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Fixed-Income Insights

The drastic levels of tuition discounting are unsustainable for schools with limited resources. 

[Note: This article is from the July 2017 edition of The Muni Quarterly.]

By Yeida Reyes, Research Analyst

Overall, the private education sector has a wide range of attractive opportunities for municipal bond investors. However, there are trends in some of the smaller, more stressed portions of the sector that require more extensive research. Investors need to fully understand these dynamics in order to identify the best investments. One thing to watch carefully, for example, is tuition discounting, which is a growing, and troubling, trend among U.S. private higher institutions of learning.  As institutions award a growing sum of financial aid in the form of grants and scholarships, the rate of discounting—the amount awarded as a percentage of the school’s published tuition price—has escalated to record highs.

Just as retail stores face tough competition and often are forced to offer sale pricing to move merchandise, colleges and universities experience similar competitive pressures. According to a recent study by the National Association of College and University Business Officers (NACUBO), the average tuition discounting rate has increased by 27% in the last decade, with the pace of growth accelerating in the past four years.  

 

Private Colleges and Universities Are Discounting Sheepskins
Tuition discount rate for the school years 2005–06 through 2016–17 (estimated)

Source: National Association of College and University Business Officers (NACUBO) Tuition Discounting Study, 2005–2016; data are for the fall of each year.
*Preliminary estimate.

 

Although published prices for college tuition are growing, net tuition dollars, for many institutions, are falling. For example, St. Lawrence University’s published tuition price in 2015 was $49,060 per year, but the upstate New York school collected an average of just $22,600 per student—an effective discount rate of 54%. The published price represented an increase of 4% over 2014. Actual tuition receipts, however, were flat, year over year—reflecting the higher costs of acquiring each new student through increased discounting.

Discounts and Demographics
While wealthy, well-known schools have been using their vast resources to aggressively discount in order to attract a wider array of students and to compete with their peers, less prestigious institutions have been increasing discounting, not because they can but, rather, because they must in order to maintain or increase enrollment. Unfortunately for many such schools, discounting has seen mixed results. According to a NACUBO survey, 58% of institutions that rely on discounting reported no gain in enrollment, and, in some cases, posted a loss.

A key reason for falling enrollment is simple demography: college-enrollment levels are declining due to trends in the population of U.S. high-school graduates. The high-school age population has fallen almost 2% since 2010, with the largest declines seen in the Northeast (-6%) and Midwest (-3.5%). This has led to total higher education enrollment falling by 2.4 million students since 2011.

 

Discouraging Trends in High-School Graduation Numbers
Total U.S. public and private high school graduates, by region for the school years 200001 through 203031

Source: National Student Clearinghouse and Western Interstate Commission for Higher Education. Lighter line colors indicate actual data; darker colors indicate projected figures.

 

These trends are not close to reversing, with no upswing likely until 2023, according to projections from the Western Interstate Commission for Higher Education. When demographic trends for high-school graduates do begin to increase again, much of the growth is expected to come from minority populations with lower incomes—precisely the types of students who will require significant financial aid and thus provide little relief to institutions looking to fill classroom seats at full price.

With thousands of private institutions chasing an ever-diminishing pool of matriculating students, competition for enrollment has increased. Schools closest to the proverbial fire are lesser-known institutions with weaker value propositions—particularly smaller, regional schools that draw from local populations in the Northeast and Midwest, where demographic trends have hit hardest. Since these institutions often struggle to compete on quality of education and overall reputation, they are increasingly forced to vie for students based on price. Indeed, the largest increases in tuition discounting over the last five years have been seen at small (1,300 students on average), less selective (70% acceptance rate on average) schools that were facing declining enrollment along with significant operating deficits (10% on average).

Course Corrections
Institutions that can adapt to market demands and provide a clear value proposition by offering new, practical programs that improve job prospects and earning power should be less reliant on discounting moving forward. Babson College, a small Massachusetts school of just 2,800 students, provides a good case study. Despite its highly competitive location, with challenging demographic trends, the school’s focus on business and entrepreneurship has helped it attract a geographically diverse student base (73% come from outside of New England), while maintaining stable enrollment and a low tuition discounting rate of just 24%.

Alternatively, Cabrini University—a school of similar size in Pennsylvania—continues to struggle to demonstrate its value. Declining demand for its core teacher certification program and lack of significant differentiation have necessitated tuition discounting of 43%, despite an endowment per student of only $25,000, and resulted in recurring deficits since 2013 and a current operating shortfall of 22%. Any economic headwinds, including but not limited to a recession, could further deteriorate the market positions and credit qualities of such schools.

While discounting can be an alluring and often unavoidable short-term strategy to maintain enrollment, the drastic levels of discounting observed in recent years are unsustainable for schools with limited resources, high fixed-cost structures, and burdensome debt levels. This is creating a divergence in credit quality—and, potentially, an opportunity for investors who understand these dynamics.

 

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THE MUNI QUARTERLY

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The July 2017 edition offers insights from our analysts on key topics for municipal bond investors, along with essential market information.

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