News Release
May 13, 2003
New Lumina Foundation research reveals unintended results of tuition discounting
INDIANAPOLIS — 'Tis the season for colleges and universities to package financial aid for new and returning students. A new analysis just released by Lumina Foundation for Education cautions institutions that the discounts they dispense to attract students may carry unintended, negative consequences for their institutions and for some low-income students.For many four-year colleges and universities, tuition discounting is a fact of life. Tuition discounting is the strategic use of financial aid to lower the sticker price of a college education for designated applicants. Tuition discounting is intended to influence a student's choice of institution in ways that match the institution's enrollment revenue goals. For example, schools may discount tuition to shape incoming classes, improve the students' academic credentials, or meet other institutional missions and preferences, such as attracting ethnic minority students. The report, Unintended Consequences of Tuition Discounting, shows that tuition-discounting practices have produced mixed results.
"Tuition discounting works for some colleges," said Martha D. Lamkin, president and CEO of Indianapolis-based Lumina Foundation. "A growing body of evidence suggests that tuition discounting does not always produce the desired effects, however. Many colleges and low-income students may be suffering the unintended consequences of this enrollment-management strategy."
Lamkin noted that, for this practice to be effective, institutional leaders must assess whether tuition discounting is successfully attracting students and increasing revenue for institutions. If a school wishes to expand access for financially needy students, it must exercise special care to ensure that enough financial aid is available specifically for this purpose.
Tuition discounting has become a standard practice for most four-year colleges and universities. According to a recent report from the National Association of College and University Business Officers, by 2002 the average discount rate for four-year private colleges was 39.4 percent of the published tuition price, with more than eight out of 10 students getting discounts. At public institutions, the average discount rate is lower but still significant: 13.9 percent, with roughly two of 10 students receiving discounts.
The report, written by Jerry S. Davis, vice president for research at Lumina Foundation, warns of the downsides of tuition discounting.
- Tuition discounting frequently fails to increase net revenue for colleges and may harm their ability to maintain the quality of their institutions.
- Tuition discounting does not always lead to students with improved SAT scores and may hurt access for financially needy students.
The analysis demonstrates that using large amounts of tuition and fee revenue for financial aid reduces an institution's options to use net revenue for other purposes, such as teaching, and has the potential of contributing to the financial distress of more than a few colleges. In his 2000 Lumina Foundation report, Discounting Toward Disaster: Tuition Discounting, College Finances, and Enrollments of Low-Income Undergraduates, Kenneth E. Redd, now the director of research and policy analysis at the National Association of Student Financial Aid Administrators, found that institutions with the greatest increases in discount rates raised their spending on grants by an average of $3,375 per full-time-equivalent student, but their tuition and fee revenue grew by just $3,069.
Tuition discounting may not deliver the students that colleges intend either. Most colleges with the greatest increases in tuition discount rates in the 1990s failed to significantly increase the median SAT scores of their students. According to a review of the College Board's Annual Survey of Colleges for 1995 and 1999, fewer than two out of 10 colleges increased their median freshman SAT Verbal scores by 11 points or more, a change that represents less than two percentage points on the test score scale of 600.
A worrisome outcome of tuition discounting, Davis writes, is that institutional aid practices, when combined across all institutions, have led to troubling financial results for lower-income students. "The report demonstrates that tuition-discounting practices have restricted access to grant aid for lower-income students to attend four-year institutions and reduce students' opportunities to choose among public and private colleges," Davis said. Davis is one of the nation's leading researchers in higher education finance.
Between 1995 and 1999, average institutional grant aid at both private and public four-year colleges rose faster for students with family incomes exceeding $40,000 than for students with lower family incomes, making it harder for the lower-income students to afford postsecondary education. During the same time period, grant aid from federal, state and private programs grew faster for students with family incomes exceeding $40,000 than for lower-income students.
The study suggests several implications for colleges to consider. Michael McPherson, president of Macalester College in St. Paul, Minn., and noted financial aid researcher, observes: "The most important message of this essay is that tuition discounting practices that may appear sensible, or even unavoidable, from the viewpoint of an individual college may turn out to be bad for colleges as a group and for society as a whole. Coming to grips with this dilemma is a major challenge for higher education policy and practice."
Lamkin notes, "In an era of constricting budgets and shrinking endowments, higher education stakeholders need to examine both the effectiveness and consequences of tuition discounting to institutions and their students."
She added, "Lumina Foundation is engaging in dialogue with higher education leaders and intends to support strategies to balance financial stability of institutions with access for all students."
William C. Nelsen, former college president and dean and current president of Scholarship America — the nation's largest private sector scholarship and educational support organization, echoed Lamkin's comments: "The practice of tuition discounting for many colleges has changed from helping low-income students to enroll to impeding their enrollment. All four sectors of the American financial aid partnership — federal government, state governments, the private sector and institutions themselves — must all do their part to improve the financial aid picture for low-income students."
About Lumina Foundation for Education
Lumina Foundation for Education, a private, independent foundation, strives to help people achieve their potential by expanding access and success in education beyond high school. Through research, grants for innovative programs and communication initiatives, Lumina Foundation addresses issues surrounding access and success — particularly among underserved student groups, including adult learners. The Foundation bases its mission on the belief that postsecondary education remains one of the most beneficial investments that individuals can make in themselves and that society can make in its people.
About Jerry S. Davis
Jerry Sheehan Davis, vice president for research at Lumina Foundation, has conducted research in student financial aid and related matters for more than 30 years and has published numerous monographs, research reports and articles. Before joining the Foundation in November 1999, he was president of the Sallie Mae Education Institute, vice president for research and policy analysis at the Pennsylvania Higher Education Assistance Agency (PHEAA), and director of admissions and financial aid at Webster University. Davis also has served as a staff researcher or manager with such organizations as the National Task Force on Student Aid Problems (the Keppel Task Force), the College Board and the Southern Regional Education Board.
For more information, contact Sara Murray, director of communications.
