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Higher math: A college's tuition is only the sticker price

McDaniel College in Westminster, Md.

Ethan Seidel, vice president of administration and finance at McDaniel.

Florence Hines, dean of admissions at McDaniel.

Junior Jake Nichols said he pays about half-price for tuition at McDaniel.

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."


Kai Ryssdal: High school seniors are starting to hear from colleges this week. If I remember right, if the envelope is fat, that's a good sign: admissions paperwork to fill out, and often a financial aid offer.

What's listed as tuition is actually more like the sticker price. And that financial aid offer is kind of like a car salesman telling you what the price will be for you. Colleges are discounting tuition for so many students that the average amount families pay has actually fallen in the past 10 years, according to the College Board. While those discounts sound like a good deal for students -- and they are -- they're a big headache for schools.

From the Marketplace Education Desk at WYPR in Baltimore, Amy Scott reports.


Amy Scott: 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. And as at most colleges, its tuition has climbed steadily. This year, the sticker price reached $33,000, up 29 percent from five years ago.

Lindsey Wilson: That's how much it is, but that's not how much we pay.

Lindsey Wilson is a senior at McDaniel.

Wilson: I don't know anyone here who hasn't gotten financial aid. Most people do.

In fact, the average student at McDaniel pays just about half-price. Most of its 1,700 undergraduates get some kind of grant or scholarship from the school. It's called tuition discounting. And the National Association of College and University Business Officers says colleges are doing more of it. The group's president, John Walda, says in the 2008 school year, colleges gave their first-year students an average 42 percent break on tuition.

Sounds great for students. But Walda says for the schools, there's a downside.

John Walda: The net tuition collected by these universities actually fell by 2.5 percent. This is the first time in our study that we have seen a decline in the net tuition collected. And as you might predict, this isn't a sustainable situation.

Especially for small liberal arts schools. Not the wealthy ones you've heard of, like Williams or Amherst, but colleges like McDaniel that draw mostly regional students.

Jane Wellman directs the nonprofit Delta Cost Project. She says these schools virtually live on tuition now more than ever, with declines in government support as well as endowments and donations. At the same time, Wellman says the colleges have to compete for students.

Jane Wellman: So you've seen tuition discounting go up most sharply in those kinds of institutions because that's the way they're getting the students.

The liberal arts business model -- small classes, mostly full-time faculty, leafy campuses -- is also expensive. Colleges have to charge enough to cover those costs, but not so much that they drive students away.

Ethan Seidel is vice president for administration and finance at McDaniel. He's also an economist.

Ethan Seidel: The challenge for higher education, and has been for a long time and will continue to be, is how do we maintain access at reasonable prices and still generate enough revenue to provide a quality product?

McDaniel is developing other sources of revenue, like a commercial real estate arm that leases property in town. Seidel says the college has also started offering lower-cost online classes and expanded its graduate programs.

Seidel: Graduate school classes occur in the evenings, weekends and over the summer. So all of these are times that gives us the opportunity to take advantage of facilities we already have to recruit more students, generate more income and actually help meet the bills.

To keep enrollment up, McDaniel has stepped up its marketing. Earlier this decade, the school changed its name from Western Maryland College, partly to seem less local. Recruiters start courting students in 10th grade, and the college is constantly updating its buildings.

At McDaniel's sparkling new fitness center, students let off steam.

Jake Nichols: My name is Jake Nichols. I'm a junior here at McDaniel College. I'm a double-major, business/economics.

Nichols is from nearby Frederick, Md. He says he had a choice of schools.

Nichols: Based on the financial aid that was given to me here, I came here because it was a lot less than all the other schools.

Nichols says he's paying about half-price. McDaniel gave him a mix of need-based grants and merit scholarhips. With a 4.4 grade point average in high school, he's the kind of student colleges fight for with aid.

But how long can they afford to keep it up? John Walda, who represents college business officers, says the money has to come from somewhere.

Walda: And we pretty well know where it comes from. It comes from cost savings in other parts of the institution.

In McDaniel's case, that's meant frozen salaries the past few years and positions unfilled. Walda says the risk is that the more colleges spend on aid to attract students, the less they'll have to offer the students who come.

In Westminster, Md., I'm Amy Scott for Marketplace.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.

Ethan Seidel, vice president of administration and finance at McDaniel.

Florence Hines, dean of admissions at McDaniel.

Junior Jake Nichols said he pays about half-price for tuition at McDaniel.

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