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The truth behind those ‘40%’ tuition discounts

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Two more colleges have slashed their tuition prices by a headline-grabbing margin. Officials from Utica College in New York and Rosemont College in Pennsylvania, both small, private liberal arts schools, announced cuts of more than 40% off the price of tuition. They join a growing roster of schools to cut tuition, including the University of Charleston in West Virginia, Ohio’s Ashland University, Converse College in South Carolina, and Concordia University-St. Paul, where similar discounts were announced with much fanfare over the last few years.

Good news, right? As the nation’s student debt tally climbs ever higher, political leaders from both side of the aisle have called on schools to make college more affordable. Moves like these should elicit hope that, finally, colleges are getting the memo. But experts we spoke with say price cuts are typically more about drawing free publicity and driving up enrollment than giving students a meaningful deal.

New bag, old tricks

What schools have traditionally done to make students feel like they were a bargain is to simply raise the sticker price of attendance and then entice students to enroll by offering large discounts in the form of merit-based aid (i.e., grants and scholarships). In many cases, however, the sticker price and the discount value were both raised at about the same rate, which gave the illusion of a great price cut but didn’t really result in a lower net price (what families pay after financial aid and grants are applied). This tactic is still common at private schools, but as families become more cognizant of college costs, it’s begun to lose its efficacy.  

“Charging a lot of money for a college education doesn’t necessarily convince everyone it’s a better school these days,” says Mark Kantrowitz, publisher of Edvisors.com. “[Colleges] hope if they charge them what it really costs, maybe they’ll get more students that way.”

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So in hopes of attracting more students, schools have started using a new strategy — they reduce the sticker price of attendance, make the local news, get consumers’ attention, and spin it all as if they are prioritizing affordability. But what they rarely broadcast is that as the sticker price falls, so does the amount of merit-based financial aid the school offers. As a result, the actual net price of attendance — again, what families pay after financial aid and grants are applied — doesn’t change as much as it may seem.

Rosemont College, in Rosemont, Pa., which has about 500 students, said recently week it would cut the cost of attendance (that’s tuition and room and board) by 34%, from $46,020 to $30,000 beginning in 2016. It seems like a dramatic discount, but the actual drop in the net price won’t change quite as much. Rosemont students paid an average net price of $24,865 for the 2015-16 school year, according to a spokesperson. With the new discount, the net price will be around $23,195, a savings of $1670 or roughly 7%.  

But a discount is still a discount, Rosemont President Sharon Hirsh says. And by reducing the sticker price so that it’s closer to what families actually pay, Hirsh hopes it will help make the college shopping process more transparent. “[The price change] will put Rosemont on the radar of families who previously overlooked Rosemont because they believed they could not afford it. And, more critically, it will restore much needed clarity to a confusing and muddled college finance system,” she says.

Rosemont can afford to take a hit on tuition revenue largely because it generates a substantial amount of revenue (30%) from other sources, such as alumni donations and from renting out its campus facilities for special events, Hirsh says. But this is a rare advantage in the small private college sector, according to Fournier, who says small private schools can derive as much as 90% of revenue from tuition alone.

Utica College, which has about 2,880 students, also announced a 34% discount on its cost of attendance this week, lowering the sticker price from $46,340 to $30,430. But, again, when you look what students have actually been paying after financial aid and grant money was applied, the net price isn’t changing that much. For the 2013-14 school year (the most recent public data available) the net price for a year at Utica was $22,308. With the new discounts, the net price will be $21,414 for the 2016-17 school year, a college spokesperson confirmed. The real discount: $892 or 4%.

“The point of these tuition cuts is they’re trying to show that they are much less expensive,” Kantrowitz says. “This way of presenting it tends to overemphasize the impact.”

The private school struggle

The schools that are making these dramatic price cuts are typically small, private liberal arts colleges, a sector of higher education that has particularly suffered in the years after the financial crisis. Unlike public institutions, which are heavily subsidized by federal and state funding, and elite private schools, with billion-dollar endowment funds, small private schools depend almost exclusively on tuition and room and board fees to keep the lights on. As a result, these schools have struggled to convince families to look past their sticker price — an average of $42,419 per year, more than double the cost of public 4-year institutions — in the years following the recession.  

“One of the challenges that small liberal arts colleges face is the perception that they don’t offer good return on investment,” says Tim Fournier, managing director of Huron Education, a Chicago-based higher education consulting firm. “Students coming out of these schools and having a lot of student debt and not necessarily having a job that pays well has been a real problem for these schools.”

As families shy away from high-cost private schools, enrollment and, consequently, revenue has fallen, leaving schools to scramble to find other ways to cope. In some cases, they fail. In March, the board of the 114-year-old Sweet Briar College in Virginia abruptly shut the school down, quickly followed by news that private Christian school Tennessee Temple University would merge with another private Christian school. (Sweet Briar College was eventually rescued by a crew of alumni who raised $12.5 million to finance the school's 2015-16 school year.)*

Freshmen enrollment was flat or down from 2013 to 2014 at nearly half of private colleges surveyed in a recent report by the National Association of College and University Business Officers, NACUBO. Meanwhile, revenue at these schools fell 2.5% when factoring in inflation.

"While the economy has improved, many families are still struggling," says Ken Redd, director of NACUBO's research and policy analysis. "There's an increased inability [for needy students to go to college] and an unwillingness to pay even if you did have the money."

The bottom line: When shopping for schools, ignore the headlines and focus on the net price — how much the average student pays for tuition and room and board after aid is factored in. This is the number that matters most because it’s the gap that families will have to fill with their own money. You can find net prices by searching schools by name at http://collegenavigator.gov or by browsing schools in the new College Scorecard.

*Correction: Sweet Briar College was reinstated after alumni rallied to raise funding for the schoo's 2015-16 shool year. We have updated the story to reflect this change.

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Mandi Woodruff is a reporter for Yahoo Finance and host of the weekly podcast Brown Ambition. Follow her on Tumblr or Facebook.