By John Lawlor
This article was previously published in the November 2017 issue of Private University Products and News magazine.
A higher education pricing strategy dubbed the tuition reset is gaining traction. Private colleges and universities as varied as church-related Concordia University, St. Paul in Minnesota, to career-focused Utica College in New York, to liberal arts-based Birmingham-Southern College in Alabama have made headlines for their tuition resets, with an increasing number of other colleges announcing them during the past five years.
Not every college is positioned to make the “tuition reset” pricing strategy a success, but those that are share several characteristics.
What is a Tuition Reset?
A tuition reset is a substantial reduction in a college’s published tuition price—what people generally think of as its “sticker price” before scholarships and financial aid are awarded. The price reduction typically applies for students enrolled in on-campus undergraduate programs, as opposed to graduate or online-only programs.
Usually the price reduction of a tuition reset is made in a dramatic dollar amount (such as $10,000 lower), represents a significant percentage (such as 50% lower), or works to bring the published tuition price below a certain threshold (such as less than $20,000) that impacts the willingness to consider and select a college or university.
Why is a Tuition Reset Done?
Almost every private college or university in America is facing the same challenge: price sensitivity. Students and families in the higher education marketplace draw a line in the sand about the amount they can or will pay for a college education.
Private institutions have long dealt with this reality by discounting their tuition via institutional aid—need-based awards designed for those without the ability to pay the published price, as well as merit awards for those lacking the willingness to pay it. But problems with discounting become apparent when the published tuition price rises higher and higher each year.
For one thing, families are scared away when the published price gets too high if they don’t realize the extent to which colleges discount. The annual average total published price at U.S. private colleges and universities has reached a figure that now represents 77% of the annual average household income of Americans.
However, even among families who are in the know, their idea of an acceptable net price remains relatively fixed. Their price sensitivity is particularly acute as they do the math of the tuition amount multiplied by four years, plus annual tuition increases, and find that it equals a huge expense and possibly a high level of debt.
As a consequence, when a college increases its published price, it must correspondingly increase its discount due to this net price ceiling. The problem is that increasing its discount rate too wipes out the college’s main purpose of raising its tuition (i.e., to cover annual inflationary expenses), since the net revenue result is now a wash.
For most colleges and universities, high published prices are not sustainable for generating the necessary revenues. A tuition reset can help solve the price perception issues that have become rampant among both audiences: To families who have been deterred by a high sticker price, it can signal affordability. And it can bring the published price below other families’ net price ceiling, thereby preventing an increase in the overall discount.
How Does a Tuition Reset Work?
A tuition reset can be financially favorable for a private college or university because in addition to a reduction in the published tuition price, the dollar amount of institutional aid is reduced. The new aid packaging aims to satisfy students of all financial means.
Those who qualify for federal and state financial aid continue to receive it to the fullest extent, and the institution retains its previous commitment to lowering their net price. For middle-income families, most typically the new award levels are designed to give them the same or a slightly lower net price compared to what they currently pay.
Any money that’s “left on the table” by lowering the out-of-pocket cost for students from high-income families who receive little or no aid can be compensated for by enrolling more students. And this greater volume is itself facilitated by the tuition reset, because a lower sticker price can increase the number of students from all family income levels who consider, apply, select, and persist at the institution. As a result, the institution can experience an overall net tuition revenue gain.
When Does a Tuition Reset Succeed?
Despite its potential to increase net revenue, the tuition reset is not a panacea for every private institution. Yet experience has shown that several conditions can help ensure the successful implementation of a tuition reset.
First, the institution must do its homework. This includes reviewing case studies of tuition resets, consulting with peers at institutions with experience implementing a reset, conducting price sensitivity studies within target markets, and running multiple financial aid modeling scenarios.
The institution also needs to be operating from a position of strength in terms of enrollment numbers, financial stability, and revenue streams. This is especially true because a tuition reset involves significant up-front expenses. An institution must be willing to absorb any potential losses during the first year of a tuition reset as the new financial aid award model takes effect.
And it also takes the proper investment of marketing dollars to generate awareness of—and sustain the momentum of—a tuition reset. Institutions also are in a better position to succeed with a tuition reset if they have an innovative campus culture and leaders who are responsive to the realities of the higher education marketplace, as well as to the needs of the students they serve.
The board and senior administrators will need to engage in data-based decision making, which requires ample time to plan, process, discern, and decide. But then to manage the actual change requires nimbleness and rapid response.
Most importantly, the institution must be delivering an educational experience of real value. No matter what the published price or net price is, families will always expect a good return on their investment. A tuition reset can increase interest and consideration, but an institution still must offer an educational experience that results in student satisfaction and desired post-graduate outcomes.
The tuition reset’s core message of improved value from good quality at a lower price must be authentic. For private colleges and universities with fiscal stamina that are able to embrace change and offer true value, a tuition reset can go a long way in the marketplace—boosting brand equity, consideration, and selection.