Discount rate is a widely misunderstood metric (feedback)

I can’t think of a metric that is more misunderstood and misused than tuition discount rates among college presidents, trustees, faculty and staff. When a metric is usually misunderstood about its purpose, it becomes almost useless.

Remove the myth

What is tuition discount metric? Why is it important and what does it actually mean? Tuition discounting generally refers to the discount rates of the National Association of College and University Business Officers, which the organization defines as “total institutional grant aid to undergraduates”, “if the institution collects a percentage of total tuition and fee revenue” and all student tuition. The fee sticker has paid the price. “

Each year, NACUBO reports the results of its annual discount study. The latest report, released this week, considers 359 of the 1,660 private colleges in the United States to be four-year private colleges and universities. From 2012-13 to 2021-22, the national discount rate reported by NACUBO for first year undergraduate students increased from 44.8 percent to 54.5 percent. This ratio is a good representation of the general public being less willing এবং and less able প্রদ to pay for the rising cost of college over time, but that doesn’t mean much more.

Universities often misunderstand and misuse the tuition discount metric as an indicator of institutional financial health. But the tuition discount rate itself is not an indicator of financial health, and it cannot be used as a ratio to properly compare colleges with each other.

Trustees, presidents, chief financial officers and others often think that growing discounts are bad and low discounts are good, but this may not be true in your college, because the tuition discount rate is not a complete picture of your money. If we really think about it, the average growing discount is normal due to the slow increase in family income and the relatively fast price increase in colleges and universities.

Discount rates are not comparable across organizations

A few brief examples may explain why we cannot rely on discount rates as a way to compare financial health and revenue. If two colleges have a tuition discount rate of 50 percent and College A has $ 50,000 tuition per year and College B has $ 35,000 tuition per year, we can easily see that the net tuition income per student of College A is higher, because $ 50,000- 50 percent of that is $ 25,000 and 50 percent of $ 35,000 is $ 17,500 The 50 percent discount rate cannot be used to compare with school, because net income is not the same. If College A has a 60 percent discount rate, its net income per student will be $ 20,000, which is still 50 percent more than College B’s discount. The net income associated with the discount rate depends on the amount of tuition charges, which means that the discount itself is not a relevant indicator of financial strength.

One of the most notable reasons why the tuition discount rate is used to determine the financial health of a college is that the NACUBO calculation does not differentiate between scholarships funded from a college endowment and which are meaningless. The NACUBO definition behaves similarly for their discounting ratios. This is problematic because unsubsidized institutional grants and scholarships act as depreciation, while scholarships and grants are funded by endowment income, the actual money is managed in the student’s account and serves as revenue from the operating budget. For colleges that can fully fund all institutional financial support through their endowment, the discount means that low-income students (indirectly) pay in the operating budget in the same way as full-paid students.

The table below explains how the two colleges can have the same price, same discount rate and very different net revenue if any part of the discount is financed by endowment income.

At college

College B

Tuition and fees

$ 50,000

$ 50,000

Room and board

$ 10,000

$ 10,000

Massive costs

60,000

60,000

Total institutional grants and scholarships

30,000

30,000

– Scholarships and grants are funded

0

$ 12,000

Unfunded portion of scholarships and grants

30,000

$ 18,000

Depreciation rate

80%

80%

Net income from students

30,000

$ 42,000

When college officials talked about reducing the discount rate, they said they wanted to reduce the financial support given to college students to increase net revenue. Since discounting represents institutional financial support, fewer students are able to afford to go to a college that greatly reduces discounts. According to the U.S. Census, about 19 percent of households between the ages of 35 and 44 have an income of $ 180,000 or more. A family often has to earn $ 180,000 or more to stay in the full payroll department at an expensive residential private college. This means that in any student pool, there are about 81 percent who are less able to pay. Access to education is important, and not just for the rich.

Net income is a good metric

When people talk about reducing discounts, what they mean is that they want to increase net income. What can be done to increase net income in your school?

The following solutions need to be considered to slow down the growth of discount rates and improve net income:

  • Get involved with a company that does econometric modeling if you haven’t already. There are several reputable organizations that do this. Econometric modeling optimizes the financial support needed to recruit the desired number of students from an admissions pool. For example, if you typically have 3,000 enrolled students and you want to keep 700 net deposits in a first-year class, the model will tell you how to optimize your rewards for doing so. If you want 750 students, you need to change the model, and to get that increased number you will probably reduce the average net income per student. If you are already involved with a company that does econometric modeling for financial support, don’t fight the system. Your market indicates what students will pay for what you value. If the Econometric model gives you নেট 28,000 net revenue per student per year to get 700 students, then don’t expect 3,000 enrolled students to get $ 30,000 net revenue per 700 students from the same pool. It is often the case that having a slightly lower net income per student can bring in more total net income and the econometric model can tell you that.
  • Concentrate on increasing the graduation rate. The average graduation rate for private nonprofit colleges is 68 percent, according to federal data. Increasing the graduation rate is one of the best ways to increase net income per student, as students who stay longer are subject to price increases and pay more over time. Also, when a college increases its graduation rate, the college does not need to have more students than the first year, and a small number of students who need more financial aid may be accepted. In addition, the ranking is greatly influenced by the graduation rate. If a college wants more affluent families and more academically gifted students, it needs to show that it is worth the investment, and the strong graduation rate.
  • Give top priority to endowment building for scholarships. It takes some time but it is one of the best financial solutions. If financial aid is a funded discount rather than a funded discount, it increases cash flow regardless of your total discount rate.
  • Invest in growing admissions applications to enable the college to grow more selectively to increase its financial strength as the graduation rate increases.
  • Reduce other costs. In my experience, colleges rarely evaluate and reduce costs, but they often add costs without verifying whether those costs help students graduate with a degree or whether those costs help generate revenue. For example, if you have invested money in an effort to increase retention and the retention rate does not increase over time, you may have invested in the wrong activity and can recover or eliminate that expense without much risk.

You may have noticed that I did not list the richest people to hire as a solution. Admission offices are already hiring wealthy families. If you don’t have a significant number of rich people committed to your school now, then perhaps your institution is not attractive enough for them compared to other colleges. Wealthy people can be selective, and they are. For example, if you have a college graduation rate that is significantly lower than your competitors, you may not be as attractive to rich families because your statistics are not good enough for them compared to your competition. It’s not about finding rich families; To show that you are a good choice for them.

It makes sense for colleges and universities to find ways to reduce costs and increase available revenue. It is not reasonable for them to do so at the expense of their customers-students. Instead of making the mistake of believing that your college offers too much financial aid with too much discount, look at the systemic issues that prevent you from gaining a better reputation and a stronger financial position by raising more funds for scholarships, retention and graduation growth. Rate, and focus on student success. Your value to the students will then improve and so will your net income.

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