The Net Tuition Revenue Iceberg 

What's below the surface of enrollment trends? 

Enrollment is up, but what’s beneath the surface?
Many institutions are celebrating record enrollments for fall 2024, but does this signal long-term financial health? A deeper look into the data reveals that higher discounting, shifting student demographics, and rising costs may be undermining the sustainability of these gains. Understanding what’s beneath the surface is critical to ensuring that today’s enrollment success translates long-term financial stability.

Enrollment and Net Tuition Revenue

Recent years have seen record enrollment numbers at many colleges and universities, but these gains often come at a cost. To attract students, institutions increasingly rely on tuition discounting, offering institutional grants or scholarships that reduce the sticker price. The National Association of College and University Business Officers (NACUBO) reports that the average tuition discount rate for first-time, full-time students at private nonprofit institutions hit a record 56.2% in the 2022-2023 academic year. This means that, on average, more than half of potential tuition revenue is being forgone to attract students.

While this strategy can boost enrollment, it raises concerns about net tuition revenue. If the net revenue per student declines due to higher discount rates, institutions may struggle to cover operational costs, especially in the face of inflation.

Recent years have seen record enrollment numbers at many colleges and universities, but these gains often come at a cost. To attract students, institutions increasingly rely on tuition discounting, offering institutional grants or scholarships that reduce the sticker price. The National Association of College and University Business Officers (NACUBO) reports that the average tuition discount rate for first-time, full-time students at private nonprofit institutions hit a record 56.2% in the 2022-2023 academic year. This means that, on average, more than half of potential tuition revenue is being forgone to attract students.

While this strategy can boost enrollment, it raises concerns about net tuition revenue. If the net revenue per student declines due to higher discount rates, institutions may struggle to cover operational costs, especially in the face of inflation.

Are you Growing? Or just Keeping up with Inflation

According to the Higher Education Price index inflation rose by 3.4% in FY 24. How does this stack up to the industry averages?

• Private, 4-year not-for-profit institution tuition and fees grew an average of 8.2%
• Public 4 year not-for-profit
  • In-state tuition and fees: growth rate YOY: +1.6%
  • Out-of-state tuition and fees: growth rate YOY: 3.1%

Data from NCES reporting, 1,2

The sticker price of private higher ed institutions often rises at a greater rate from necessity as they do not benefit from state appropriations. Public higher ed institutions often look to out-of-state students or graduate students to help ease their financial burdens as there are less state driven regulations and limitations around tuition for those cohorts.

Institutions should carefully evaluate their growth in relation to inflation. A tuition revenue increase that appears promising may be misinterpreted as growth, when in fact, it offers limited room for expansion or financial flexibility.

The Tuition Revenue Icerberg: Decoded

At first glance, record enrollments suggest financial strength, but the real risks lie below the surface. Institutions are facing record-high tuition discounting, a growing share of part-time and online students, and rising per-student costs. The question isn’t just whether enrollment is growing—it’s whether this growth is sustainable.

Cost of Education Per Student

Beyond net tuition revenue, institutions must consider the full cost of educating each student. While some costs—like faculty salaries and classroom resources—are clear on the surface, others, such as technology infrastructure, security, and student support services, are often overlooked in financial planning. These expenses must be accounted for to fully understand the financial sustainability of an institution's enrollment strategy.

Some additional factors in your cost to educate may be:

• Academic Support: Tutoring, resources.
• Technology Infrastructure – Learning management systems (LMS), classroom tech, and IT support.
• Security and Safety – Campus security, emergency response, and safety training programs.
• Study Abroad Programs – Administrative support and travel expenses for global learning opportunities.
• Student Housing – Dormitory maintenance, staff, and amenities for residential students.
• Dining Services – Meal plans, food services, and associated staffing costs.
• Insurance – Health, liability, and property insurance for students and the institution.

According to data from the National Center for Education Statistics (NCES), in the 2019–20 academic year, public four-year institutions in the United States spent an average of $8,650 per full-time equivalent (FTE) student on instruction, which accounted for 22% of their core expenses. Private nonprofit four-year institutions spent slightly less on instruction, averaging $8,480 per FTE student, representing 17% of their core expenses.

However, instruction is just one component of the total cost. When considering additional expenses such as student services, academic support, institutional support, and operations and maintenance, the total expenditure per student increases significantly. Public colleges and universities spend an average of $30,227 per student annually, with only 27.1% of that amount allocated to instruction.

Considering that federal funding for public post-secondary institutions average $2,648 per student, and state and local governments contribute a combined $8,370 – we are left with an average gap of $19,209.

For a modestly size regional public university, of 5,000 students, the gap before breakeven without considering other expenses is $96 million.

This highlights the need for institutions to manage tuition, financial aid, revenue streams, and costs effectively. Public universities benefit from state and federal funding but still face significant revenue challenges, requiring strategic enrollment and planning.

What happens when you remove access to government funding? Lacking appropriations, financial analysis and scenario planning are even more critical for private institutions to ensure sustainability.

Beyond the Iceberg's Base: Strategies to Strengthen Financial Sustainability

Relying solely on tuition revenue to cover operating costs is neither sustainable nor competitive in today’s higher education landscape. Institutions must find ways to bridge financial gaps without placing the full burden on students through ever-rising tuition and fees. Sustainable financial management requires balancing endowments, debt, retention, and auxiliary revenue to cover operating margins without overburdening students. A holistic long-term modeling approach ensures long-term stability and accessibility.

Endowment Growth v.s. Liquidity Constraints

A growing endowment is often viewed as a sign of financial strength. However, endowment restrictions for purposes like scholarships or capital projects, often limit their availability for day-to-day operations.
Furthermore, during economic downturns, endowment values can decline sharply. Following the Global Financial Crisis, many U.S. university endowments lost nearly one-fifth of their asset size in 2009, underscoring the importance of liquidity management.

Private universities can optimize endowment management by modeling liquidity under different market conditions, ensuring accessible funds for operational stability. Chapman University applied this approach, reallocating operating income to grow its endowment from $134M to $392M over a decade while increasing liquid assets from 8% to 50%. This strategy strengthened its financial flexibility and credit position. By leveraging financial modeling tools, institutions can simulate endowment growth strategies and align financial planning with strategic planning goals.

Capital Expansion and Debt Levels

Investing in new facilities and infrastructure can enhance an institution's appeal, attracting new students and retaining existing ones. Such projects often come with substantial debt. As of 2023, the median level of endowment dependence was 16.3%, up from 14.1% in 2022, indicating that institutions are increasingly relying on their endowments over other funding sources like debt to support growing operating budgets.

This trend raises concerns about long-term financial sustainability, especially if revenue growth does not keep pace with rising expenses and debt obligations.

By modeling various debt and revenue scenarios, universities can assess the long-term impact of capital projects, prioritize investments that align with both mission and financial goals, and balance growth with fiscal responsibility. This approach ensures that funding decisions support mission-based priorities while maintaining financial flexibility for future needs.

Retention Rates and Financial Implications

Student retention rates are a critical factor in the financial health of higher education institutions. High retention rates contribute to stable enrollment numbers, which are essential for maintaining consistent tuition revenue and ensuring the stability of academic programs.

National retention rates have been improving, with the national retention rate for students who started in fall 2022 rising to 68.2%, a 1% increase from the previous year. This growth marks the second consecutive year of improvement and demonstrates the increasing importance of student retention as a critical driver for financial sustainability.

Improving retention rates is crucial for private institutions to stabilize and grow net tuition revenue while managing operational costs. Higher retention reduces the need for costly recruitment, helps avoid large tuition discounts for replacement students, and stabilizes a steady flow of revenue.

By forecasting enrollment more accurately, institutions can allocate resources efficiently and offset rising expenses before relying on tuition hikes or heavy discounting.

Auxiliary Enterprises: Balancing Revenue and Costs

Diversifying revenue streams through auxiliary enterprises is essential for private institutions seeking to enhance financial resilience and reduce their dependence on tuition. Services such as student housing, dining, and event hosting can generate stable income, even in years with fluctuating enrollment.

For instance, universities that have expanded their conference and event hosting operations have not only increased auxiliary revenue but also boosted institutional visibility. Similarly, partnerships for online learning platforms have enabled institutions to tap into broader markets, creating new revenue streams. The online education market is projected to reach $564 billion by 2030, demonstrating the vast potential for growth in this area. Institutions like Arizona State University, through its online degree offerings, have successfully capitalized on this trend, expanding their reach, and boosting revenue.

However, to maximize success, institutions must align auxiliary enterprises with their core mission and student experience. Scenario analysis tools are an optimal way to model financial outcomes and ensure sustainable, profitable revenue streams.

Dive Deeper to Discover a Sustainable Future

A record-breaking incoming class doesn’t automatically translate to financial health. If net tuition revenue isn’t growing alongside enrollment, institutions risk long-term financial instability. To ensure that today’s success leads to future sustainability, colleges and universities must look beyond enrollment figures and discount rates—modeling their full financial picture, from cost structures to retention strategies to alternative revenue streams.

A deeper analysis of net tuition revenue, operational costs, and external revenue streams such as auxiliary enterprises and online education will give institutions a more accurate picture of their financial health.

By leveraging tools like scenario analysis and financial modeling, institutions can more completely understand their financial outcomes under varying conditions, ensuring both resilience and sustainability. Ultimately, strategic planning based on comprehensive financial insights will enable universities to navigate challenges and seize opportunities for long-term success.