Private Colleges Adopt Car Lot Strategy

Do students prefer bigger scholarships reducing higher tuition?

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A growing number of private colleges are adopting the old car salesmen's trick of setting high sticker prices then clinching sales by offering nearly everyone who walks in the door a special discount—or, in college terms, a scholarship.

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 A new College Board report on colleges' tuition price-setting strategies reports that in the 2008-2009 academic year, the last year for which data is available, private colleges only collected about 67 percent of the tuition they would have received if they charged everybody their advertised prices. In other words, while private colleges' average advertised tuition was a little more than $27,000 that year, students paid, on average, about $18,000—a 33 percent discount. In 2000, the typical private college advertised a tuition sticker price of $16,300 but the typical student paid about $11,700, an average discount of 28.6 percent.

 College administrators and financial aid experts say the private college scholarship bonanza accelerated during the recent economic troubles. As a result, many incoming freshmen at private colleges are paying less in tuition this year than they would have a year or two ago when sticker prices were lower and scholarships were smaller.

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Of course, elite colleges are in such demand and have so many donors that they can charge rich students more than $50,000 in total annual costs (tuition, fees, room, board, books, and extras) while providing scholarships to low- and middle-income students. But a growing number of less prestigious private schools are posting high prices and then attracting applicants by giving scholarships to most admitted students, says Sandy Baum, a Skidmore economist who co-authored the College Board report. Schools that make it a practice to discount for all but a tiny percentage of their student body are in danger of being viewed like "car dealerships, where you'd have to be a lunatic to pay full price," she says.

 Other research shows just how widespread the "high price, high discount" strategy is among private colleges. Federal statistics show that the average scholarship offered by private colleges rose from $6,600 in 1999 to $9,500 in 2007. A 2009 survey by the National Association of College and University Business Officers (NACUBO) found that the percentage of full-time freshmen at private colleges who received scholarships rose from 76 percent to 82 percent in the decade ending in 2009. As a result of the rise in scholarship largesse, despite higher advertised prices, the average private college's tuition revenues dropped from 2007 to 2008, NACUBO found. 

Many parents find colleges' high sticker prices scary, and the way they hand out scholarships confusing. Why don't colleges simplify things by cutting their prices?

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College officials fear that Walmart-esque everyday low pricing would actually drive more applicants away because many students and parents assume that higher tuition prices mean a higher quality education, a phenomenon known as "the Chivas Regal effect." In addition, many admissions officials believe parents and students increasingly want to be able to boast to friends about receiving a scholarship, even if the end result is that they'll pay more for the degree. 

At Augustana College, in Rock Island, Ill., fewer than 20 percent of students pay the full sticker price of more than $41,000 for tuition, fees, room, board, and books. But if the school chopped its price close to the roughly $24,000 that the typical student pays, wealthier students would pay less, and wouldn't provide the extra tuition needed to fund lower income students who can't afford that average price, says W. Kent Barnds, vice president of enrollment, communication, and planning.

 The downturn in the economy has dropped the family income of a typical Augustana student by about $5,000, forcing the school to give out so much more aid that the average freshman is paying $900 less today than last year's freshmen did, even though the published tuition price rose by about $900 to $32,235 this fall, Barnds says. But by handing out more aid, Augustana, which enrolled 618 freshmen in the fall of 2009, enrolled 752 in fall 2010, so the school is receiving more revenue in total, he says.