Navigating Tuition and Financial Strategies

This article originally appeared in the fall 2023 issue of the Enrollment Management Association's magazine, The Yield, as part of their series on Exploring the Enrollment Management Spectrum. NBOA and EMA regularly partner in content creation, program presentations and thought leadership to advance business and operational excellence in independent schools throughout the U.S. and the world. 

Are you ready to partner in sustaining your school’s long-term financial health? Financial stewardship is a shared responsibility among a school’s leadership, including its board of trustees, head of school, business officer, enrollment leader, and administrative team. This collective group must develop, implement, monitor, and evolve a long-term financial strategy that supports the school’s mission and that values and defends its defining freedoms. It goes without saying that tuition is the biggest revenue driver within a school’s business model, and therefore, enrollment leaders play a key role with regard to the school’s financial strategy and long-term fiscal health.

At the core of EMA’s strategic Enrollment Management Spectrum lies a strong financial strategy, which begins with tuition pricing and net tuition revenue. While each lever within the Spectrum is crucial, intergenerational financial sustainability is paramount to realizing a school’s mission indefinitely. Independent schools derive nearly 80 percent of their operating revenue from tuition dollars, underscoring the importance of an integrated enrollment strategy for fiscal health. The tuition price serves as a signal to the market, communicating the value proposition of the school’s mission. Therefore, structuring the tuition model becomes a collaborative effort between the enrollment and business offices in coordination with the head of school and the board of trustees.

The Independent School Business Model

The business model in traditional independent schools is distinct from that of other industries and is inherently challenged by the fact that many schools intentionally charge tuition prices lower than the cost of educating their students. The independence we have to structure our own financial models provides great freedom and also great responsibility. Being solely supported by private funding in the form of tuition dollars and charitable gifts means that there must be synergy between enrollment management efforts and financial goals. Setting tuition to cover true costs while maintaining a pricing level that is palatable enough to attract families willing and able to pay requires a delicate balance.

Tuition Discounting

Using data from Business Intelligence for Independent Schools (BIIS), NBOA’s signature data reporting tool, NBOA produces research reports to help business and enrollment leaders, heads of school, trustees, and other independent school leaders understand key trends in independent school finance and operations that may inform critical exploration and strategic decisions. The 2021 Tuition Discounting Report is the first formal NBOA publication focusing solely on tuition discounting and the “gap” it creates (association staff have collected, analyzed, and reported related data for nearly two decades). The report showed that at an average discount rate of 18 percent, schools are collecting approximately 82 cents on the dollar.

More key takeaways from the report:

• 100% of schools in this study were committed to need-based financial aid. This was the highest percentage of total discount, accounting for 81 percent of all discount dollars distributed in 2019–20.
• 4 percent of schools in this study provided tuition remission benefits, accounting for 16 percent of all discount dollars distributed in 2019–20 (second highest category).
• 6 percent of schools in this study provided merit aid and scholarships, accounting for 3 percent of all discount dollars distributed in 2019–20 (smallest category but growing).

Many schools also offer tuition discounts, including need-based financial aid, merit scholarships, and tuition remission benefits, to enhance affordability, accessibility, socioeconomic diversity, and enrollment. However, this practice creates a “gap” between tuition revenue and operating expenses, which schools endeavor to bridge through various means, most notably fundraising. It is crucial to recognize that a widening gap, which recent data suggests is the current industry trend, can lead to financial instability.

Monitoring financial health requires focusing on net tuition revenue (NTR) rather than gross tuition or enrollment headcount. NTR, obtained by deducting tuition discounts from gross tuition, provides a more accurate indicator of the funds received to cover operating costs. Tuition and financial aid are key areas at the intersection of long-term school financial health with accessibility and affordability for the community the mission serves.

Minding the Gap

Almost every school faces a disparity between the stated tuition price and the actual cost of educating each student. Consequently, schools must find ways to fill the gap between tuition revenue and operational expenses. While many schools have operated successfully despite this gap, sustaining it becomes increasingly challenging without substantial endowments, robust annual giving, and/ or alternative revenue sources. School leaders need to acknowledge some fundamental realities:

• Charging less than the cost of education means that every student effectively receives financial aid.
• The true differentiators in quality learning lie in the school’s faculty and programs, not just class sizes. Maintaining small class sizes, a common perception of quality, comes at a higher cost due to personnel expenses. Consider opportunities to carefully shift this structure and the messaging of personalized learning so as not to diminish the appeal to families but to better secure the school’s financial position.
• “Not-for-profit” is simply a tax status and should not mean that the school’s business model is to be “for loss.” Surplus funds can be reinvested in the school’s mission through investments in facilities, programs, capital needs, reserves, and more.

Strategic Financial Planning and Opportunities for Partnership

Opportunities for Partnership

The annual budgeting process also provides a crucial opportunity for close collaboration between the enrollment and business offices.

NBOA’s latest book, The Business of Independent Schools: A Leader’s Guide, explains: “Given the vast majority of a school’s operating budget relates to tuition, it is important for the admission and business offices to be in sync as the budget is being developed. For example, a significant increase or decrease in [enrollment or financial aid] applications could signal budgeting opportunities or challenges that a school would want to get in front of as early as possible.

Similarly, once the enrollment season is complete, having accurate enrollment information will impact the final budgeting strategies for the following year. Fostering the relationship and communication between the two offices enables the business office to function most productively.”

In the guide, don’t miss the chapter on the enrollment management and business office partnership, co-authored by EMA’s CEO Heather Hoerle.

Addressing a school’s financial challenges necessitates collaborative efforts among the head of school, trustees, and the “golden triangle” of business, enrollment, and advancement leaders. Tapping diverse perspectives when aligning priorities and solving complex financial problems, this collective must work together to develop long-term strategies. Data, including internal trend analyses and benchmarking with peer and aspirational school groups, should inform key discussions, questions, and related decisions among these leaders.

As was the case during the Great Recession of 2008 and the COVID-19 pandemic, we are again in an economic climate that necessitates a long view on financial health, given today’s volatile investment market and high inflation. Making drastic financial decisions in response to acute yet temporary circumstances is never prudent. Instead, as independent schools navigate an increasingly complex future, the current landscape provides an opportunity for leaders to carefully consider and pull financial levers that better reflect their priorities in their annual budgets and long-term projections and secure their fiscal health. Explore opportunities to secure your greatest sources of revenue and grow others while moderating your most significant expenses.

Securing the Future

Independent schools face an increasingly complex future, which demands innovative business strategies and tuition models aligned with their priorities. By employing prudent business practices focused on fiscal health and intergenerational equity, schools ensure the availability of resources to fulfill their missions well into the future. Despite mounting pressures, school leaders have the opportunity to partner and drive positive change.

Embracing collective responsibility, independent schools can build a sustainable financial foundation that supports their mission, enhances the educational experience for students, and strengthens their communities. The pressure is real, but so is the opportunity for school leaders to partner in effecting change. Let us embark on this journey together toward long-term financial health and success.

Putting Data to Work: The NBOA Financial Dashboard and Financial Sustainability Heat Map

As leaders work together to sustain a financial strategy specific to their schools, another tool to consider utilizing is the NBOA Financial Sustainability Heat Map, a fully customizable tool that allows users to select indicators, set targets and track progress in areas such as liquidity and financial sustainability. The tool uses BIIS data to populate a color-coded visualization of a school’s movement toward or away from financial goals. NBOA members that submit DASL/BIIS financial operations data in the fall can access these BIIS tools and others. Custom-made tools available in NBOA’s BIIS data reporting platform can help school leaders understand the financial indicators that have the greatest impact on an independent school’s financial health. The NBOA Financial Dashboard distills 12 multifaceted measures across the income statement and balance sheet that reveal operational strengths and weaknesses that may inform strategic decisions.

For example, a downward trend in the school’s net tuition revenue would invite examination of demographics, tuition price, economic factors, program, and value proposition. These are the 12 metrics:

1. Net Tuition Revenue*
2. Total Enrollment with Financial Aid*
3. Operating Income*
4. Operating Expenses (ideally, increases in this data point would not outpace increases in operating income to minimize “the gap”)
5. Staffing: Per-Student Ratios
6. Annual Giving per Student
7. Endowment and Debt per Student (ideally, endowment growth should outpace debt growth)
8. Net Assets per Student
9. Plant Reserves (PPRRSM) (ideally, target at least one times annual depreciation at a minimum)
10. Age of Plant (in years)
11. Working Capital
12. Debt Service Ratio

*Critical indicators for partnership between enrollment and business leaders