Tuition Setting for Growth and Affordability
By Eric Amar
Please allow me to start by saying that unless your school is in the highly enviable position of being able to fill almost every seat in every classroom with a full-paying student, this article applies to you!
I have been fortunate to have spent 20+ years of my professional career working with independent schools, mostly within the context of financial sustainability. I learned the foundational elements of the school business while in the position of CFO of, at the time, one of Canada’s largest Jewish day schools. Over a ten-year period, I witnessed a gradual and seemingly unstoppable enrollment decline. I was the person who administered the final family financial aid allocation. I learned a few hard lessons which I would like to share with you.
After years on the job, I reached a eureka moment when I realized that school financial sustainability was not diametrically opposed to family finances. What was needed was a set of policies that aligned the school’s need for cash flow and financing via its tuition, with the parent body’s need for a fair, easy and dependable financial aid system.
Independent schools work on a set of key strategic levers (a topic for another blog). Not only do these levers define the school’s demographics, but they also drive the school’s financial outlook.
As educational leaders, we choose the policies that affect these key levers. These levers are also highly interconnected and interdependent. When we understand and internalize the impacts of these levers, we can then set policies that will work in accordance with community needs and expectations.
Tuition should be a function of your value proposition in the context of your competition and community demographics (religious and financial). However, what often happens is that tuition is set after all other variables of the budgeting process have been estimated and calculated. For example, schools will often budget by estimating all costs (teaching, administrative and overhead), then subtracting financial aid expectations, adding alternate sources of financing, and then dividing that grand total by the remaining enrollment.
Although mathematically accurate, this process can lead to a vicious tuition cycle particularly, for schools with declining enrollments. Such a practice increases the tuition burden on the fewer remaining school families by allocating the rising excess costs of occupancy inefficiencies to the remaining families. This means that even if all budgetary costs remained flat from one year to the next, tuition would still increase because of declining enrollment. This process may exacerbate the middle -income affordability issue and push your middle-income families to leave.
Here is an alternate solution that not only allows for long-term planning, but also empowers school leaders to make strategically impactful decisions. This simple calculation will quantify the amount of tuition that your remaining families will bear as enrollment either increases or decreases.
The following is a much-simplified theoretical example on a total school basis (as opposed to a recommended per grade basis) :
|Total operating budget (all costs)||$7,000,000|
|Non-tuition income sources (fundraising and other)
Remaining budget to be covered by tuition
Maximum number of students in the school at full capacity
Ideal tuition at maximum occupancy ($5,000,000 / 500)
Scenario 1 (decline of 50 students)
Scenario # 2 (increase of 25 students)
In this greatly simplified example, the school in scenario 1 will require a 12% tuition increase only because it has lost students from one year to the next. Its costs have not changed, but the remaining students will have to shoulder an additional $1,389 each to make up for those students who left. This school will likely see further middle-income attrition because it will require more and more funding from an ever-decreasing student population. This vicious cycle will repeat itself unless tuition setting becomes a strategic attraction tool.
Enter the concept of tuition at maximum capacity: here, $10,000.
Why is this number so important?
This number simply puts a full-occupancy price tag on your proposed value proposition. It shows you how much less would be required from each student if you could fill your school to maximum capacity (500 students in our example above). It introduces a key strategic lever that you may have never-before considered: financial-aid driven enrollment as a method to reduce the additional burden of empty seats. It quantifies the growing cost of chasing away your middle-income families and the additional financial burden that it places on the remaining population. It effectively measures the impact of losing your middle class.
It also empowers you to create innovative flexible tuition policies that will attract those same middle-income families by quantifying a more affordable financial contribution all while satisfying your theoretical tuition at maximum capacity. The school in scenario 2 above may have identified 25 families capable of paying $10,000 and thus lowered the financial burden of all remaining families to $10,526– a reduction of $585 per remaining student. Regardless, the school in this example would greatly benefit by creating a flexible tuition program that is aimed at all families able and willing to pay at least $10,000, effectively ensuring that it doesn’t slowly and gradually alienate its remaining middle-income families.
My tuition setting advice to the school #1: before increasing your tuition to $12,500 from $11,111, create a flexible tuition program with the specific intent of attracting as many students as possible capable of paying at least $10,000 (full-occupancy tuition). Once that is done, you should be able to reduce your 75-student attrition and your enrollment should be higher. This will effectively reduce your $12,500 required tuition, all the while keeping your enrollment base more stable.
By calculating full-occupancy tuition, you have identified your break-even tuition at full-occupancy, applied that to a middle-income family flexible tuition, and as a result, have protected your enrollment and all remaining families from wasteful tuition increases.
By quantifying how empty seats affect your pricing, you inherently align your school’s financial sustainability with your middle-income families’ need for an affordable tuition.
In real life, you will of course get the opportunity to debate a more complex series of very important interim strategic decisions:
- Do we change the number of classrooms per grade?
- Do we change the maximum number of students per classroom?
- Do we offer less than we had wished for?
The point, however, is that our traditional accounting-based annual budgeting processes do not provide for this type of in-depth strategic insight. Understanding how tuition setting policies affect different types of enrollment strengthens the tools at our disposal. Enrollment is not an end result, but rather a lever that can be activated through middle-income friendly policies. At the end of the day, your school’s culture, policies and financial structure should be inclusive and inviting to the middle class.
Now more than ever, enticing and accommodating middle-income families is a key strategy in maintaining stable tuition, particularly in light of ever-increasing costs.
Eric Amar CPA, CGA is a seasoned nonprofit executive with 20+ years of independent school consulting and leadership experience. Eric has worked with over 150 independent schools throughout North America on financial sustainability and is the author of the innovative Multi-Year Flexible Tuition approach to solving independent school sustainability. Eric can be reached at [email protected].