So, You Are Worried About Your Discount Rate?
John W. Dysart
The Dysart Group
If you are worried about your discount rate, join the chorus. Few institutions are pleased
with rising discount rates.
Concern is fine, but it is important to understand the drivers of discount rates
before settling on a plan to reduce them. For many private colleges and universities,
reducing discount rates is neither realistic nor desirable. A reality check is in order.
If you enroll needy students, your discount rate is going to be high and
will likely increase every time you raise tuition.
Colleges and universities with Federal Pell Grant eligibility exceeding 40% of the
population are going to have high discount rates. Reducing discount rates at such
schools is like trying to squeeze blood from a turnip. You cannot increase the amount
families pay if they do not have the money. Decreasing financial aid expenditures will
reduce new student enrollments, increase attrition rates and simply transfer discount
expenditures into outstanding receivables.
Consider a real example. The following is a financial aid package for a needy student at a
college trying to control its discount rate by capping institutional grants at $12,000.
Assume tuition, fees, room and board at this school is $36,500.
|Federal Pell Grant
|Subsidized Direct Loan
|Unsub Direct Loan
While an arbitrary cap will control the discount rate, the impact of the approach
means that this student will owe $7,155 plus books, when the government formula
indicates the family is able to pay nothing. Consider the possibilities when students are
offered unrealistic packages:
- If it is a prospective new student, the family may do the math and
elect not to attend.
- If it’s a currently enrolled student, the family may decide that
continued enrollment is not financially feasible, and the student will transfer or drop out.
- A prospective student may elect to enroll anyway and hope that
the $7,155 balance can be addressed in the future. It is more likely, however, that the student will not be allowed to enroll for the following term because of the outstanding balance and will now be counted in the institutional attrition rate and will definitely not be counted in the graduation rate. The student will not even be able to transfer, as most colleges and universities withhold academic transcripts for students with outstanding balances.
- A continuing student may elect to re-enroll anyway and hope that the $7,155 balance can be addressed in the future. It is more likely, however, that the student will not be allowed to enroll for the following term because of the outstanding balance and will now be counted in the institutional attrition rate and will definitely not be counted in the graduation rate. The student will not even be able to transfer, as most colleges and universities withhold academic
transcripts for students with outstanding balances.
Keep in mind that under scenarios three and four, the student leaves owing money to the college, but also departs with a sizeable student loan debt that they are unlikely going to be able to pay.
- Whether it’s a new or returning student, it is always possible that the family will miraculously find another $7,155+ in resources by winning the lottery, or perhaps, through the generosity of a friend or relative. In this case, the institution has controlled its discount rate without negatively impacting total enrollment counts, cash flow, retention or graduation rates. Of course, when the student tries
to re-enroll the following year, the same financial obstacle will exist, but there may not be a lottery ticket or another generous relative available to bail out the family.
This example is not at all unusual at colleges and universities. It can be caused by an institutional aid cap, unreasonable financial aid gapping practices, ill-informed leveraging schemes or just inappropriate financial aid packaging policies. The bottom line is that such outcomes occur due to institutional financial aid budgets that are based on whim or desire and are capricious or random, instead of being based on accurate research and reason.
Unrealistic institutional aid targets are most disturbing at schools purporting to provide access and serve under-represented populations. If the probable outcome of an unrealistic aid budget and packaging model is attrition, then one must ask if at-risk students are righteously served at such schools, or would they have been better off attending college
elsewhere, or not attending college at all?
Be careful how you use PLUS loans to fill packaging
Parent Loans for Undergraduate Students (PLUS) can be an excellent option for a family with some ability to pay. Perhaps a parent loan makes more sense for a family unwilling to tap funds from investments. It is also an effective means for families who have the monthly income to add a loan payment to their expenses. Unfortunately, PLUS loans are increasingly offered to families who cannot afford them.
- I have personally seen hundreds of PLUS loans approved for parents of students eligible for Federal Pell Grants.
- Families with low incomes are very likely to default on these loans.
- While PLUS loans for financially disadvantaged families might serve the short-term Accounts Receivable needs of colleges and universities, they can be financially devastating for families.
College administrators are right to monitor and be concerned about discount rates. It is important, however, to understand the financial characteristics of the students and families you serve. It is a mistake to initiate policies to control your discount rate that are likely to result in fewer new student enrollments, attrition and unreasonable financial hardship for families. There are other ways to control expenditures and generate revenue with intelligent financial aid award policies.