Will Your College Go Out of Business?

How can you tell if your school—or a school you are considering—is secure or struggling?
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By David Ressner

Long before COVID, colleges and universities had been coping with the double-whammy of higher costs and lower revenue. Think what you will about comfortable dorms, extensive dining facilities and other campus amenities, many of the growing expenses that schools face today are unquestionably legitimate costs of 21st century higher education, including technology, career counseling and mental health services. Lower revenue is largely due to escalating financial aid and a well-documented decline in the number of college-aged students, which is expected to continue for years to come.

David Ressner

David Ressner

To survive, many schools have taken drastic action, cutting departments, reducing services and/or eliminating activities. Sometimes such steps weren’t enough to save even long-established schools like Valparaiso University Law School in Indiana and MacMurray College in Illinois, both of which ceased operations in 2020. In the last five years alone, those schools and more than 60 others closed their doors entirely or merged with other schools.

Now—three semesters into the pandemic—COVID has added to those challenges, and education experts are estimating a wide range of potential school closures. For instance, NYU business school Professor Scott Galloway, after noting that college is an expensive operation with a relatively inflexible cost structure, writes, “The economic circumstances for many of these schools are dire…. Per current plans, hundreds of colleges will perish.”

Galloway based his statement on data from the U.S. Department of Education. Measuring 441 schools on their value and financial vulnerability, he predicted that high-value/low-vulnerability schools would “thrive” after the pandemic. At the other end of the spectrum, he predicted that many low-value/high-vulnerability schools would be “challenged.” The full analysis can be downloaded from his blog, where you might be surprised by some of the schools in both groups.

If anything, this data only underscores the importance of seriously examining the financial viability of each school you are considering and not just assuming that the books are balanced.

Although some colleges will close altogether, perhaps a bigger risk is that the academic major, extracurricular activity or service that attracted you to a school will be cut back or eliminated, leaving you with a difficult decision—stay and make do or transfer and take your chances elsewhere.

So, how can you tell if your school—or a school you are considering—is secure or struggling?

In addition to Professor Galloway’s analysis, the following publications allow you to look under the hood to determine if schools are running efficiently or running on fumes.

College Viability

The College Viability app comes in two versions—free and paid ($49). Both apps analyze data from the National Center for Education Statistics (NCES). That data covers enrollment, graduation rate, expenses, revenue, endowment and admission yield (the percentage of accepted students who enroll). These factors can shed light on the financial health of a school, especially when the data is observed over a series of years.

Edmit’s College Financial Health Center

Edmit defines “financial health” as the degree to which revenue and assets are likely to cover long-term operations. Its College Financial Health Center also considers each school’s COVID-related costs, remote teaching capability, dependence on international student fees, and endowment or state funding—where applicable. In Edmit’s analysis, more than one-third of schools were deemed to have “low financial health.” For almost half of those schools, COVID-related costs were a major reason for the “low” rating.

The Hechinger Financial Fitness Tracker

For private colleges, Hechinger examined enrollment, student retention, tuition per student and the ratio of endowment to total spending. For public colleges and universities, Hechinger examined the same criteria, but instead of endowment health it looked at state funding. Regarding endowments, if managers stayed the course through last year’s COVID-related volatility, many have recovered. But the recession has forced many states to cut funding for higher education. For example, Nevada cut 2021 funding to UNLV by 20%, and Colorado cut overall higher education support by 58%. Hechinger’s Financial Fitness Tracker is based on work by three higher education experts from the University of Pennsylvania and Middlebury College. Their book, “The College Stress Test,” was published in February 2020—just as the pandemic was taking hold. The book’s appendix contains a template for assessing schools’ financial viability.

Forbes College Financial Health Grades

In February, Forbes analyzed 921 private nonprofit U.S. colleges on nine factors, including endowment assets per student, operating margin, admission yield and grant aid to students. The data—from NCES—predates COVID, which led Forbes to conclude, “Before COVID-19, scores of the nation’s private colleges were facing a financial health pandemic. Things are worse, but don’t expect a rash of closures.”

These forecasts are confirmed by college leaders. In a September 2020 survey by the American Council on Education, 43% of college presidents said that “long-term financial viability” was one of their top concerns—second only to student mental health.

In addition to the above resources, families can do some of their own research. Two great publications are The Chronicle of Higher Education and Inside Higher Ed. They don’t always publish information about specific schools, but by subscribing to them or their free newsletters, you can learn a lot about college operations, admissions, financial aid and the business of higher education. Create Google Alerts for information about particular schools.

Another informative resource is IRS Form 990, which tax-exempt organizations, including nonprofit colleges and universities, must file each year. It contains data on revenue, expenses, assets and liabilities, as well as some qualitative information that can be revealing. Often, a school will post its Form 990 on its website. It usually can also be found at GuideStar.org or by searching online for “990” and the school’s name.

In a school’s Form 990, worrisome figures include high total debt and annual debt payments, consistently large operating deficits, and endowment spending over 5% per year. Not in Form 990, but available elsewhere, are long-term enrollment trends and the tuition discount rate. Tuition discounting is a common practice, with the average private school charging only about half of its published price tag. Schools with large endowments or other sources of revenue can afford this practice, but for some schools, discounting could prove to be unsustainable.

Another way to uncover a school’s financial strength is its bond rating. Just like governments, colleges often issue bonds to finance projects, and those bonds are rated according to the financial strength of the school. If you can find such reports, they may provide some additional insight into a school’s financial wellbeing. The main bond rating agencies are Fitch, Moody’s and Standard & Poor’s.

A school’s annual report or president’s report are often very promotional, but sometimes they contain valuable information on institutional priorities and challenges. Often, more objective sources are the student newspaper and news outlets located near the school.

Finally, while touring campus, be on the lookout for physical maintenance issues. And if you have questions for which you cannot find an answer, ask. Don’t be shy about asking questions of each school you are considering. You are entitled to an informed decision! Polite questions will not jeopardize your child’s chance of admission.

A college education is often a six-figure purchase. You should inspect a prospective college at least as much as you would inspect a new car or home. If a school does not respond to your questions, that could be cause for concern.

About the author: David Ressner

David Ressner is a Wealth Advisor at Buckingham Strategic Wealth. He enjoys advising families on the financial aspects of college planning because educating children is the perfect storm of high cost and high emotion. By knowing how colleges operate, Dave is able to guide students to truly formative college experiences, while making sure the cost of college does not jeopardize parents’ long-term financial plans.

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