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Unintended Consequences
In practice, tuition discounting programs are diminishing access for the students who are least able to afford college

By Jerry S. Davis

Tuition discounting-using institutionally funded grant aid to help defray students' college expenses, and to influence their enrollment decisions-is standard practice at the nation's four-year colleges. Since coming into vogue in the late 1970s, tuition discounting has become an integral part of enrollment-management strategies that colleges use to try to build enrollments, increase net revenue and shape incoming classes to fit institutional missions and preferences.

Tuition discounting works for many colleges, helping them improve their enrollment and financial situations. At other colleges, however, discounting is having the exact opposite effect, increasing their financial instability and making it harder for lower-income students to afford the costs of attendance.

A recent Lumina Foundation for Education report, "Unintended Consequences of Tuition Discounting," describes how tuition discounting frequently fails to increase net revenue for colleges. In fact, during the past decade, colleges that have offered the deepest discounts generally have lost the most tuition revenue. Moreover, tuition discounting does not always result in increasing student quality. Colleges with the greatest increases in tuition discount rates in the 1990s did not see an increase in the median SAT scores of their incoming students.

Clearly, any college using large shares of its tuition revenue for financial aid has less net tuition revenue for other purposes, such as instruction, academic support, student services and faculty development. Diverting tuition revenue to institutional aid, if it cuts institutional quality, can eventually lead to enrollment losses, and those losses can lead to institutional closures.

Because the college-age population is growing rapidly, and the demand for college training for adult learners is soaring, the nation cannot afford to lose colleges. Nor can it afford to have financially strapped colleges reducing the quality of education and service they provide to their students and their communities.

An even more worrisome outcome of tuition discounting exists for public policymakers at the state and national levels: Tuition discounting and other accompanying institutional aid practices, when combined across all institutions, are diminishing financial access to four-year colleges for the students who are least able to afford college.

Consider these patterns revealed by the National Postsecondary Student Aid Survey results for 1995 and 1999. Between those years, average annual tuition and fees at private four-year colleges and universities rose by $2,345. During the same period, average institutional grant aid to undergraduates with family incomes below $40,000 rose by $658-only 28 percent of the increase in charges. However, average institutional grant aid for students with incomes above $40,000 rose by $1,992-85 percent of the tuition increase.

A similar pattern-with more affluent students getting larger increases in aid-occurred among public four-year institutions. At those institutions, where average annual tuition and fees rose by $501, undergraduates with incomes below $40,000 got $86 increases in institutional grant aid; for students with family incomes above $40,000, the average increase was $224.

The fact that colleges are giving smaller shares of their grant aid to their lower-income students (who represent one third of full-time undergraduates) might not be so troublesome if grant aid from federal, state and private programs were growing fast enough to compensate for the losses in institutional grant aid. However, between 1995 and 1999, grant aid from these non-institutional sources also grew at slower rates for lower-income undergraduates than for other students.

Students with family incomes below $40,000 got a 32 percent increase in non-institutional grant aid at the private colleges, and a 55 percent increase at the public colleges. Those with family incomes above $40,000 got a 109 percent increase at private colleges, 122 percent at public colleges.

The inequity in the growth rates in combined institutional and non-institutional grant aid is especially problematic for private college students with family incomes below $40,000. Their average increase in total grant aid from all sources covered only two thirds of their average tuition and fee increase. For their more affluent student peers, increases in grant aid covered 110 percent of the tuition hikes. According to the Advisory Committee on Student Financial Assistance, the shortfall in grant assistance creates hardships for lower-income students. Many such students have to borrow more, work longer hours (possibly detracting from their academic performance) and make other sacrifices to meet the increased net charges.

At public institutions, the average increase in tuition and fees was only $501, small enough to be offset entirely by increases in total grant aid. However, the lowest-income students' $322 net growth in total grant aid after subtracting tuition and fee increases was hardly enough to cover costs of books and supplies for one semester. Sharp increases in public college tuitions since 1999 are certain to have outstripped that net growth, effectively cutting purchasing power for these students.

Another adverse effect of shifting grant aid from lower-income to more affluent students is that it has increased the gap between net tuitions at public and private colleges, thereby making it harder for the private colleges to compete for students.

Between 1995 and 1999, the average "net tuition gap" (net charges after tuition discounts and grant aid from all sources) for students from families with incomes above $60,000 either remained constant or narrowed. Tuition discounting seems to be working for the more affluent private college students. But the same cannot be said for the less affluent students. The net tuition gap for students with family incomes between $40,000 and $60,000 increased by 3 percent between 1995 and 1999, while the gap for students with incomes below $40,000 rose by 27 percent. Lower-income students' ability to afford to choose private institutions has diminished because both public and private colleges have shifted more of their institutional grant aid away from such students to their more affluent peers.

What do the unintended consequences of tuition discounting mean for policy and policymakers? Tuition discounting has produced two categories of adverse effects: reduced financial access for lower-income students at both public and private colleges, and current and threatened financial difficulties for many private colleges.

It is unlikely that tuition discounting has led (at least so far) to financial difficulty for many public colleges, because they do less of it, much smaller percentages of their tuition revenues are used for discounting, and they receive state appropriations. Tuition discounting by public colleges has, however, led to financial difficulties for many of their students.

Implications for access
Many thoughtful higher education administrators and policymakers have reviewed and discussed potential solutions to the problems generated by tuition discounting. To respond to the financial access problem for lower-income students, for example, knowledgeable researchers and observers have raised the following considerations. Given diminishing state appropriations for public colleges, and given the increasing competition among private colleges for students, it seems unlikely that public or private colleges can, by themselves, afford to reverse the tuition-discounting trend and sharply increase institutional aid to lower-income students. Colleges are acting in their own self-interest to achieve important institutional goals through their tuition discounting practices. Consequently, many may be unwilling (or unable) to devote larger shares of their aid dollars to assisting lower-income students.

The federal government could help greatly by increasing Pell Grant and Federal Supplemental Education Opportunity Grant funding to keep pace with rising college costs. Increasing federal grant aid, however, may not alleviate financial difficulties for lower-income students if colleges continue to shift their institutional grant aid to students with higher incomes. Increased federal funds might just replace diverted institutional funds, leaving lower-income students no better off.

At least two strategies could help avoid this situation. The federal government could demand that colleges match new, larger federal grant awards to lower-income students with their own institutional aid dollars, thus creating an incentive to leverage federal aid (and a disincentive to cut institutional aid). Or, the federal government could reintroduce a "maintenance of effort" provision that was featured in the early federal campus-based aid programs. Such a provision would require colleges to "maintain" the amounts of institutional aid they currently provide to lower-income students. The first solution would leverage more aid for lower-income students; the latter would at least maintain current levels of support.

State governments could also act to help lower-income students. In recent years researchers have documented significant increases in "merit-based" state grant programs at the cost of financial support for "need-based" state programs. Although there is overlap in recipients from both kinds of programs, the majority of "merit-based" grant recipients are from families with higher incomes. States would be wise to examine all of their grant programs to learn whether they are working as intended, and to determine to what extent the programs produce unintended financial barriers for students with the least ability to pay for college.

States should determine who is being served by all of their aid programs, what kinds of financial assistance their state grant recipients get from institutional and non-institutional programs, and whether this combined aid can meet the financial needs of lower-income students.

This knowledge could lead to the development of state grant program policies that supplement or complement aid from institutions, the federal government or private sources. Because funding for student aid from all sources is limited, it is imperative that state grant program policies be structured to maximize intended enrollment effects of dollars from every source.

Implications for institutional health
Higher education experts have also considered the second category of problems created by tuition discounting: threats to the colleges' financial well-being. College administrators and policymakers have offered several means of addressing these matters. Even though discounting practices are producing unintended consequences for private colleges, it would be very difficult for the vast majority of them to stop or reduce discounting now. The practice is too widespread, and discounts are now expected by many students and their parents. Few colleges could decide independently to reduce tuition discounting without losing enrollment to competing institutions.

© The New Yorker Collection 1994 Mick Stevens from
All Rights Reserved.

However, private colleges that compete for similar students in the same student marketplaces could collectively agree (if federal laws prohibiting such agreements were changed) (a) to focus their aid awards solely on meeting students' financial needs; (b) to equalize the estimates of students' out-of-pocket costs of attendance; and then (c) to compete with each other on factors other than net price.

This could help to slow tuition increases, because less tuition revenue would be required to support discounting. The probability of such agreements working successfully would be enhanced if the systems used by colleges to calculate student and family ability to pay for college produced better assessments than the need-analysis systems used today. Improved need-analysis systems would produce better estimates of willingness to pay as well as ability to pay.

Even without a new agreement on competition, private colleges and their associations could implement more public relations efforts to better inform students and parents about the factors that influence tuition charges and increases. A well-conceived information campaign could help demonstrate how institutional quality, services and mission are related to net tuition. These efforts could also help focus student and parent attention on factors other than price in their college choice decisions. Or, at the very least, these efforts could lower the influence of price. Either result could reduce tuition discounting.

Another idea sometimes discussed applies best to several states with larger numbers of private colleges. These states could establish and fund programs of increased direct financial assistance to private colleges that enroll and graduate lower-income students. The rationale for this subsidy is that it would be more economical and efficient to subsidize existing private colleges that meet public purposes than to build new public college campuses. Direct financial assistance would reduce private colleges' need to discount tuitions to raise revenue, just as appropriations to public colleges suppress the need to raise tuitions on those campuses. States could also decide to directly support private colleges when those colleges keep annual tuition increases from exceeding inflation.

© The New Yorker Collection 1987 Gahan Wilson from
All Rights Reserved.

It is clear that tuition discounting has produced unintended, frequently negative, consequences for students and colleges. It is equally clear that the problems do not have simple solutions. Solving them will require coordinated action and effort by institutions, governments, foundations, private scholarship organizations and others who are interested in assuring that a quality college education remains a part of the American landscape for all students.

Jerry S. Davis is vice president for research for Lumina Foundation for Education.

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