As enrollment management and marketing professionals, we often face an uphill battle with discount rates, a concept that can make or break our schools. Surprisingly, many trustees—those at the helm of our institutions—may not fully grasp this crucial element. Let’s break it down, so you can arm your trustees with the knowledge they need.
The Discount Rate Dilemma
Picture this: a trustee, seasoned with a decade of board experience, admits she doesn’t understand the discount rate. You’re floored. This isn’t a one-off scenario; it’s a widespread issue. It has happened to me. Discount rates are the percentage of gross tuition revenue allocated to financial aid. According to the National Business Officers Association (NBOA), pre-COVID, this rate was around 18% for independent schools. Post-COVID data is scarce for the discount rate, but the probability for a greater number is expected.
Calculating the Discount Rate
Let’s demystify the math. Say your school charges $20,000 in tuition and has 300 full-pay students, generating $6,000,000 in gross revenue. If you award $1,200,000 in financial aid to some number of those students, instead of charging them the full price, your discount rate is 20%. Simple division—$1,200,000 divided by $6,000,000—gives you the percentage. In this scenario, you net $4.8 million in tuition revenue, assuming no further discounts.
The Funding Puzzle
Financial aid funding can come from various sources: annual giving, endowment funds, auxiliary programs, federal grants, and vouchers. Ideally, a robust endowment is the best long-term solution, but many schools rely heavily on annual giving. Sometimes it is simply reducing the price for a family and there is no source subsidizing it.
Financial Aid: More Than Just Assistance
Financial aid isn’t just a lifeline for families; it’s a strategic marketing tool. It supports three main goals:
- Access: Ensuring diverse student enrollment.
- Composition: Enhancing the educational environment.
- Revenue Generation: Bridging gaps in tuition revenue.
The Perils of “Invisible Paper”
Here’s a term to get familiar with: “Invisible Paper.” This refers to unfunded discounts, a short-term fix with long-term consequences. Imagine you have 18 first-grade seats but only 15 full-pay students. You offer discounts to fill the remaining seats, calling the reduced tuition “financial aid.” Without a funding source, you risk financial instability over time. It’s a band-aid solution that can’t sustain you long-term.
Spotting the Problem
A shrinking pool of full-pay families often signals trouble. Yet, schools and many associations rarely track this critical number. Early detection through consistent tracking and strategic planning is key to avoiding crises. Why do trustees fail to address the discount rate problem? It’s a mix of hopefulness or a lack of understanding. Sometimes the school administration doesn’t want to alarm them, so it isn’t highlighted. In this situation, it makes it difficult to spot. I also have heard, “It’s this economy.” This indicates that it’s an environmental problem and it can’t be helped.
The Snowball Effect
Ignoring discount rate issues can lead to a snowball effect. Here’s the typical progression:
- Decrease in full-pay students.
- Lowered student body quality.
- Increased use of “Invisible Paper.”
- Facilities deteriorate due to lack of funds.
- Leadership struggles to find solutions.
- Hiring of less qualified faculty.
- Decline in educational quality.
Proactive Solutions
What’s the solution? Proactive, strategic leadership. Here’s a checklist for trustees:
- Understand the discount rate.
- Ensure competent leadership.
- Track full-pay numbers.
- Develop a full-pay marketing plan.
- Use “Invisible Paper” sparingly and strategically.
- Create a top donors marketing plan.
- Maintain program quality.
- Align costs with tuition revenues.
Final Thoughts
With a clear understanding of discount rates, and a strategic approach, schools can navigate financial challenges and thrive when enrollment numbers fluctuate. It’s about pulling the right levers at the right time to ensure sustainability and growth.
