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Be Careful With Your Discount Rate!

DECEMBER 1, 2016

Cost-conscious families are forcing colleges and universities to keep a tight grip on tuition increases as competition for students remains great, but schools without a distinctive brand or value proposition are feeling the pinch the most, according to a report released by Moody's Investors Service on November 29.  

The credit rating agency said that three-quarters of the 159 colleges and universities polled for its annual survey expect that net tuition--the money earned from students after schools provide financial aid--will grow roughly 2 percent to 2.5 percent for fiscal year 2017.  Those estimates reflect a continued trend of tuition increases tracking closely to the historic rate of inflation, following years of breakneck growth after the 2008 recession.

State flagships and public research universities stand the best chance of achieving around 3 percent net tuition growth due to enrollment in graduate and professional programs and the attraction of out-of-state students, who often pay more than residents, Moody's said.  By comparison, rating analysts forecast that small and moderate-sized public universities, those with fewer than 25,000 students, will experience median net tuition growth of 1.5 percent.

Among private colleges and universities, the financial prospects are strongest for large institutions that can capitalize on brand identity and program diversity.  These more elite institutions project net tuition revenue growth of 3 percent. However, smaller private colleges bear the brunt of tuition constraints with nearly 40 percent projecting decline, according to Moody's.  Many of these smaller schools, including many Christian colleges and universities, are offering steep discounts to attract students, at their own expense.  Roughly half of the small and moderate-sized institutions told analysts that they now have discount rates of about 50 percent.  Yikes!  While most institutions desperately need students, they must be careful not to discount themselves out of business.  

Larry J. McKinney
Higher Education Consultant
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