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Twokin Consulting: Tuition Reset to Slash Tuition Cost Might Not Work

This post is a continuation of a series of Twokin Consulting articles on how higher education institutions need to challenge the status quo using innovative ideas for reducing costs, increasing revenues, and improving campus operations.

Twokin Consulting Estimate of Implementation Difficulty

Hard

Twokin Consulting Estimate of Implementation Timeline

Long Time Frame (6 months to 24 months)

Twokin Consulting Estimate of Direct Financial Impact

Large

Twokin Consulting Estimate of Campus Controversy it will Generate

Will be seen as a positive

As reported in Inside Higher Ed, some institutions have done “tuition reset” where they drastically reduce their listed tuition price to appeal to a larger audience of perspective students. As part of the listed tuition reduction, Twokin Consulting has seen that it is quite common to also reduce (or freeze) the institutional financial aid. A recent articles from the New York Times speak to the issues involved in a tuition reset.


When pondering the institutional discount rate discounts, one needs to think in terms of the net tuition revenue per student. If the posted tuition and fees is $35,000 per year for a college and the institutional discount rate is 60.5%, then the net tuition per student is $14,000 ($35,000 x (1-.605)). To make the college more attractive, suppose the administration slashed the tuition rate to $18,000 per year. (Twokin Consulting has seen that it is quite common to reduce the listed tuition rate by 45% to 55%). In the meantime, they also reduce the volume of institutional aid (e.g., scholarships) they used to provide. At $18,000, tuition is now a little over 51% of what it used to be. With the reduced aid, the net tuition per student actually potentially increases by $4,000 per student. As a Forbes article highlights, a tuition reset is a bit of a gimmick.


A tuition reset works if future students and their parents think in terms of net tuition paid. That is, what is their out of pocket tuition expense. The challenge that Twokin Consulting has experienced is that is not how most people think. Consider the retailer JCPenney. They are known for offering numerous coupons for shoppers. As reported by CNN Business, when they sought to reduce their coupons and offer an everyday lower price, it was a disaster.


Retail customers like the idea of getting a deal. So do parents. When a child is offered a scholarship, it allows the parents to boast to family and friends. Though sometimes the scholarships can border on the ridiculous. At one of my prior schools, we offered any student that visited the residential campus a $1,000 “visit” scholarship. I had a grandparent once share with me,“my grandson is not a good student, I don’t know what is says about your school for you to offer him a scholarship.”


When families are comparing scholarship offers amounts from multiple schools, many do not consider the net cost of attending the school. Why would this be the case? For highly recruited students, they and their parents have often invested a lot of time and money into their preparation through such things as summer camps, private music lessons, tutoring, test preparation services, being on a traveling sports team. In Twokin Consulting's opinion, they want a return on that investment and a school offering a large scholarship is confirmation of their effort.


From a consumer perspective, which sounds better:

  • Option 1: Paul was accepted to college A and we will pay tuition of $18,000.

  • Option 2: Paul was accepted to college B (assume a listed tuition of $35,000) and was awarded three scholarships – athletic scholarship for $10,000, STEM scholarship for $6,000, and visit scholarship for $1,000. We will pay tuition of $18,000.

Both colleges have the same net tuition cost. Option 2 is the one that mom and dad will brag about. It is also the one that Paul will potentially talk about to his children – “I had three college scholarships.”


In a study of 71 institutions that have done tuition resets, Ruffalo Noel Levitz (RNL) found that half saw no increase to enrollment. In general, if the net tuition revenue per student increases, you are better off even if you total student enrollment does not grow. Unfortunately, RNL found that that net revenue from first-year students actually declined by 4 percent.


Overall, colleges need to think carefully their strategies and approaches for setting their tuition rates to ensure they are maximizing their total revenue return.


Twokin Consulting specializes in helping supporting colleges, universities, and nonprofit organizations in brainstorming strategies and ideas for improving operations.


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