By Saif Ahmed and Anirban Ghosh

A key takeaway of literature examining the impact of tuition increases on enrollment is that students act like consumers. Students are responsive to price increases—whether they occur as a result of tuition hikes or cuts to financial aid. However, students also tend to be less sensitive to price than consumers are for many other goods and services. This relative insensitivity to price has allowed colleges and universities to boost revenue by raising tuition.

Tuition Elasticity and Higher Education

Tuition elasticity measures the responsiveness of a student’s enrollment decision to changes in a college’s tuition. Technically, it is the percentage change in enrollment divided by the percentage change in cost of going to college (tuition rates). Measured in absolute value, by convention, the formula below shows the tuition elasticity of demand for college enrollment:

The higher this ratio, the more sensitive enrollment is to changes in tuition costs.

Measuring tuition elasticity correctly is extremely important to universities and other higher educational institutions which depend on student tuition for a substantial portion of their operating income. Universities can increase revenue by raising tuition rates if student enrollment is relatively insensitive. However, if tuition elasticity is greater than 1, —that is, if students are very price sensitive—then an increase in tuition rates result in both enrollment and total revenue decreasing.

The following table, taken from a study conducted by Funk in 1972, illustrates the relationship between price elasticity and total revenue.

Relationship between Enrollment and Tuition. Source: Journal of Education Research

At Hanover Research, we have done numerous studies measuring tuition elasticities for our member colleges. For each university, we are able to estimate the change in expected enrollment rates for their own, unique student body and also forecast the expected change in revenue from a proposed tuition hike. We are also able to measure expected changes in enrollment as a result of changes in other costs of education, such as financial aid, or grant money. Typically, such analysis uses a regression framework with panel data across multiple years, controlling for other factors that can affect enrollment such as location, other costs, and the current economic climate. Recently, Hanover Research estimated the elasticity of enrollment to changes in grant aid for a private liberal arts college in the Mid-Atlantic region of the United States. Hanover Research found that a 1% decrease in grant aid leads to an expected 0.08% decrease in student enrollment, with a 95% confidence interval range from 0.02% to 0.13%.

The relative insensitivity of student enrollment to changes in grant aid is consistent with other studies in literature. Most studies found student demand for higher education to be very inelastic. In other words, the rate of tuition increase is typically much greater than the rate of enrollment decline. This is not to say that students do not notice price increases, and some students choose not to enroll or reduce their course load, but the magnitude of this response is typically small.

The table below displays a summary of some notable studies conducted on elasticity. Researchers typically report the expected percentage change in enrollment for a $100 increase—fixed to a given year to account for inflation—in tuition. As the table below shows, most studies show a decrease in enrollment of around 0.5 to 1.0 percent for every $100 increase in tuition.

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