This paper contains a policy model for tuition discounting that avoids the major financial pitfalls encountered in the administration of institutional scholarships. The dual objective of maximizing the funded scholarship discount rate and minimizing the unfunded discount rate is explained. Marginal cost pricing is the accepted criterion for tuition discounting among college and university administrators. This pricing rule leads to the same problem created by marginal cost pricing in public utilities and for the same reason. An alternative model based on average cost pricing is presented. Financial equilibrium is made explicit and its relationship to the institution's general long run equilibrium is illustrated.