The big non-secret for both? The difference between the “sticker” price and the “dealer’s” price.
With enrollments decreasing and revenues declining, administrators at the nation’s private institutions of higher education continue to discount tuition rates to keep their cash flow positive. Today, those discount rates are at an all-time high.
Why? There are at least 2 explanations:
- Net revenue to universities and colleges is expected to grow @ ~0.4%/student for the 2015-2016 academic year. Adjusting for inflation, tuition revenues have been flat for the 13 years.
- Having sold bonds to fund building projects, academic programs, and a burgeoning administrative layer to deal with all of the regulations imposed upon higher education by the federal government, the value of those bonds was originally based upon projected income streams and size of endowment. Today, the interest due on those bonds is consuming an increasing proportion of the annual budget because tuition revenues are not increasing, requiring administrators to “juice” cash flow by filling empty seats and dorm beds with “warm,” “paying” bodies.
This pattern mimes the real estate “bubble” of 2008. The National Association of College and University Business Officers (NACUBO) knows it, with a recent NACUBO report indicating that this strategy is "not sustainable."
Examine the chart carefully:
- The average private institution’s discount rate was 48% for freshmen. That’s a 46.4% increase over 2013! That means those institutions awarded ~48 cents to freshmen for every $1 collected for first-year tuition and fees. Parents gloat because their super-achieving children are receiving “scholarships” and “grants.”
- The average freshman received a “scholarship” that covered 54.3% of the institution’s sticker price. That’s a 53.1% increase over 2013!
- 89% of first-time, full-time freshmen received some level of tuition discount. That’s an increase of 88% oer 2013.
Anyone who oversees a budget and pays bills knows that trend isn’t sustainable.
The argument to continue discounting is that the body of “needy” students is increasing. However, what defines the term “needy” itself needs to be defined:
- Higher tuitions and fees translate into a greater need for discounts.
- The desire to be more “inclusive” and “diverse” translates into providing discounts to students who may not be as needy or prepared for higher education but certainly love a “discount.”
- While families may have more $$$s today than they did in 2008, the price of tuition has outpaced the growth of disposable income.
In the world of commerce and finance—like car dealerships—“price sensitivity” on the consumer’s part drives the “dealer’s” price.
Much to their credit, some private institutions didn’t take the bait: 31% reduced or maintained their tuition discount rate from 2013 to 2014. That’s 34.6% lower than between 2012 and 2013. Yet, good as that sounds, reducing or maintaining the discount rate can also present problems. Namely, more and more students are taking out government-funded tuition loans, which the nation’s taxpayers guarantee.
Q: When will this bubble burst?
A: When the Fed starts raising interest rates.
And guess who’s going to foot the bill?
Let the discussion begin…
To access the NACUBO report, click on the following link: