The Nexus of Tuition Discounting and the Federal Funding of Higher Education
By Watson Scott Swail, President & Senior Research Scholar, Educational Policy Institute
A new study by NACUBO says that half (49.9 percent) of the revenues from tuition and fee charges at private, not-for-profit institutions of higher education are used to discount the sticker price of a college degree at these institutions. The lesson from NACUBO is that students and parents must look at the discounted price—not the sticker price—when making a decision on where to go to school.
And herein lies the problem. When the pricing formula in higher education requires a college education to understand it, it probably isn’t the best marketing system in the world. Unless, of course, institutions prefer obscurity rather than transparency in selling their product. I’m not so sure that is the case, but it could be argued from a business perspective that complexity in numbers equals higher enrollment to some degree. While an angle may be that discounting actually helps low-income students (it does) and others who could normally not afford these private schools, the real angle is that the system is preposterously designed when it requires a discounting program to undercut their actual printed tuition, fee, and room and board costs.
We don’t see this at the publics to near the same degree, of course, because their financial systems are different due in large part to the fact that they receive large direct state subsidies that significantly impact their public prices. As we will see, the privates do receive other subsidies in the form of federal grants and other funds. Without these funds, only a fraction of the privates would be in operation today. The most exclusive/selective, heavily-endowed schools would remain for two reasons: (1) they have the resources to provide free or reduced-price education to most of their need-based students anyway; and (2) they could fill their seats with full pays regardless if they wanted or needed. (see this link for information on the largest endowed institutions in the US and beyond).
But for the approximate 1,600-plus private, not-for-profit institutions in the United States, most rely on Pell Grants to help lower the burden on students and families. From there they then discount their tuition.
If readers don’t quite follow how institutions use a discount method, it really is an extra level in Pell Grant, although not always to the lowest-income families. Consider that an institution ends up with a pool of resources from their tuition and fee charges. With this anticipated, formula-driven pool of expected revenues, they are then able to redistribute the wealth to a few different populations. The first is lower-income students and families (need-based) who could not possible attend without a lower price. The second is for exclusive students that they want to entice to their institution through special institutional grants and scholarships. A third population are the legacy students whose parent or family had attended. The discount rate and final cost of attendance (COA) can only be provided to a student when they have applied to the institution and applied for financial aid via the FAFSA. Thus, many students actually self-select themselves out of certain institutions because they refer to the sticker price as the real cost of education. Rarely, and likely never, is the sticker price remotely accurate for need-based students.
This is how the financial aid business works in higher education and why the college search process can be so mind-blowing for families. The issue of discounting is complex because it can be argued, in principle, in a number of ways. First, if you believe in reducing the cost for low-income families at more prestigious (sometimes), private, not-for-profit institutions, then the idea of redistribution becomes a welfare-style program. The Pell Grant is, by definition, a redistribution program, and so is providing a “discount” to a large degree. However, if you believe that the cost is the cost and it should be transparent and factual while letting other Pell-like programs take care of affordability adjustments, then it comes across as an unfair system, especially for the more affluent who are ultimately bankrolling the redistribution process.
How we deal with this issue depends on which viewpoint you have. If you believe in the former, then you probably just live with the opacity of the true cost of a higher education at these institutions because at least you are on the receiving end of the redistribution. However, if you support the latter, then you probably want to remove discounting to a large degree and pay what you feel is appropriate, not a formula-driven method that will work against you every time.
In reality, public two- and four-year institutions receive the most Pell Grant funds available to the higher education system. In 2015-16, two thirds, or 69 percent, of Pell Grant funds went to public institutions of higher education, compared with 15 percent going to private, not-for-profit and 16 percent to for-profit institutions.[1] In most cases, public institutions receive a higher percentage of available federal dollars for student aid than private, not-for-profit institutions do. However, it is important to note that this sector takes up a significant portion of the distribution depending on the type of aid. According to the College Board[2], private, not-for-profit institutions take up 41 percent of Federal Work Study funds, 50 percent of Perkins Loans, 26 percent of Direct Subsidized Loans, 37 percent of Direct Unsubsidized Loans, 42 percent of Parent PLUS Loans, and 67 percent of Graduate PLUS Loans.
Thus, the private, not-for-profit sector, together with the private, for-profit sector, take up a considerable amount of public taxpayer funds that are used to help students go to college. An argument could be made for, and against, moving those funds to public institutions where the costs of providing an education are less expensive, in most cases, than at private institutions. The one argument is that institutions playing the discounting game should be limited in their access to public funding. True, they do not receive direct federal support except in federally-funded research but do receive federally-funded need- and non-need-based grant and loan funds. The need-based funds are supplied by taxpayers; the non-need funds supported by repayments from students and families.
I expect that most people do not support the action or conclusion of limiting federal funds to private institutions. To be fair, private, not-for-profit institutions have provided great expertise and knowledge to the world, let alone the US. But how much public support for a private enterprise is appropriate? Personally, I do not know the answer to this question, but I do know that sometime in the future we need to address it.
Regardless of how the question is couched, there is something inherently wrong with the massive discounting process we see at the private institutions. Again, most discounting is for the right reasons. But we should question whether there should there be discounting at all. In the end, discounting confuses the system and its users; makes the financing of a college degree difficult and obscure; and potentially misappropriates public funds.
[1] Author’s calculations using IPEDS Data Center (April 30, 2018).
[2] https://trends.collegeboard.org/student-aid/figures-tables/percentage-distribution-federal-aid-funds-sector-2015-16.