The Answer To the High Cost of College: 42% Cut In Tuition

McGruber writes: Utica College, a small, private university in upstate NY, announced it is cutting its annual tuition by 42 percent. According to College President Todd Hutton, the change will reduce the sticker shock that many parents and students have when seeing the tuition price. Hutton says there are fewer than a dozen students who pay the full price. Currently, 61 percent of the tuition revenue coming from freshman is grants and subsidies directly from the college's pockets. Under the new tuition rate this number, called the "discount rate," would go down to 29 percent. Essentially, Utica College would spend less of its own money to pay the tuition of students who can't afford the full price. It expects to make up the lost revenue through increased enrollment, which would come as a result of the college appearing to be more affordable. Even though some of it sounds like a shell game, students will all make out better in the end, Hutton said. The least a student will save is $1,000. The most is more than $5,000, Hutton said.

Comments

How it works?

[Michael Woodhams]

The explanation wasn't very clear, but I think this is how it works.
Student in 2015: "We charge you $34k tutition, but you are eligible for $20k grant, so you pay us $14k."
Same student in 2016: "We charge you $20k tuition, but you are eligible for $6k grant, so you pay us $14k"
(NOTE: $14k is just an example, number made up from top of my head.)
For that student, there is no financial impact on the university for the cut in tuition. There will be some loss because of students who were paying over $20k after grants, who will now be paying only $20k, but they say there are very few of these students. They anticipate getting more students because $34k tuition was scaring people off from applying, even those who in the end would only have been paying $14k (or whatever) after grants. This extra volume will supposedly offset their losses.

Problem: "We're losing money on every student, but we make up for it with volume". Unless that $14k after-grants payment is actually enough to cover the university's costs for that student, getting more of them won't help.

Re:How it works?

[AthanasiusKircher]

The explanation wasn't very clear, but I think this is how it works.
Student in 2015: "We charge you $34k tutition, but you are eligible for $20k grant, so you pay us $14k."
Same student in 2016: "We charge you $20k tuition, but you are eligible for $6k grant, so you pay us $14k"

Yes, that's the gist of it. But there's a lot of stuff that goes into that word "grant." College budgets are very complex, and there's a lot of reasons why those "grants" can be useful to move money around.

For one example, rich colleges with big endowments (over a billion dollars) generally pay at least 1/3 of that tuition "grant" money with endowment money.

Why would they do this? Sometimes because they have to. Endowment management often involves weird operations akin to money-laundering. Donors often give money that's earmarked for particular things, and for the college to actually make use of that money in their general budget, they need to find a way to funnel the money out of the endowment.

Tuition is an important factor for many richer colleges here. Let's say that you have a couple who has a decent amount of money that they want to give to the school. They're not rich enough to pay for a building or anything like that, but they'd like something smaller that they can put their name on.

So, they fund the "Jimmie and Maggie Stewart Scholarship in Basketweaving Studies," which can pay out $10,000 per year to some lucky undergraduate basketweaver (or perhaps a few of them, divvied up).

Jimmie and Maggie get a lot of "bang for their buck" here -- they get to feel good about funding undergraduate education, and often colleges will ask students who receive scholarships to write a letter of thanks or at least information to the donors periodically and/or host some "donor cocktail hours" or whatever where the donors get to mingle with the happy undergraduates and see where their money is going.

But now the college needs to get that money into its general funds to use it. So it has an incentive to "award the scholarship." On the other hand, the college can "double-dip" here by increasing tuition at the same time. Before the student paid $20k or whatever with no grant, but now the tuition can be $30k with a $10k scholarship, so the student gets a "scholarship" and is happy because they think they are getting a "deal" (and something to put on a resume), the donors are happy because they think they are helping students succeed in this era of high tuition, and the college actually increased its effective annual revenue by 50% for this student.

Most of the situations with endowments aren't that direct -- donors give money that's not earmarked for individual scholarships, but perhaps it's meant to go toward "undergraduate education" or whatever. (And many alumni often tend to feel the best about their undergrad experience, so they might donate toward that.)

Again, the school could try to use that money for direct expenses, like building a new gym or whatever, but then they have to justify it to endowment managers as directly relevant to "undergraduate education" -- is the new gym really necessary? Maybe... maybe not. But "tuition" really is considered "necessary" for undergraduate education, so if you give that money as a "grant" to a student to lower tuition, then the money flows directly from the endowment and back to the general college funds... where it can used to pay for the new climbing gym or another administrator's salary or whatever.

And that's just one type of "shell game" that goes on... but it's an important one for richer schools. Tuition hikes at smaller schools may have other pools of money or grants or whatever involved that having a "higher tuition" allows them to use more freely. Meanwhile, schools obviously have incentives to charge higher "official" tuition, since they can squeeze that money out of richer families and thus actually increase income.

What's going on in this case is a smaller schoo

Re:not enough rich people, unless you mean teacher

[phantomfive]

2010 wealth distribution: ucsc.edu/whorulesamerica/power/wealth.html

Note that is wealth, not income, so changing the tax rates will get almost none of that.

Re: Just go to Germany!

[Anonymous Coward]

This! The average American right wing nut decries Socialism, but fails to understand that a lot of those things they consider as American aa Apple pie, like a strong military, police force, fire stations, roads, public schools, etc. , are here because our forefathers were progressive enough to know that a society cannot just be made up of rugged individuals, but must also take responsibility for society as a whole.

The debate has long been over the responsibility of society in general vs. the responsibility of the individual. And a lot of other societies have found a different balance than we have, which lets us take the observation point to see how they are faring.

Let's take health care for instance. On an individual basis, in our system prior to the ACA, the average American spent 8 times the amount on health care in a given year than their next most expensive counterpart in an industrialized nation. And they received access to health care services on par with Uganda, according to the WHO (this ranking was mostly based on average ability to pay, not the actual presence of health care workers AFAIK). So what do we know from this? We pay too much for so little. Yet we continue to delude ourselves into thinking we are better off than the rest of the world, while medical expenses remain the #1 reason why individuals file for bankruptcy.

And, IMHO, the ACA is not the solution we should settle for, because it still allows the comfortable rent-seeking behaviors currently enjoyed by the health insurers and health care providers. Either completely do away with insurers altogether and make everyone pay from the same set of published fee schedules (the force of competition allows patients to choose the best balance between price and service) or bring everyone under the same coverage umbrella. Right now, insurance companies enjoy the ability to break us up into these artificial groups called "employer sponsored plans" and then tell each and every employer out there that they continually maximize the available funds in their pool and push the plan into more expensive brackets. And since the negotiated pricing between the providers and insurers is proprietary, and most providers don't even entirely understand how pricing is associated with the coding of specific services, this allows a lot of room in which the patient is essentially being ripped off.