The rate by which U.S. colleges and universities discount student tuition continued to rise in the 2022-2023 academic year, contributing to our negative view on the higher education sector. The ongoing rise in tuition discounting magnifies other concerning trends facing higher education institutions, including declining enrollment, the leveling off in the number of high school graduates throughout much of the U.S., and increasing affordability concerns resulting, in part, from heightened inflation.

The average tuition discount rate for 341 private, nonprofit colleges and universities surveyed in April 2023 rose to a peak of 51% in the 2022-2023 academic year, continuing a steady climb from 40% in 2014.

Figure 1: The steady upward march

Source: National Association of College and University Business Officers (NACUBO); As of 4/24/2023.

What exactly is tuition discounting?

A school’s discount rate measures the total institutional grant aid awarded to students as a percentage of gross tuition, also commonly known as the sticker price. In short, the higher the discount rate, the less net tuition revenue schools derive from students.

Figure 2: Greater the discount, the less tuition revenue realized

Source: Moody’s Investor Service US Higher Education Medians; As of 6/30/2022.

What are the intended and unintended consequences of discounting?

While school administrators use the discount rate as a tool to address the declining number of college-age students, enrollment has, nonetheless, continued to fall for a majority of U.S. institutions, thereby limiting the operating flexibility of most colleges and universities. According to sector medians reported by Moody’s, a sizable 41% and 69% of operating revenue for public and private schools, respectively, comes from net tuition.

Inflationary pressures as well as a growing debate around the general affordability of a college education have also fueled the growing use of tuition discounting. The NACUBO reports that, after adjusting for inflation, net tuition revenue declined by 5.4% for the current academic year versus the 2021-2022 year. For elite institutions that are highly selective, tuition discounting is relied upon significantly less, 47% versus 59% for the balance of colleges and universities, according to the NACUBO, thereby exacerbating the growing divergence between strong and weak colleges and universities.

Investment Implications

While segments of the sector remain attractive from an investment standpoint given numerous options available to counter net tuition revenue pressures and maintain financial stability, the importance of credit selection remains critical as the trends highlighted above are unlikely to abate. To that end, our investment thesis continues to incorporate a preference for colleges and universities that benefit from strong balance sheets, stable demand indicators, and generally stable net tuition revenue, all of which contribute to operating and financial flexibility.  The ability of institutions to manage tuition discount rates is a key component of successful enrollment and financial management.

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