Colleges’ real discount rates–and what they mean for you

You may have heard the term “discount rate” tossed around in regard to college tuition.  But what is it, and why does it matter?

Typically, the discount rate is calculated one of two ways:

Total institutional grant aid ÷ Total gross tuition and required fee revenue

or

Average institutional aid per student ÷ Published tuition and required fee rate

As Sandy Baum and Lucie Lapovsky explain in a College Board report on tuition discounting, “the discount rate is calculated relative to only tuition and fee prices.” If room, board, and other living costs—which are sometimes covered by grant aid—were included with tuition, it would be difficult to compare discount rates at residential colleges, colleges with few students in residence, and commuter or community colleges.

So far, it seems relatively straightforward: a college’s discount rate is calculated like a regular discount on any good or service, only it’s expressed as an average of students’ discounts.

Problem is, there’s more to it than that.

In addition to the aid some colleges offer to cover living costs, many nonprofit colleges don’t charge students the actual cost of their education.  The Integrated Postsecondary Education Data System (IPEDS), which collects all kinds of higher education data and uses it to identify and analyze trends in the sector,  allows colleges to count the annual costs of operating and maintaining a college—but not the capital costs of ever-more-impressive buildings and equipment–toward the total cost of educating students.1

Just how generous is the actual tuition discounting at some colleges?  Here’s a slide from a 2011 presentation Grinnell College made to its alumni and other stakeholders:

GrinnellSlide

 click to enlarge image

 The chart reveals the college’s actual per-student costs varied from $50,600 to more than $58,000 per year, while the comprehensive fee hovered under $40,000.  Even if all students paid the full fee, Grinnell was eating up to $20,000 per year per student!  Even more astonishing, very few students pay the full fare at Grinnell, so the college was “losing” even more revenue per student.  If you look at the blue portion of the bars, you’ll discover that revenue from students and their families covered on average only 36.5 to 38.5 percent of the college’s total cost. (Currently, about 85 percent of Grinnell’s students receive financial aid.)2

Why am I going into such detail?

It’s not just because I appreciate these behind-the-scenes glimpses into collegiate budgets and financing. (I also appreciate Grinnell’s commitment to grappling publicly with some potentially troubling long-term trends; I wish all colleges would make this data so accessible and understandable.)

More significantly, Grinnell offers a case study in what you’re really getting for your tuition dollars. Grinnell’s discount rate, when calculated according to IPEDS’s rules, is 50 percent—meaning the average student receives a combination of grants, loans, and other financial aid totaling half of the advertised cost of attending the college.  But when you look at the costs Grinnell is absorbing—the $20,000 or so per year above the comprehensive fee it charges—you can see Grinnell students are getting an excellent deal.  If the college charges $38,000 as its comprehensive fee, and students pay on average half of that, they’re paying $17,000 per year.  But the actual cost to Grinnell per student is, as the chart shows, around $56,000.  The average student, then, is getting a $56,000-per-year education for $17,000 per year—or, over four years, $68,000 for a $224,000 education.

But wait, you say, that’s still a lot of money.  Yes, it is!  But Grinnell limits the amount of its graduating students’ debt, capping it at $19,000, and the average student with need-based loans graduates with only $12,350 in debt.  Grinnell requires student self-help contributions of $2,500 per year, but excuses the student from this requirement for one summer’s internship or research at Grinnell, meaning many students pay $7,500 while in college and graduate with $12,350 in debt.  Before student loan interest, that’s less than $20,000 for a $224,000 education.

How families can use this information

Imagine your student is offered admission to two colleges, and each offers $10,000 per year in financial aid toward a $20,000 tuition bill.  Assuming both colleges are a good fit with your student’s personal values, interests, and goals, you might want to find out the actual amount each college spends per year educating each student.  If one school spends $40,000 per year, and the other only $18,000, that suggests there may be a higher quality of education and life at the first college.

Want help determining colleges’ actual costs, evaluating financial aid packages, and the real discount rate to you and your family? I’m available to help.

  1. For  details on tuition discounting practices, including a list of 49 colleges’ actual costs vs. the comprehensive fees they charge, see Roger T. Kaufman’s essay “Discounts and Spending at the Leading Liberal Arts Colleges” in Liberal Arts Colleges in American Higher Education: Challenges and Opportunities (American Council of Learned Societies, 2005): 70-79. []
  2. Full disclosure: Grinnell was my alma mater; during my time there in the 1990s, I received loans and, in my senior year, a need-based grant. []