Enrollment & Financial Aid |
Article by David D. Schriver, Jr., CPA, Ellin & Tucker
Consumers have been trained to believe that higher cost items are synonymous with higher quality, and education is no exception. Families who choose an independent school education for their children generally believe that the scholastics and experience are superior to what’s available in the public-school sector. In an effort to keep up with one another and attract applicants, independent schools continue to offer new technology, facilities and programs, raising tuition rates along the way to fund each new project.
For a growing number of schools, tuition prices have risen sharply over the past few decades. The result is that, on average, private school tuition now takes up a larger percentage of household income than ever before. We are approaching a tipping point where nearly every potential student will require some form of discounting to be able to afford a private education. As tuition reaches new heights, “sticker shock” is becoming a problem and parents are beginning to wonder: is the education these schools deliver really worth the skyrocketing costs?
Financial aid is paid for as a budget line item or draw from the school’s endowment, or perhaps a combination of both. Not all schools are fortunate to have a large endowment, and therefore must consider the cost of awarding financial aid as a reduction in overall tuition revenue they will receive. In a school that funds financial aid as a budgetary item (i.e., out of their own cash flow), the families that pay more than the average are subsidizing the families that pay less.
The process of tuition discounting is a coordinated effort between the business office and admissions. The goal of the admissions office is to fill the school with a diversified student body that fits with the overall culture and mission, while the directive of the business office is to make sure that the net tuition revenue will fund operations for the school year. To accomplish this complex feat, the two departments work in tandem to identify the most qualified applicants and design a financial aid package that entices them to enroll.
Tuition affordability is key to maintaining a diverse student population. The primary tool for enhancing socioeconomic diversity has been financial aid and tuition discounts, which allow qualified students from all economic backgrounds the ability to secure an education at a private school at a manageable price point. Getting squeezed out are the middle-income earners who neither make enough to afford the “sticker price” nor little enough to qualify for aid. In addition, as tuition rates continue to climb, this unfunded discount is becoming an increasingly larger portion of the budget.
It is easy to reach the conclusion that the current tuition model is not sustainable. To address this issue, schools have taken a proactive approach by developing and implementing new tuition models.
A tuition reset is a significant reduction of the existing tuition price at the school. This approach seeks to make the school more accessible by reducing the sticker price and increasing transparency throughout the financial aid application process. While the result is a new advertised price, the reality is that families would likely already be paying as much through financial aid. A school using this strategy may need to increase overall enrollment in order to maintain its current net tuition revenue, and school leadership must ensure that the school’s value proposition is maintained when tuition is significantly lower.
Variable tuition is somewhat similar in that the school essentially publishes guaranteed financial aid. Information provided by the school enables prospective families to estimate their potential tuition rate based on their individual finances. In this model, the school might employ a tiered system whereby families in a particular household income range can expect to pay a specified tuition price for that range. These tiers may present exact ranges or they may disclose only the low and high end of tuition pricing. So as not to give away all seats in the classrooms at the lowest tier, the school will only make so many of each tier available. When that tier fills up, the family that would have qualified for it must move up to the next tier. This may cause more applicants to enroll faster, as each family tries to secure their spot in the appropriate tier. Knowing the probable aid they might receive up front can enable some families to apply without all the guesswork.
Another model is indexed tuition, which caps the percentage of household income that will be used for tuition. The school may set different rates for certain income ranges and publish these rates so that a potential family will be able to calculate what tuition will cost them before they even apply. The school has latitude to define what is included and excluded from household income. Employing this type of strategy requires a deep understanding of the financial status of its current school families, as well as the target demographics of the region in which the school operates. This is necessary to calculate the index to which the school will apply to the defined household income.
While each tuition model operates in a different manner, the basic premise is the same – a tuition price that is affordable to a diverse range of families. Individualized tuition rates can help families feel more comfortable with receiving financial assistance. These models also help prospective families understand what they can reasonably expect to pay to send their child to the school of their choice. Perhaps an even greater benefit is that employing any of these methods makes the unaffordable appear affordable.
Reflecting Pull: Rethinking Financial Aid (Nov/Dec 2019)
Foundations of Flexible Tuition (web-only, Oct 2019)
Modeling Sustainability: Four Tuition Models to Consider (Jul/Aug 2019)
Which Price Is Right? (May/Jun 2017)
New Approaches to Indexed Tuition (web-only, May 2017)
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