The mystery of tuition discounting

On average, students at private, nonprofit colleges pay less than 60% of the published tuition. That’s right, on average they receive a tuition discount of more than 40% (the “discount rate”). Many public institutions follow this practice, too, although more so with their out-of-state students who don’t qualify for the much lower in-state tuition. What all this means is you can’t really tell much about actual cost by comparing published tuitions.

There are some private colleges, like Grove City (Pa.), that follow an alternative pricing model, preferring to set their tuition lower and offer fewer scholarships and grants. And there are a relatively few elite colleges that are in such high demand that they offer only need-based grants. But the vast majority of private colleges follow the pricing model that allows them to generously award scholarships and grants because their published tuitions are too high to fill out their classes.

The difference between the published tuition and the amount actually charged is “discounted,” much like an airline discounts its seats. If you’d ask everyone on your next flight what they paid for their tickets, you’d get lots of different answers. Similarly, if you’d ask freshmen at any college what they’re paying in tuition (especially at private colleges), you’d also get lots of different answers. Moreover, the differences are often vast. In other words, there is rampant price discrimination in higher education. There is not necessarily anything wrong with that, but you need to know it exists and how it works if you’re to make a sound college choice.

The tuition discount a college offers may be called a scholarship, grant or award. You may be led to believe it’s solely due to academic “merit,” that is, the strength of your academic record. Or it may be tied to financial need. In fact, both merit and need may play a role — sometimes a determinative role — in setting the amount of the discount. Yet sometimes these factors play only a minor role, or no role at all. Oftentimes the scholarship, grant or award is merely a discount to get the price down to a level the market will bear. Indeed, at some private colleges, everyone gets some discount.

Private, nonprofit colleges (with very few exceptions) know their residence halls would have many empty rooms, and their classrooms many empty chairs, if they tried to charge the published price to all their students. Students would flock to cheaper state schools. Of course, private colleges would love to be able to charge and collect the published tuition from everyone, but they know there aren’t enough students who are able and willing to pay that amount. Therefore, private, nonprofit colleges cut the price and call it a scholarship, grant or award.

So why do colleges set their published tuition so high if they can’t actually charge and collect that amount from many of their students? There are several reasons.

First and foremost, some colleges actually do manage to collect the published tuition from many of their students. I knew of one private, very expensive school in Virginia that collected full tuition from a third of its students. Some schools probably collect full tuition from an even higher percentage of its student body. Setting a lower tuition would be tantamount to “leaving money on the table,” something any vendor of services or products is loath to do. But that’s not the case at all institutions. In fact, some private colleges don’t have any full payers (students who pay the full published tuition), and many have only a handful.

Colleges also establish high tuition because they know that prospective students (as well as parents, guidance counselors and people who rank schools) infer quality from price. People assume a college that “charges” tuition of $35,000 is better than a school that charges $15,000. Of course, that may not be the case at all, but in lieu of better insight into the actual quality of an institution, it’s not entirely unreasonable to draw that inference. Experience in other areas of our lives tells us that price connotes quality. In the case of colleges, however, it’s just as likely the published prices will be misleading and tell you nothing about actual quality.

Further, colleges set the sticker price high so they have the flexibility of offering sizable scholarships and grants. They want this flexibility because they know it improves their chances of enrolling students and filling the beds. Indeed, experience reveals (at least in the judgment of the vast majority of admissions officers and their consultants) that an institution has a better chance of enrolling a student if it reduces the price by a $10,000 “merit” scholarship than it would by simply dropping the published price by $10,000. In other words, all things being equal, a school that “charges” $35,000 in tuition but rewards a prospect with a $10,000 merit scholarship, yielding a net price of $25,000, has a better chance of enrolling that student than a comparable school that sets its tuition at $25,000 but doesn’t discount.

The reason: people like the feeling they get from receiving a discount and for being acknowledged and rewarded for their (or their child’s) past academic work (even if, to an objective observer, the record isn’t particularly stellar and even if, in reality, the academic record had little or nothing to do with the “scholarship”). Prospective college students and their parents are no different from people generally: we are highly susceptible to being manipulated by effective pricing strategies. It’s true. And it happens all the time, even in the world of higher education.

Another reason colleges are apt to set their published tuition high, irrespective of their ability to actually collect it, relates to institutional ego. If a school’s published price is in the ballpark of prices charged by more selective colleges, then the faculty and staff at the lesser-reputation school, as well as the school’s alumni, feel better about their school and aren’t constantly reminded of the great disparity between their school’s reputation and that of other, more selective schools.

The human ego is frail. I know it may sound silly to you, but sometimes it’s easier to construct a false narrative than to face the stark reality. Many colleges think they’re better and more desirable than they really are. These gimmicks help to perpetuate the myth. In any case, many alumni (and faculty members) would be shocked by how weak the demand is for their school and how little of their school’s published tuition is actually collected.

You might be surprised by the size of an institution’s discount rate, too—in a good way. But there is only one way to know for certain: apply and await receipt of your financial aid award letter.