The Continuing Case For Price Resets At Colleges And Universities

When you are buying a car, you walk onto the lot or into the showroom, look at several cars and negotiate the price of the car you want to buy. In an afternoon, you may do this at several dealers and you come home either with your car or with very good information about how much your car will cost and how much of a discount you can get off of the sticker price of the various cars you are considering. Unfortunately, college shopping does not work this way. Although you can easily find the sticker price for a college, the tuition, few students pay this price yet most students do not know what they will actually have to pay until after they have applied to a school, been accepted by the school and received their financial aid award. According to the latest data from the National Association of College and University Business Officers, 89.5% of new full-time undergraduates at private institutions received institutional financial aid awards and the awards averaged 60.7% of the published tuition. Overall, private colleges received only 54.5% of their “list” price from new freshmen; thus a school that has a published tuition of $40,000 receives, on average, only $18,200 from each new freshmen.

Maintaining a price far in excess of what any student is paying at that school, a practice at many private institutions, significantly depresses the number of students and families who will look at that college. According to the latest survey from Sallie Mae and Ipsos on How America Pays for College 2022, 61% of parents and students will eliminate schools based on cost before even researching the school to see if it would be good for them. This percent increases to 70% before applying to the school; these numbers compare with 40% before researching a school and 54% before applying from the 2017 study. Thus, there are an ever-increasing number of colleges and universities which may be a perfect fit for a student which never even get considered because of their published price which often bears no relationship to what the student will actually pay.

Why do schools with very high discount rates who aid most of their students persist in pricing themselves in this way? The answers given include the following:

– We have always done it this way

– We need to price relative to other schools like us

– Students relate our price to our quality

– Students and their families like to get large grants and scholarships from us

Let’s explore the validity of these answers. Many schools are facing declining enrollments which are presenting serious financial challenges for them thus one can ask isn’t it folly to keep doing what you have been doing and expect different results? Pricing is certainly one of the first and most visible things many students and their parents see about a school and the Sallie Mae data indicates that a high price discourages students from looking at the school. Schools can look at what is happening in terms of the numbers of applicants they receive and when this is declining, they should evaluate the impact their price may have on their applicant pool. Schools can get data on the number of students who begin researching their institution and become discouraged when they see the price by the numbers of students who get to the page on the website with the tuition and do not continue looking at the school.

Many schools are concerned that if they no longer price similarly to the private schools to which they compare themselves, the type of student they want will not look at them. For most schools, they have a peer group of schools which have similar programs, similar students and similar prices but when it comes to their competitors in terms of the schools that students consider, most students who look at private institutions also look seriously at nearby public institutions which have much lower published prices. In head-to-head competition between the private and public institution, the public institution usually enrolls many more of the students than the private institution.

The argument which talks about the relationship of price and quality as a reason not to reset price is difficult to support given that the U.S. has a system of public and private institutions with vastly different prices. Many of our most selective, highest quality institutions are flagship public institutions and small public honors colleges with prices for in-state students far below the price of most private colleges. This confuses the price/quality argument. Also, if a school resets its price and chooses to be transparent about the amount of revenue that it has to support its programs, it can easily show that the price reset will not reduce the resources that it will have and may even increase them if it results in an enrollment increase which is usually the goal.

The final argument raised against resetting tuition is that students and their families like to get large scholarships and grants from the institution; it is viewed by many as an indicator that the school really wants the student. Schools need to turn the conversation to the net tuition that a student pays rather than the amount of aid because, at the end of the day, the most important variable for most families is the out-of-pocket cost to attend college. Schools can usually overcome the bragging rights that large scholarships and grants provide to families by packaging small grants along with non-pecuniary perquisites with their acceptance letters and by educating families about what is most important in terms of paying for college.

The latest data which shows students and parents are becoming increasingly price sensitive and eliminating schools based on price alone should be a wake-up call to the higher education industry to reevaluate its pricing strategies. The high price/high aid strategy which has been adopted by most private colleges needs to be reexamined. Higher education needs a much more straight-forward, predictable pricing strategy so that students and their families have a good idea of what they will have to pay to attend a school before they apply to the school.