Brands in the News

Rethinking College Tuition

11 Apr 2024  

Colleges are announcing tuition and other costs for the 2024-25 academic year.

Washington University in St. Louis is increasing tuition and fees by 4.5%, bringing the cost of attending to $87,644 (including tuition, housing, meals, student health, and activity fee). Yale is increasing tuition and fees by 3.9% to $87,150. Bucknell’s is up 4.75% to $84,736. Princeton will be $86,700, an increase of 4.3%.

As schools announce the new tuition levels, the message is similar: we will increase financial aid at the same time and help families that need assistance.

This model, “raise tuition and increase financial aid,” is followed by universities around the country. It is time to rethink this approach to tuition.

The Model

Private colleges in the U.S., especially selective schools, follow a simple model: Set a high price to attend and then provide financial aid for families that need it. Public universities have a different approach, with relatively low in-state fees and higher out-of-state fees.

The private school model makes a lot of sense. Families with more resources should pay more and families that need support should pay less.

So, each year tuition and fees go up and so does financial aid.

The $100,000 Threshold

People have a funny reaction to prices. Discounts, for example, are popular. Surge pricing is often considered opportunist price gouging, as Wendy’s discovered recently. Even when the prices are the same, how the pricing is presented matters.

Threshold prices are particularly important. A product priced at $79.99, for example, seems cheaper than one priced at $80.00.

Back when I was managing the Parkay margarine business at Kraft, for example, the $0.99 threshold was critical. Changing the price from $0.91 to $0.96 did not have a big impact on sales. Moving from $0.99 to $1.04 sent sales dramatically down.

Colleges are quickly approaching a threshold: $100,000.  In one or two years, the cost of attending a private college will pass this mark. Washington University in St. Louis, for example, has three years of 4.5% increases before it passes $100,000. Other private schools are looking at a similar timeframe.

The Problems

Still, what is the problem?

There are several.

First, the $100,000 price makes college seem completely unaffordable to potential students, so qualified students, especially from economically disadvantaged communities, might not apply. When the median household income in the U.S. is $74,580, spending over $100,000 to attend college seems wildly out of reach, even if there is aid. Yale President Peter Salovey has noted this problem. In a recent interview with the Yale Daily News, he noted “People have difficulty understanding the relationship between the sticker price and the actual cost to them of an education at Yale.” Crossing $100,000 will firmly cement the perception that a private college is only for the wealthy.

Second, the $100,000 mark will invite criticism. Private universities with large endowments are targets on a wide range of topics: tuition levels, admission policies, curriculum, faculty hiring. Already, endowments are taxed, thanks to the Tax Cuts and Jobs Act. After the Supreme Court ruling on affirmative action, state legislatures are talking about regulating admission policies. Going over $100,000 will make universities an even easier target.

Third, the basic financial model will stop working. The problem with the “raise tuitions and financial aid model” is that it works less and less well over time. As tuition and fees increase, each move generates smaller amounts of incremental funds. Fewer students can pay the higher full cost, meaning more students become eligible for financial aid.

This is clearly happening. At Northwestern about 40% of students received financial aid a few years ago. Now the number is over 60%. This means that today a 4% increase will generate less than 1.6% more revenue.

Of course, the situation is actually worse than that because the percentage of students receiving aid will be higher next year. The following year’s 4% increase might generate only perhaps 1.1%. Pretty soon it will be close to zero.

It will likely accelerate faster than expected with the $100,000 threshold. Even wealthy families might start to question the value proposition of private universities, outside a select few with particularly powerful brands: Harvard, Stanford, MIT, and a few others.

One option is in-state tuition at a state school. Is a private school really worth an incremental $250,000? Another option is paying attention to merit and athletic scholarships, used extensively at many private colleges to attract students. Even a family with resources will be tempted by a major offer from a well-regarded school.

As many schools move well past $100,000, there will be few families left paying the full tuition. The high tuition will essentially be a fictional number. It will nonetheless be a tempting target for critics and a strong message to those with fewer resources that a top education is unattainable.

A Different Approach

Some people suggest the solution is to raise more donations to pay for more financial aid. Directing contributions to aid is fine, but this money is not free; the support could have been used for research or improved student support and teaching. More contributions will not solve the basic problem.

Instead of raising tuition, universities should consider holding the line before getting to $100,000. This would be a powerful talking point, “We understand that the cost of attending college is a barrier for many families. So, we provide substantial financial aid. In addition, we are not increasing tuition and fees this year. And we will guarantee tuition and fees will not increase during your time as a student.” A university that moves first could be perceived as a leader. It would be an appealing angle for fund raising, too.

Purdue, a public university, has embraced this approach: the school recently announced its 13th year with no tuition increases.

Perhaps it is time to go the other way and reduce tuition and fees. This would not be as financially difficult as it might seem because most of the revenue shortfall would be offset by a corresponding reduction in financial aid. It would be a dramatic move, a school taking action to make education less elitist and more accessible for all students.

Some might argue lower tuition would damage the brand since people sometimes link price and quality. I think this is not a major concern. Will people think more of Hamilton College when it costs over $100,000 to attend? Would people think the school was a discount player if the tuition was $80,000 a year? No. If anything, the very high price might create negative perceptions around elitism and the idea that it is just a school for children of wealthy families.

Might colleges also need to reduce costs? Yes. But that is inevitable as schools lose the ability to increase revenue with higher tuition and fees.

Cost reductions would be a good exercise. Does every university need to teach every subject? Schools might get more strategic in course offerings and research staffing to excel in certain domains while easing back in other areas. Being all things to all people is rarely a good strategic approach in a competitive market.

It is time for fresh thinking on college tuition strategy.

7 Responses

  1. Hakan Ener says:

    Great post! Quick clarification question: You mentioned that at Northwestern about 60% of students now receive financial aid, and that this would imply a 4% tuition increase would generate less than a 1.6% boost in revenue. However, not every student receiving financial aid enjoys full protection from tuition increases (since not every financial aid recipient holds a full scholarship provided by the university). Instead of that 60% number (of students getting financial aid), shouldn’t we be using the proportion of total tuition fees covered by financial aid provided directly by the university (which may be a much smaller number)?

    • Tim Calkins says:

      Hi Hakan – Presumably the university has determined that someone with financial needs can pay a certain amount, perhaps $20,000 a year. If tuition and fees increase, the university then has to provide additional financial aid to get them back to the $20,000. So if over 60% of students are receiving aid, over 60% of any tuition/fee increase will just turn into more financial aid. The actual net revenue impact to the university would be just a fraction of the tution/fee increase. And this fraction will decrease as tuition goes higher and more students receive aid.

  2. Justin Kim says:

    If we leave it to universities to “do the right thing” when it comes to holding the line on tuition, I’m not sure much will be done. There has been talk about tuition outpacing inflation for years and yet here we are.

    Best intentions don’t work, mechanisms do. Here’s a suggestion:

    We mandate that colleges and universities explicitly share a few key metrics (independently verified and audited) such as graduation percentage, graduates with jobs within a set number of months after graduation, and starting salaries – and all BY MAJOR. That way, the consumer (i.e., prospective student) can make an informed decision on whether the tuition is worth it. This decision would also include considering their intended major – maybe if they are planning on pursuing a technical degree, it’s worth it. Having this transparency then creates incentives for universities to control costs on the products they offer (i.e. degrees) which may not offer strong ROI for their customers. Yes, I realize it is one price for all products as tuition does not vary by major. I do still think this transparency will help customers make better decisions and changes in demand will then force colleges and universities to make improvements to their cost structure in order to make sure their prices don’t go beyond customer’s willingness to pay.

    • Tim Calkins says:

      Justin – Great thought. Intentions don’t matter, but the numbers do. I think the tuition model is going to break down soon…when nobody is left paying full price, tuition increases become essentially meaningless. There is a huge incentive for schools to embrace a different approach before going over teh $100,000 threshold.

  3. Shannon K says:

    There was a recent test case for this with St. John’s College in Maryland when they made a tuition reduction. a few years ago.

    • Tim Calkins says:

      Shannon–There it is! A lower tuition leads to more applicants and a more productive system. I suspect the tuition reduction was less expensive than it seemed since there was a corresponding reduction in financial aid.

  4. Sanil says:

    It is time for fresh thinking on (private?) college value proposition, not just tuition strategy. Colleges want more tuition from those that can pay (wealthy US and international families). The high cost of attendance only makes sense for the most elite/reputable/selective institutions and only for the courses whose graduates routinely make enough money to payback high student debt that rivals a mortgage payment. If interest rates go and stay up in the medium term, some of the current and near term graduates will struggle to make ends meet.
    For technical courses (engineering and like), at bachelor level, private universities don’t offer value proposition at the current cost differential from well run public universities. Graduate salaries between the graduates of two also have negligible, if any, difference.
    Its no surprise, also, that increasing number of young people are preferring trade schools over traditional 4 year college. For the keen evaluator, the value proposition just isn’t there.

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