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Schools Will Regret A Tuition Reset

By Derek Newton
Reposted from Forbes, with permission.

If you’re not familiar with the term, “tuition reset” has been coined to describe when a college or university reduces the advertised tuition price to a universal baseline rather than an inflated, cushy number that leaves room for negotiated grants, loans and discounts.

For context, cars are usually priced the way most colleges are – there’s a sticker price. But no one really pays it. To continue the car analogy, Saturn tried the price reset approach.

Nonetheless, a handful of colleges have decided, in an effort to separate themselves from a competitive pack amid an increasingly limited supply of college-age students, to make themselves into true price options – the price is what you pay. They initiated tuition resets.

When the New York Times wrote about tuition resets a few weeks ago, their headline writers described the practice as “a sign that tuition is too high.” That’s wrong. As the article itself notes a few times, tuition resets are marketing ploys designed to attract attention. And, when the New York Times writes about your small liberal arts college in New Hampshire, it works.

But colleges that use tuition resets won’t be taking in less money. They’re not actually charging students less. Nearly universally, the schools are just skipping the part where they give institutional grants and scholarships in a practice known as discounting. A school with a tuition reset is very likely to see no real change in their balance sheets over the moderate term. Paid tuition won’t change. Schools are not suddenly and magically able to get by on 40% or 50% less revenue.

It’s a gimmick, not a market adjustment. It’s absolutely not “a sign tuition is too high” because the actual tuition is not changing.

Nationally, discounting is so common and so powerful that the average discount rate is now about 60%, as The Times noted. In other words, the average student pays only about 40% of what’s advertised as the price of tuition.

More importantly, schools that use the gimmick and reset tuition will probably regret it. And soon.

Reducing advertised tuition may generate a bump in attention and an uptick in applications, but only for a limited time – the time it takes for headlines to fade and for people to take advantage of a perceived discount. Getting a school that was priced at $40,000 a year for $15,000 feels like a deal. And people like deals. That’s even though, as mentioned, they probably would have actually only paid the $15,000 anyway.

But once that moment is over, the school will have reset more than its tuition sticker price, it will have reset its competition – moving deeply down market.

Like it or not, in higher education, price is a proxy for quality and prestige. The better schools cost more. And the more expensive, more prestigious schools are in the highest demand. Exponentially more people want to go to Harvard or Columbia than the schools can accommodate and they’re all willing to pay – or at least negotiate – inflated advertised tuition prices to do so. These luxury schools cost more because they’re usually worth the extra money. And they’re in more demand as a result.

At some level, every consumer knows this. We all know the difference between a Kia and a Ferrari, between Marshall’s and Chanel. Price signals quality. And prestige. So, when you drop your price tag by 60% – you’re making a statement about both.

For colleges, that’s a long-term problem because if you’re aiming to compete on the actual price of what students pay, you can’t. The buyers’ clubs of assembly-line, volume discount degree manufacturing occupy large market share these days. As a school, you can try to underbid the likes of Southern New Hampshire University or University of Phoenix, but you probably can’t. And unfortunately, by dropping your published tuition, you’ve signaled to the market of prospective students that you’re in the same business as they are now – getting a degree cheap.

Maybe it’s a challenge to convince prospective students that you’re really in the same educational product line as Yale. But that feels like a better fight to have than trying to underprice and compete with Sam’s Club.

Another reason schools will regret doing the tuition reset is because is ties the hands of admissions officers to entice and recruit. Now, and over the next handful of years, an extra few students in each class will make a big difference to smaller private schools. As such, being able to enrich an acceptance offer with more aid, deeper discounts, can matter. Being offered a scholarship feels good. And taking yourself out of the recruitment game as other schools pile on the ego discounts seems like a self-inflicted limitation.

Moreover, from a crass business perspective, how is a school going to get an extra few thousand dollars in actual tuition from a student who can afford it when they’ve removed discounting? If someone can pay $20,000 but your advertised base tuition is $16,000, you’re throwing away money at exactly the time when you can least afford it.

And today, schools know exactly the dollar amount that will trigger an enrollment – the precise mix of discounts and scholarships it takes. Their predictive enrollment software is top-notch. And it means that reset schools will absolutely see students pay more in tuition to go somewhere else just because they feel as though they’re getting a better deal.

A student who pays $18,000 a year at a school with an advertised tuition of $35,000 may feel better about enrolling – and paying – than if tuition was a flat $16,000 somewhere else.

It’s probably true that most students and parents and families don’t get tuition discounting or why they should still apply to schools that seem too expensive. But that’s a different problem and not one that will be solved by a “tuition reset.” Once the attention leaves, schools will likely find that the students who are shopping for a degree by price will choose the cheapest option available, which won’t be the school with an actual campus, a real college culture and tenured, quality faculty.

Originally posted on Forbes on December 31, 2022.