmart.
    (2) “Private college prices, like hospital prices, are increasingly divorced from reality. . . . [Yet they] are price discounting aggressively as they compete for a shrinking number of college students.”

    Maybe we have too many institutions of higher education chasing too few student dollars. Changing educational expectations and changing job markets and the threat of automation are all pushing more to go to college, and changing demographics and price elasticity is pushing back.

    But there’s another big impetus to go to college here, the guilt that’s poured onto those who’ve been to college to help those attend who can’t afford to. And this translates into overpricing for those who can pay it, to subsidize those who can’t. Which is a social tax.

    For what purpose do we pay this tax? Equality of opportunity (leading to greater equality among people generally) is the usual reason cited. Now, I certainly can argue here that the way we go about achieving that goal is inefficient and counterproductive. Inefficient because it’s a highly regressive tax, levied not on the person benefitting but on his/her family, often at the expense of the parents’ retirement resources; or, levied on the person benefitting, but at the expense of that person’s freedom and potential growth at the time of greatest risk-taking in life; or, levied on the government, which backs all those student loans and pays them when the student (increasingly) defaults. Counterproductive because the way we raise aspirations and offer cheap loans fosters cost inflation and bureaucratic bloat and waste in higher education today.

    Let me say it again: we ought to accept the reality that high school is not enough life-preparation for our children today, that forcing the expense of college largely onto the backs of parents and future graduates is bad policy, and the only way out of this dilemma is to make community colleges free like high school, paid for by the government, and let the rest of the higher educational establishment fend for itself, selling the alleged superiority of its offerings when compared with community college without any direct government assistance.

    I say this not to argue for some liberal giveaway of government money but for the most efficient outcome from the government and family resources we ALREADY spend on this mess we have today.

  7. Jim post is painful reading.

    So much harm is being inflicted. So much more harm seems unavoidable. Large parts of entire generations are being hobbled by all the wastage, extravagance, and dysfunction that riddles higher education today.

    In the past two weeks, I have seen in real time how college and post grad loans that totaled up to $350,000 per graduate and $500,000 per couple hobbled even the most highly successful graduates’ future, obstacles to their ability to marry, to buy a home, start a family, or a business. Imagine all those young people, the vast majority, who are not in the upper 1% of graduates getting paying jobs, or even remotely close to them in incomes, how can all of these other graduates or dropouts even stay solvent?

    Why can’t we forcefully address these issues or even admit to them? And how can we not even admit to what is causing them, and instead hide the facts behind these extravagant prices that have little to do with education.

    Because in the end:

    As bad as the collateral damage done in 2008 by the irresponsible Sub-prime Mortgage loan bubble that rippled out to ruin the economy, this current college loan and education scandal will do far worse damage. It directly attacks all our young, and everyone’s future in this country.

    At least the growing discounts in student tuition forced on so many schools by the dwindling supply of students willing or able to play in this false system that labels itself higher education, will substantially reduce the debt incurred by students whether they graduate or dropout along the way.

    Painful as it is to many schools, these forced Discounts might force solutions on an entire broken system. But here we’ll likely lose schools that we can’t afford to lose. And others will survive and even thrive while poisoning the entire system and standing in the way of global solutions.

    I believe the rot is systemic, holistic. This snakes got many heads.

    • Yes, painful. You say, “At least the growing discounts in student tuition . . . will substantially reduce the debt incurred by students . . . [and] might force solutions on an entire broken system.” I hope so. But, for now, more discounts means a smaller and smaller subset pays not only their own way but also for the discounts given to others. We should all hate to see more and more of the cost of higher education shifted onto the backs of those parents who, because of their own successes in life, can’t qualify their sons and daughters for “financial aid” from these rapacious institutions. It was bad enough when my four children went to college.

  8. The logic here has a decidedly snowflake tone. In the case of UVA … why would any student be subsidized? Because their parents are of limited means? Who cares? Anybody accepted into UVA ought to be able to borrow the money and pay back the loan. The kid is going to graduate from one of the top colleges in the country. Why does he or she need to be given (as opposed to loaned) any money?

    You want to expand health care? Stop subsidizing young adults who have been accepted into a top university and will earn a high salary after they graduate. Talk about hand outs to the (soon to be) wealthy. Spend the money on people who are poor and very likely to remain that way.

    • Agreed. Spend the money transparently, through government programs openly paid for by taxpayers. That includes health care. The discounting of tuitions is hidden, but for the likes of JB’s reporting. As for why UVa would discount its tuitions (at the expense of parents of full-freight kids), it makes no sense except (1) greater market share, and (2) pressure from the GA to admit kids from a broader range of backgrounds. Neither of those provides a reason why any subset of parents should pay for those discounts.

      Signed: Resident Snowflake.

    • Exactly –

      In the case of UVa. (and institutions of its ilk) the primary purpose of many grants and discounts is not to help out to poor but instead to buy rankings by buying the acceptances of offers to kids with extremely High SATs, and especially so if you can buy out of state kids with high SATs from all over the 50 states (as far away from UVA as possible) so as to claim the mantle of Elite NATIONAL University per rating standards.

      UVA must do this to Keep climbing up the ratings chart to No. 1. It must steal as many student prospects away from its competitors whose national rankings are higher than UVAs. Otherwise UVA stays struck in place which means over time it slides down the scale, a horror of all horror for UVA and its ilk.

      UVA announced recently that its combined SAT average score for the first time reached the 1400 mark, up from 1395 from the year before. You can be sure that many affluent and not so affluent Virginians ended up one way or another paying big time for that 5 point bump with out of state kids. And also found their tuition payments dumped into the pot that pays for all those unreimbursed research costs that are now busting out through the roof at UVA.

      By the morals and values of these elite institutions a five point jump in SATs spread all over the county could well mean jumping one or two or three spots up the charts, pushing one or more competitor schools down below you.

      That is why too many institutions have been caught chasing after highly sought SAT applicants after their classes have been filled, just in hopes that those fooled kids will apply so that the school can reject them, and hang the kid’s scalp on their belt. The more highly qualified kids that only schools want but that you can say you rejected that better you look rating wise.

  9. ” Stop subsidizing young adults who have been accepted into a top university and will earn a high salary after they graduate.”

    ah.. THE …. Problem.

    Jim Bacon thinks these kids are being “denied” their rightful subsidy because it is being diverted to low income kids…

    I’m all for “free” basic 2 yr college but means tested.

    Any low income child in any school should be told and recognize that if they persevere and apply themselves even in “bad” and “disruptive” schools that they will get two years of college and a real opportunity at a real job.

    There are LOTS of jobs.. for 2yr college.. police, fire, EMS, medical techs, nursing, computers… etc…

    Our number 1 job should NOT be high salaries for only some kids of means .. but basic jobs for as many we can train.

    If someone wants to get the next two years and go for a higher salary – more power to them – but our problem right now is too many without sufficient basic employment to pay for their needs – and a lifetime of tax-payer-funded entitlements to make up for their lack of income.

    One year of entitlements – channeled into 2 years of community college will more than pay for the next 30 years of entitlements.

    • I agree such an entitlement will pay for itself. But there are too many obstacles to enforcement, and too much potential for abuse, to require that “Any low income child in any school should be told and recognize that IF they persevere and apply themselves even in “bad” and “disruptive” schools that they will get two years of college and a real opportunity at a real job.” We don’t do that for H.S.; shouldn’t for intro C.C. either. The only criterion should be graduation from H.S. according to the graduation criteria (or GED) applicable to everyone.

  10. it’s the low income students that doubt they’ll ever succeed … they can see the cards are stacked against them…

    There are occasional stories of philanthropists who promise each kid that graduates – 4 years of college – and while they do not have a 100% rate of success – they have high numbers… 70, 80, 90%

    that tells me if they KNOW early on – in the formative years that they actually DO HAVE a legitimate opportunity at life…

    ” Every year, 1.3 million students drop out of high school in the United States. More than half are students of color, and most are low-income. Low-income students fail to graduate at five times the rate of middle-income families and six times that of higher-income youth, according to a recent study by the National Center for Education Statistics (NCES).”

    I’m not opposed to helping other kids but if money is an issue and we can only do SOME kids – then we should means-test it.. especially for kids who are headed to college anyhow.

    RIght now, our K-12 schools are basically set up for college for the middle class … most schools spend twice as much as the state requires on core academic courses and most of the other half (that are paid for locally) are for those primarily headed to 4yr college not low-income kids to get them enough education to be able to get a job in the economy.

    I’m not only talking inner city – I’m talking rural … giving 2 yrs of free community college to kids whose parents make 100K .. I dunno…

    I’m primarily focused on those who do not graduate HS with enough education to get a job that pays sufficient income so they do not need entitlements. We need to focus on getting the lower-income enough education to be able to earn enough money to pay for their needs and not need taxpayers subsidizing them.

  11. does anyone actually know the NUMBERS of low income students at the Universities and the amount of additional subsidy they are receiving?

    I bet the percentage is small and the dollars to low income compared to total dollars is small..

  12. If taxpayers are going to fund all this, why not nationalize higher education? Put everyone on the GS schedule, thus, limiting pay, like Woodrow Wilson did 100 years ago to the telephone network. Perhaps, allow a certain number of hours per year for self-contracting work. Close down inefficient operations. We probably have many more instructors, etc. at the higher education level than we need. Put some pain on them.

    • I’m actually arguing that 4yr Universities privatize and not get govt subsidies and that high school be expanded to K-14 (2 yrs of community college ) and it be funded locally – but means test any course in K-14 that is not a core academic or occupational certificate course.

      All electives, sports, extracurricular, and any Community College course that does not lead to a certificate or acceptance into a 4yr institution.

      for 4yr – give students – not institutions.. vouchers .. and let the student pick the most affordable option for them.

      This does not prevent anyone from paying to have their kids take any course that is not taxpayer-funded.. they are free to buy any/all “extras” … for their kids.. but not with taxpayer money.

      you ought to like that TMT!

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