The perils of price competition: discounting the price of college to influence student enrollment is a risky business

University Business, June, 2005 by Robert J. Massa

LET'S FACE IT--COLLEGES DO NOT AWARD SCHOLARSHIPS TO incoming students as a reward for superior academic performance or leadership accomplishments. They award so-called "merit aid" as an incentive to lower net price in order to influence a student's enrollment decision. Like it or not, this is the truth. Sorry Virginia, there is no Santa Claus.

Recently, a father of an admitted student wrote to me claiming that of the five colleges to which his daughter was admitted, three awarded merit aid and two of these were "direct competitors of Dickinson." Only Dickinson College (Pa.) and another top liberal arts college neglected to reward this $250,000 per year family whose daughter was very good but just slightly above average in our pools. What to do? Say no and likely lose the student, or award a small incentive scholarship to secure the enrollment and the net revenue? In this highly competitive environment, the answer is simple: "Show me the money." And so it goes.

Family expectations of price incentives are rampant and my colleagues and I take the bait rather than risk the loss of net revenue. Critics of the high price of higher education would say that students benefit from this price competition. In the short term they are right. In the long term, they are dead wrong. The jockeying for enrollments based on price will, over time, result in lower revenues to colleges which means less money available to those who truly need it, and insufficient funds to invest in academic programs and facilities--major characteristics of the "quality" of the educational experience for all students.

In a 2003 Lumina Foundation study, Jerry Davis, vice president for research at the foundation, revealed a shocking statistic: scholarship aid to students from families making $40,000 or less increased 22 percent from 1995-2000. But for students from families with $100,000 in income or more, scholarship aid shot up by 145 percent in the same time frame. The commitment to access is taking a back seat to leveraging dollars to ensure enrollments and net revenue.

Colleges can, however, accomplish access, "quality" and net revenue. To do so, they must clearly demonstrate the value of their "product" and must strategically allocate their limited aid resources. Consider the experience at Dickinson from 1999 to 2004. Non-need based aid recipients in a freshman class of 600 decreased from 104 in 1999 to 64 five years later. Average SATs jumped from 1189 to 1274 while minority enrollment more than tripled from 4 percent to 15 percent. And the tuition discount rate plummeted from 52 percent to 33 percent. Dickinson's positive experience in the past five years--reducing non-need aid and increasing diversity and quality--can be used as a model.

There is some hope that this whirling spiral will end, or at least that it will cease to spin out of control. For the last two years, major leaders in higher education have gathered at Smith College (Mass.) and Dickinson, and at the College Board National Forum to discuss the issue and to formulate, within the spirit of the anti-trust laws of course, some possible options for colleges to consider.

At the top of the list is the broadening of the "568 exemption" that allows colleges to share financial aid policy issues only if they are totally need blind in admission and meet the full financial need of all admitted students. This is a small list indeed, but it includes the wealthiest institutions in the country with market positions and resources that in many ways exempt them from the pressures to offer non-need based aid. Also underway in Pennsylvania is a Lumina Foundation funded study by the Association of Independent Colleges to quantify the challenges within our state and to broaden the conversation at private colleges from Philadelphia to Pittsburgh. And the conversation will continue this fall at the College Board Forum and other venues.

The goal, perhaps elusive, is to understand that as a "system," higher education jeopardizes its future by increasingly discounting price to those well able to afford tuition and to benefit from a quality experience. A long-term vision rather than a short-term gain must be paramount--but tell that to an enrollment manager who is employed today to get the class and the revenue. So this shift nationally will be no easy task, particularly when state legislatures are also increasingly in the game by devoting a larger and larger proportion of their college aid funds to non-needy students in an effort to keep them in-state.

Will hungry colleagues jump at the chance to "steal" students now from those of us concerned about our present impact on the future? Or will they join us on the road to equity, access and quality programs that a de-escalation in non-need based aid will allow? Time will tell, but the time to act is now.

Robert J. Massa is vice president for Enrollment and College Relations at Dickinson College.