Eight factors that can affect your discount rate

Mitsi Messier

April 19, 2012

Noel-Levitz just released its 2012 Discounting Report, a summary of fall 2011 discount and net revenue outcomes based on aggregate freshman data from institutions partnering with us to strategically manage their financial aid. (Our participants are 139 private four-year colleges and universities.) The good news from this report is that the average overall freshman discount rate increased less than one percent in 2011, the smallest increase since the peak of the recession in fall 2008. The recent growth trend appears to be slowing as the economy improves.

Discount rates, 2000-2011, from the 2012 Noel-Levitz Discount Report
Discount rates in 2011 increased by less than one percent for the private colleges in this study, the slowest growth since 2008 (click to enlarge)

What can we learn from these results? Recently, a client expressed concern about using discount benchmarks from our financial aid services clients and asked me to help her explain to her president and board the caveats when evaluating these discount rate benchmark data. That is, what drives the discount rate, and why could your discount rate be higher than that of other institutions?

While there are a variety of reasons that your discount rate could be higher, what follows is a listing of some of the factors at play that can help explain discount rate variation.

1. Institution sticker price. We see in our 2012 Discounting Report that discounts remained highest in 2011 among small colleges with higher tuition levels. On average, these colleges saw a decrease in net revenue of 0.2 percent, while small colleges with lower tuition and large colleges and universities increased their net revenue. Depending on other factors, if you have a higher tuition level, you could have increased pressure to discount.

2. State-based aid programs. While some states have generous state-aid programs, many do not. Furthermore, we continue to see reductions in many state programs, which may necessitate additional spending of your institutional gift dollars in order to maintain affordability.

3. Financial characteristics of your student population. Do you know what proportion of your entering student body demonstrates financial need? Within that group, how much financial need do they have? If you enroll a population which has very significant financial need, your discount rate is likely to be higher than an institution that attracts more students with the ability to pay.

4. Academic characteristics of your student population.Just as the need distribution can impact your discount rate, so can the academic distribution of your entering class. Top academic talent costs more because they have so many options—the competition for top students is fierce and often requires campuses to spend more on scholarships and awards to enroll them. Understanding the academic distribution of your new students, and what different academic profiles cost your institution, will help you understand how this influences your discount rate.

5. Strength of your institutional brand. Does your institutional brand have a draw for prospective students? How are you communicating the value proposition of attending your college? Students are more willing to pay the costs for a national brand or an institution for which they have a high perception of value. If the value proposition isn’t there, it can cost you more to enroll the students.

6. Athletic affiliation and level. Just like top academic talent, athletic talent comes at a price. If you are not Division III, then filling a roster can certainly impact your discount rate.

7. Competitive environment. The competitive environment within which we work is changing and can also influence financial models. Depending on your state, there could be a declining number of overall high school graduates, or an increasing number of high school graduates who are less academically prepared and have less ability to pay. Or perhaps you are in a state with increasing high school graduates, but suddenly there is also increased competition for your state’s students from states with declines.

8. Institution priorities. It is important to understand the price tag associated with your institution’s priorities. Is academic profile a priority? I’ve already said that the top academic performers will cost more money. Greater diversity (e.g., geographic)? Out-of-state students can cost you more as they leave behind their state aid funding.

It’s generally not one factor, but the interaction of multiple dynamics that will drive where you land with your discount rate. How have these variables changed over the years at your institution? Consider those changes, too, when you compare your discount rate trends with those in our recent report.

I’m happy to discuss any questions you have about creating an awarding plan or analyzing the impact of your awarding policies on enrollment and net revenue. Feel free to contact me by e-mail, and best of luck as you finalize your awards for next fall.

Read More In: