There was a time when shopping for a car involved a lot of guesswork—everyone knew that the advertised price was just the starting point for lengthy, sometimes contentious negotiations. But companies like Saturn and CarMax started a trend toward "no haggle" sales policies where the price you see is the price you get. College tuition pricing, on the other hand, is moving in the opposite direction, with more haggling and plenty of guesswork.

Colleges, competing for top rankings, are using financial aid to attract the best possible students, assembling individualized financial aid "packages" for students that include federal loans and grants, work-study opportunities, and traditional "need-based" scholarships. And, increasingly, they are providing "institutional" grants. Money doesn't change hands with these grants—instead colleges charge less than their sticker prices, a practice known as "tuition discounting," which helps schools meet students’ financial needs, recruit desirable students, and build revenue by boosting enrollment.

Colleges don't advertise these deals. Students have to seek them out and, since financial aid notices are generally mailed out with acceptance letters, students don’t know the actual cost until after they have been accepted—sometimes after they haggle for a better price. Top students, those with higher grades and more extracurricular activities and thus more college options, are in the best position to barter with financial aid officers for the biggest tuition discounts. But even students who are not at the top of their class may be offered discounts. By offering small discounts to relatively wealthy students who can pay close to the sticker price, colleges earn more revenue than they would by offering large discounts to lower-income students. This strategy also helps increase overall enrollments and further boosts the bottom line.

If this sounds like it runs contrary to traditional notions of financial aid helping students who otherwise couldn’t afford college, it does. Colleges say that most discounts are used to fill financial "need," defined as the difference between the sticker price and what students and their families are able to pay under federal qualifying formulas. But offering tuition discounts to strong applicants regardless of their income threatens to cut into the aid institutions are able to offer to students who are most needy.

As Charts 1 and 2 show, tuition discounting is becoming increasingly common. These charts show student financial aid data from a sample of 130 private colleges defined by the National Association of College and University Business Officers (NACUBO) as having a small student body (fewer than 850 students in the freshman class) and, relative to other private colleges, low tuition (less than $25,000 per year). While the use of tuition discounting is rising throughout higher education, its growth among small private colleges is startling.¹

Each square on Chart 1 represents an individual college in 1996. The horizontal axis shows the percent of freshmen receiving grants. The vertical axis shows the average grant those freshmen received, as a percentage of the sticker price.²

The colleges had a range of discounting policies in 1996, indicated by the distribution of the squares on the chart. Some schools discounted tuition for only a few students, but those grants were equal to 60 percent or more of tuition. Others gave discounts to the large majority of students, but the average discount was 20 percent or less.

As Chart 2 shows, by 2005, much of the variation in financial aid policy had disappeared. The dots on Chart 2, representing the same 130 colleges, are more tightly clustered than the squares in Chart 1. Every college in the sample gave a discount to at least 60 percent of students, and, on average, 92 percent of students received some institutional grant. The typical size of the grant also fell into a fairly narrow range, with most between 40 percent and 60 percent of the sticker price.

The shift wasn't accidental. Over the last 10 years, a growing number of colleges and universities have hired consultants who use sophisticated software to determine the combination of individual financial packages that will help colleges fill their seats in a way that maximizes the schools' revenue and the competitiveness of their students. Colleges are using institutional aid to adjust their prices according to each student’s willingness to pay, maximizing the amount some students pay while discounting tuition to recruit students who might not otherwise attend.

As a result, the gap is widening between the prices colleges advertise and the price they actually charge their students. Chart 3 shows the average "net tuition"—the price after tuition discounting—and the average "gross tuition"—the sticker price—at a sample of private colleges from 1996 to 2005.

That average price that students paid increased from less than $10,000 per year to almost $15,000, an increase of 53 percent. College is undeniably more expensive today than ever before. But the average "gross tuition," or sticker price, increased even faster during that time period, from about $15,000 to nearly $24,000, an increase of 62 percent. The average difference between the sticker price and the actual price has increased nearly 80 percent, from $5,205 in 1996 to $9,267 in 2005.

Tuition discounting is a mixed blessing. For some students, it is countering rapidly rising college costs. But for talented students from low-income families, discounting means that more and more of the financial aid they need to attend college is going to less needy students—students who are often pursued by  budget-conscious colleges because they are less needy. Discounting also makes shopping for a college a more difficult and confusing process, especially for students for whom price matters, because they only find out the true cost of attending a college after they are accepted.

Endnotes
¹ Tuition discounting is also growing at public universities, see for example Baum & Lapovsky’s 2006 College Board report, “Tuition Discounting: Not Just a Private College Practice.” Accessible at http://www.collegeboard.com/prod_downloads/press/tuition-discounting.pdf

² NACUBO defines an institution’s tuition discount as the total amount of institutional grants given, including restricted endowment grants and athletic scholarships, divided by the total tuition and fee revenue the institution would have received had all students paid the full price.