Your daughter is a high school senior and needs a car to get to and from her part-time job. You’re going to buy it for her as a graduation present. You don’t have a lot of money, but you figure you can afford to spend $20,000.
Of course you’d like her to have the best, something like a sporty new Porsche, which has a great reputation for quality and comfort and is solidly built so you believe she’ll be protected should she ever get into an accident. But everyone knows that a Porsche will cost way more than $20,000; you’ve even looked online and seen that the price for such a car is about $50,000.
So you begin looking at other options. You see that a dealer in the neighborhood has a different model on sale for exactly $20,000. It’s a far cry from a Porsche: less comfortable, not as powerful, and smaller—so it might offer less protection in the event of a collision. But you’ve only got $20,000 to spend, so off to that dealer you go and a couple of hours and $20,000 later, your daughter has her first car.
Now imagine, if you will, a world where, unbeknownst to you, for just your $20,000 you could have purchased that new Porsche. Imagine the Porsche dealer had asked you to fill out some forms and told you you’d hear in a few months if he’d be willing to help you in purchasing the car.
A few months later a letter arrives from the dealer, and you learn that he will give you a $30,000 discount on the car—$20,000 because the dealer wants to encourage young women to drive Porsches and another $10,000 if your daughter agrees to come to the dealership periodically to help out around the office. With that $30,000 in discounts plus your $20,000 in cash, your daughter could have been driving a new $50,000 Porsche. But you didn’t even look at the Porsche because you thought you couldn’t afford one.
Ridiculous, right? Car dealers would never post one price on their website and then have you wait months before letting you know that you’re eligible for a huge discount because they want you as a customer. What sort of business would do such a thing?
Well, that’s exactly the situation at private colleges in the U.S. today.
Substitute the name of a high-priced nationally ranked private college for “Porsche” and the name of a mid-priced regionally ranked private college for that other car and you’ve got a picture of how college pricing currently works: A student of limited means but high ability might get a big discount off the list price of the high-priced private college and attend for less than it would cost to attend either a public college or a private college with a lesser reputation.
How can this be? It’s because colleges set their prices artificially high and then offer substantial discounts off that published price. The published price of tuition at a private college today is discounted on average by about half, according to the National Association of College and University Business Officers (NACUBO). About nine students in 10 who entered a private college last year as freshmen received some grant money from the institution.
Yet parents and students often rely on published prices when considering the cost of school. As a result, they are largely unaware that a college education at a top school may be available to them at a heavily discounted price. A study by Sallie Mae showed that 63% of parents will reject a school based solely on the published price, without learning a single other fact about it.
Why would a college employ a strategy that scares people away from applying but offers those who persevere a discount of 50% or more? There are a number of reasons.
First, many colleges think the general public subscribes to the belief that quality is directly associated with price—prospective students will assume the education is of a high quality if the price is high. Also, from a management perspective, having a high price gives the college the flexibility to “shape” its entering class by offering significant discounts to students that it really wants to attract while offering no aid or a pittance to students who would come anyway. Finally, some college administrations and board members don’t understand the relationship of list price and discounting; they fear that simply lowering the published price of tuition will somehow reduce the net revenue that the school receives.
What needs to be done
If we’re serious about making higher education available to all regardless of means, we must change the system so that the perception of price doesn’t discourage students from applying to the best school for which they are qualified.
I recently completed, for the Lumina Foundation, a study of eight colleges that bucked the trend toward ever-increasing tuition price and reduced their published tuition by amounts ranging from 12% to 40%. None of them reported losing significant operating revenues because they simply lowered their average discount rate to compensate for the reduced list price.
In several cases, the colleges’ revenues grew because their enrollment increased due to larger numbers of applicants attracted by the lower price. Each of these schools believes that there was no downside to the tuition reduction and that their enrollment, revenues, and reputation are all as good as or better than they were before the change.
We need more schools to follow their lead and set their prices closer to what it costs to educate a student. We must simplify the rules surrounding the awarding of scholarships so that prospective students and their parents have a better idea of what a school will cost without having to wait months to be admitted. And at the same time, we must educate students and their parents so they understand that, when it comes to selecting a college, it’s the net price that counts.
Guest columnist Lucie Lapovsky is a higher education consultant specializing in strategic financial issues and CFO search. She is the former president of Mercy College in New York and the former CFO of Goucher College in Baltimore. She has been writing on tuition pricing and discounting since 1990.