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Price Sensitivity Strikes Back

Belmont Abbey College and a handful of others are bucking the high tuition, high discount model.

By Duke Cheston

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December 20, 2012

For decades, rising tuition rates have been almost as reliable a feature of American life as death and taxes.  A substantial part of those increases has been used to fund large amounts of tuition “discounts,” a combination of merit- and need-based grants. The result has been a business model called “high tuition, high discount.”

Colleges charge high prices to some students, enabling them to charge relatively little to other students they hope to lure in. Colleges try to use these lower prices to attract brighter students and more socioeconomically diverse students while simultaneously increasing net revenues.

The idea has been around since the late 1970s, but there are growing signs that the model is unsustainable, and some schools are reversing directions. One of these in the forefront is Belmont Abbey College in North Carolina.

Next year, Belmont Abbey will cut its tuition and fees “sticker price” for freshmen and transfer students by roughly 33 percent, from $27,622 to $18,500. Other students will not receive the cut but the school has promised to not increase their tuition as it had previously planned to. Belmont Abbey will still offer scholarship aid, but not as much as it used to.

“It just seemed crazy to me,” said Belmont Abbey president William Thierfelder in an interview with the Pope Center, referring to the continued rise in tuition in American higher education. “We’re going to keep raising prices until when? When is it ever going to stop?”

Thierfelder, for his part, would like it to stop now. He told the Pope Center that he hopes Belmont Abbey’s example will create a “crack of light,” showing students, parents, and other schools that it is possible to back away from the high sticker price model.

Indeed, the high-tuition, high-discount phenomenon has become so pronounced that 42 percent of gross revenue from undergraduate tuition and fees was being “given back” to freshmen (via scholarships, fellowships, and other grants) in 2010, according to a 2012 study by the National Association of College and University Business Officers (NACUBO).

Thierfelder would not disclose Belmont Abbey’s discount rate, but said until now it has been slightly less than the national average. 

One problem that critics see about the high-tuition, high-discount model is that it is, if not exactly deceptive, certainly not forthright. A college may tell you you’re getting a $20,000 “scholarship,” when in fact you’re just paying what the average student at the school pays.

Economist Peter Sacks complained about the rapidly growing disconnect between appearance and reality (as measured by net price, the average cost of attendance for students) in an article for Minding the Campus. From 1994 to 2010, sticker prices rose more than 50 percent in constant dollars, while the average net price rose only 14 percent.

Some have criticized colleges’ policies of large discount rates on privacy grounds. They are fully effective only because the federal aid application (which is required for most discounts) obtains detailed information about the family’s income and assets. “A car dealer who demanded such information so that he could see how badly he could gouge you would either be out of business or in jail within days or weeks,” noted economist Richard Vedder in a speech to Hillsdale College.

Moreover, some evidence suggests that the high tuition, high discount model may work for some colleges, but as a whole it is counterproductive. A 2005 Lumina Foundation study by Jerry S. Davis found that, for the period surveyed, despite increases in institutional aid, many colleges saw no increase in bright students, diverse students, or revenues.

Another factor is leading Belmont Abbey away from the high discount rate: students and their parents are changing the way they choose colleges.

According to Thierfelder, prior to the recession of 2008-9, aspiring college students and their families tended to associate higher price with higher quality. Following the recession, however, they have become much more cost-conscious. As a 2012 poll by the College Board showed, over half of college applicants passed over colleges based on their sticker price alone, not considering the net price they would likely pay including aid. Tuition discounts just don’t seem to have the drawing power they once did.

A handful of private colleges other than Belmont Abbey seem to be catching on to the trend, cutting their published prices as well. The University of Charleston cut tuition by 22 percent for entering freshmen and transfer students this year. Concordia University in Minnesota is reducing tuition by the same 33 percent as Belmont Abbey this coming year. Sewanee University cut its tuition by 10 percent in 2011 and has pledged no increase over the following four years for that class of students.

The National Association of Independent Colleges and Universities lists dozens of other schools that have either promised to freeze all tuition or tuition for just one class or segment of students for one or more years.

Among those is William Peace University in Raleigh. The school, formerly an all-female school known as Peace College, made some big changes in 2011 in response to financial difficulties. It cut tuition by 7.7 percent in 2012-13, invited males on campus for the first time, and will keep the same level of tuition this year.

Belmont Abbey, however, contends that it changed tuition in the midst of relative prosperity. Although the Abbey is “not a mega-endowment university” in the words of Thierfelder—its endowment is only about $11 million—it recorded its highest-ever undergraduate enrollment in 2012 and is not planning to offset lost revenues with increased enrollment. 

Some critics have worried that a return to a low tuition, low discount model will hurt poorer students, but Thierfelder insists that poorer students at Belmont Abbey, at least, will be all right. Belmont Abbey still plans to offer $5 million in institutional aid, and the lower price will apply to lower-income students, too. They will still be eligible for outside aid like the Federal Pell Grant Program or private scholarships, and the lower price means that those dollars will stretch farther. 

Thierfelder hopes the lower sticker price will help students “recognize that this kind of education is accessible to them.” And he hopes that more private colleges follow Belmont Abbey’s example, for the sake of small liberal arts colleges in general. “I think other [colleges] are going to take a look at this and say let’s go here because this makes more sense,” he said. “I’m hoping that this will eliminate some of the discouragement that students and families have about private education accessibility.”

 


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