Higher Education

Financial aid “arms war” continues to drain cash from colleges

By offering steeper discounts to fill seats, institutions sap their revenue

The nation’s private colleges are distributing more dollars to attract students at a speed that threatens to unravel their fiscal health, new figures suggest.

Eighty-eight percent of first-time, full-time freshmen received tuition discounts this year and last, according to a survey of 401 private, nonprofit colleges released today by the National Association of College and University Business Officers. The average grant awarded in this academic year covered about 56 percent of tuition and fees.

That means colleges and universities have had to dip deeper into their endowments for money to supplement the tuition revenue they are getting.

The trend of offering steeper cuts to incoming students comes at a time of breakneck tuition price hikes at private four-year, nonprofit colleges. Between 2000 and 2015, tuition and fees at these schools surged by nearly 50 percent, from roughly $22,000 to more than $32,000, according to the College Board.

But because of the competition to give discounts, net revenue from that same period has remained mostly flat, forcing colleges to dig deep to make up the difference between what students pay and the actual cost of their educations.

The ratio of discounts to tuition is called the “discount rate,” and this year it hit an all-time high of 42.5 percent among all undergraduates, NACUBO said. That’s the equivalent of giving away almost 43 cents for every dollar that private nonprofit colleges collected this year from tuition and fees.

It also means that, while college tuition keeps going up, the revenue that colleges get from it is rising less. This academic year it rose only 1.2 percent for freshmen, compared to 2.1 percent last year. (For all undergraduates, revenue rose 1.8 percent this academic year; it had risen 8 percent as recently as 2010-11.)

And while the motivation to provide discounts is to attract more students, enrollment at private colleges continues to lag. More than half of the colleges that shared data with NACUBO reported that enrollment had fallen among undergraduates and first-time freshmen. In many cases the colleges are fighting an uphill battle with family apprehension about sticker-price shock: Almost two-thirds of the business directors of colleges with falling freshman enrollment in the past four years attributed the declining numbers to “price sensitivity.”

The report also noted that the enrollment declines might not necessarily signal troubled financial waters ahead. “Some colleges may purposefully reduce their numbers of students to become more selective or to correct for years when enrollment yield was larger than anticipated,” it said.

Flagging freshman tuition revenue for private, nonprofit colleges has been a cause for concern among industry watchers. After roughly 4 percent annual growth between 2004 and 2008, yearly increases in freshman tuition revenue took a nosedive after the recession, and haven’t recovered much since.

When inflation is taken into account, this academic year’s 1.2 percent growth in freshman tuition revenue actually translated into a net decline in “inflation-adjusted value,” the report said.

Private colleges get an average of 30 percent of their funding from tuition and fees, according to the National Center for Education Statistics.

NACUBO warned that “further declines in this revenue source may limit the institutions’ ability to fulfill their educational and public service missions.”

The tuition discounts don’t go only to students who demonstrate financial need. More than one fifth of institutional grant money at private colleges and universities went to students who did not meet the federal government’s definition of having financial need, according to NACUBO.

The practice of giving grants based on reasons other than financial need, which the colleges call “merit” grants, has come under scrutiny, as critics charge that colleges use the allure of merit aid to entice wealthier families to enroll. Those families are also more likely to negotiate with colleges for bigger discounts, while first-generation students who may not be as familiar with higher-education finance miss out on potential savings.

“Even in a year of lower endowment investment-returns, colleges and universities spent substantially more from their endowments,” the NACUBO president, John Walda, said in a prepared statement. “It is not surprising to see higher discount rates as many institutions are directing endowment spending to student financial aid.”

The survey considered all the fellowships, grants, scholarships and funds from endowments and philanthropic gifts that were given to students to defray their college costs. The 401 colleges that responded to the survey represent 42 percent of NACUBO’s private, nonprofit members.

This story was produced by The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education. Read more about Higher Education.

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