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Colleges Have A Way Of Finding Out A Student’s Financial Capacity; Here’s How [VIDEO]

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Price of Education
Colleges and Universities know what students can afford using intelligent economics. Experts try to calculate the difference between the sticker price and the actual price schools charge.
(Photo : Photo by Matt Cardy/Getty Images)

According to a new report from the National Association of College and University Business Officers, the underlying financial weakness of private colleges is now a nationwide problem. For the record, it is worse than ever.

The association tracks the average tuition "discount rate" at private college and universities. Simply put, it analyzes the difference between the "sticker price" that schools advertise and the actual price they charge upon enrollment, after subtracting scholarships given by the schools themselves. To illustrate, if the "sticker price" is $50,000, but the average student pays $30,000, the discount rate is $20,000 divided by the sticker price ($50,000), or 40 percent.

In 2005 to 2006, the mean discount rate was 38 percent. Since then, it has increased on a yearly basis. In fact, last fall, it reached a record high of 49.1 percent.

Per New York Times, the gradually increasing discount rate suggests that a popular strategy for optimizing college revenues is running out of steam. Also, there are fewer paying customers with middle-and-working-class families continuing to struggle, leaving less money to support tuition fees.

According to Economics Help, there is a thing called price discrimination. It says that in any market for good and services, there is a range of prices that customers are willing to pay. Typically, there will be a small percentage of people willing to pay a lot of money, a large number of people willing to pay a little money, and other statistics in between.

When the number of people who want to buy something at a given amount becomes the same as the number of items the firm wants to sell at that price, the market price is born. However, no company would want to sell all of their products at the market price. Thus, they try to find the people willing to pay a lot of money and sell the product for the highest amount he or she is willing to pay.

After that, companies find the next most willing buyer on the demand curve, and then the next, selling each product for different prices. This, now, is called price discrimination. Truly, it brings in a lot more revenue than selling the products for the same market price.

Another concrete example is how airlines sell seats. They create business and first-class cabins, wherein the larger price is often equated to better service like free drinks, bigger spaces, and "more polite" flight attendants. However, in reality, first class is just an excuse to get the people who are willing to pay more because they are rich. The next move for them is to gather information about other passengers to know how much they can charge next.

Well, airlines know that certain trips suggest business travel or that a last-minute flier is willing to pay more than people who planned their flights months in advance. College tuition discount rates are like airline seats. Schools do not want to sell each student slot for the same market price. They look for the rich students first who show sure interests in that particular school and charge his or her parents a lot of money.

Simply put, this is the reason why colleges set the tuition fee high and then start discounting to accommodate the next customers in the demand curve. This is why schools ask for very detailed financial information during enlistment. They say that it is important to calculate the "best" package for students but the truth is they want to determine the price that is best for the college.

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