McDaniel College in Westminster, Md.
McDaniel College in Westminster, Md. - 

McDaniel College is the picture of a small, private, liberal arts school. It sits on a hill in Westminster, Md., its brick buildings overlooking the distant Catoctin Mountains. As at most colleges, its tuition has climbed steadily. This year the sticker price reached $33,280, a 29 percent increase from five years ago.

"That's how much it is, but that's not how much we pay," senior Lindsey Wilson said. "I don't know anyone here who hasn't gotten financial aid."

Wilson and her friends benefit from a practice called tuition discounting. Like most private colleges, McDaniel gives many of its students a break on the listed price. In fact, most of the college's roughly 1,700 undergraduates receive some form of grant or scholarship from the school. The average student pays about half price, not counting state and federal aid.

As more families struggle to pay for college in the tough economy, the practice has grown. The National Association of College and University Business Officers tracks tuition discounting at private, nonprofit colleges. In the 2008-2009 school year, the colleges the group surveyed gave first-year, full-time students an average 42.4 percent discount on tuition, up from 39 percent the year before.

It sounds like a great deal for students, but the group's president John Walda says colleges are discounting their way to trouble. In 2008, the tuition collected by those schools fell by 2.5 percent, Walda said. "This is the first time in our study that we have seen a decline in the net tuition collected," he said. "As you might predict, this isn't a sustainable situation."

The pressure to discount is especially strong at small liberal arts colleges like McDaniel, according to Jane Wellman of the Delta Cost Project, a Washington, D.C.-based group that researches college revenue and spending. With their small classes, mostly full-time faculty and leafy campuses, these colleges are expensive to run. Unlike wealthier, better-known schools like Williams or Amherst, regional colleges tend to have small endowments, so the schools depend mostly on tuition for revenue. Other sources, including private donations and government support, declined during the downturn. At the same time, Wellman said, the colleges increasingly have to compete for students. "You've seen tuition discounting going up most sharply in those kinds of institutions because that's the way they're getting the students," Wellman said.

"That's our biggest challenge," said Ethan Seidel, vice president for administration and finance at McDaniel College. "Our revenue comes overwhelmingly from our students, so we need to maintain a stable enrollment to maintain a stable budget."

To keep enrollment up, McDaniel has given more money to families with financial need. At the same time, the college tries to attract a certain caliber of student. To build a diverse class of students, most colleges offer a combination of grants based on financial need and academic or other merit. According to the National Association of College and University Business Officers, 36 percent of the aid private colleges awarded in 2008-2009 was entirely need-based. About 42 percent was based entirely on merit, and 23 percent on a combination of the two.

According to the U.S. Department of Education, the growth in merit awards has outpaced need-based aid. Critics of that trend say it denies access to students from lower-income families. Florence Hines, dean of admissions at McDaniel College, defended the practice. "The students who are receiving merit awards really light up the classroom," she said. "They bring a dimension to the college that you want in your academic experience here." According to the college, many students who receive academic scholarships would otherwise qualify for need-based grants.

Tuition discounting leads to confusion among students and their families about the real price of college. Michael McPherson is the former president of Macalaster College, a private liberal arts school in St. Paul, Minn. Now president of the Spencer Foundation in Chicago, he's also an economist who studies the cost of higher education. McPherson compared college tuition to airline pricing. Everyone on the plane pays a different price. "The airlines are trying to match the price to the particular passenger's willingness to pay for that flight at that time," he said.

Unlike the airlines, McPherson said colleges also have a social mission. By charging more to the people who can afford it, they build a more diverse mix of students. "Setting different prices for different people, besides helping the business, if it's done right, also can also help colleges advance their underlying mission," he said.

At McDaniel College, several students said financial aid made all the difference in their college decisions. Junior Jake Nichols said he pays about half-price. "I came here because it was a lot less than other schools," he said. With a 4.4 grade point average in high school, he's the kind of student colleges fight for with aid. McDaniel gave him a combination of need-based grants and merit scholarships.

First-year student Maria Mercurio of Pleasanton, Calif., had been leaning toward the University of Oregon. When McDaniel College offered her $15,000 a year in aid, her parents encouraged her to visit the school. "The feeling was what made the final decision, but I wouldn't have even really considered it if it hadn't been for the money," she said.

Colleges pay a price to keep the aid flowing. In the past few years, McDaniel has frozen faculty salaries and left positions unfilled. John Walda of the National Association of College and University Business Officers said the money for aid has to come from somewhere. "We pretty much know where it comes from," he said. "It comes from cost savings in other parts of the institution."

Schools are seeking new forms of revenue. In the 1980s, McDaniel formed a for-profit commercial real estate arm that leases property in town. It has recently started offering lower-cost online courses and expanded its graduate programs. Graduate classes meet at night, on weekends and during the summer. "All of these are times that give us the opportunity to take advantage of facilities we already have to recruit more students, generate more income and actually help meet the bills," Seidel said.

The result is a different college than 20 or 30 years ago. The liberal arts school is intact, but graduate students now equal undergraduates in number. In 2002, McDaniel changed its name from Western Maryland College, to raise its national profile.

"I don't think the college has changed," Seidel said. But he acknowledged that the business model has. "We haven't had to change the college, our mission or our beliefs," he said. "But we've had to be creative about how we finance that operation."

Follow Amy Scott at @amyreports