Edmit's College Financial Health Analysis

Update [November 2020]

Through our partnership with New America, this research has been updated as of November 2020. Please visit this link to read their analysis and download the full data set. Information is also available on our college pages.

Introduction

Edmit updated its college financial health model to include the most recent financial data for colleges as well as assumptions about how COVID-19 could affect institutional revenues and expenses over the next 2 years. We believe COVID-19 introduces substantial risk to the financial health of many private institutions in the U.S. - institutions which are already grappling with fiscal challenges from changes in domestic enrollment trends, and uncertainty about foreign enrollment. The acceleration of financial health problems could lead these institutions to debt defaults, layoffs, and ultimately insolvency and closure.

In addition to the financial health model, Edmit analyzed two additional metrics that may signal a college’s ability to stay resilient through the COVID-19 era. The first is a college’s experience with distance education. In the event that colleges need to deliver instruction online in the coming academic year, those with existing capabilities and experience will be better able to attract students and deliver a good learning environment cost-effectively. The second additional metric is a college’s reliance on international student enrollments. Colleges that traditionally enrolled more international students will likely be more challenged in meeting their revenue goals for the coming year.

College Financial Health

Key Findings

• Using federally-reported institutional data from 2002 to 2018, we assessed the financial health for 937 private institutions. 

• “Financial health” is defined based on how soon the combination of revenues and net assets could fail to cover operating expenses.

• In addition to modeling institutions’ historical trends, we incorporated assumptions about the effects of COVID-19 into our model. We find a substantial increase in risk to many private institutions.

• We find that 345 institutions are now “low financial health”, 247 are “medium financial health.”

• The number of “low financial health” schools grew 47% (+110 schools) compared with our baseline model without COVID-19 effects.

• Our baseline analysis found that 25% of our private school list were “low financial health.” After incorporating assumptions about the effects of COVID-19, 38% of our private school list was categorized as “low financial health”.

Data and Institutions in the Edmit College Financial Health Analysis

The universe of institutions in this analysis are private institutions that participate in federal student loan programs, are well-attended, and offer a majority of their degrees as bachelor’s and higher. We collected federally reported data for these institutions from NCES IPEDS, a data tool created by the federal government and used by higher education analysts and researchers. The data collected are from academic years 2002 to 2018. The number of schools included in the analysis was limited to 937, based on where there was sufficient data available. We did not include public institutions in our analysis given the complexity of forecasting future state and federal support for those institutions.

The Edmit College Financial Health Model

The original model of college financial health proposed by Edmit arises from straightforward accounting concepts: to remain open, a private institution must have revenues exceeding expenses, and net assets greater than 0. We can summarize our modeling approach by asking: “given previous revenue and expense trends for institutions, and institutions’ net assets, to what extent are institutions at risk of insolvency?”

The Edmit college financial health model uses a common statistical technique known as regression analysis to forecast institutions’ net assets in the future by looking at historical trends of revenue and expense, and how changes in those trends affect net asset reserves of the institution. 

As a result of the spread of COVID-19 and its disruptions on the higher education sector, Edmit updated the above model approach to include revenue and expense “shocks” on institutions’ financial health. We believe these assumptions about decreased revenue and decreases expenses for the 2020-2021 and 2021-2020 academic years are quite reasonable, and perhaps even conservative given early news and surveys done about students’ expectations of the Fall 2020 semester:¹

• Tuition revenue decreases are spread across two years: 10% for the first year, 20% for the second 

• Investment returns decrease by 20% from the previous year²

• Salary expenses are decreased by 10% from the previous year

We did not include CARES Act funding in our analysis, though these funds could mitigate the near-term pressure for many small colleges.³

College Financial Health Categories

Edmit’s model of college financial health categorizes each school as “low financial health”, “medium financial health”, and “high financial health” in proportion to the model forecasts of how quickly they will deplete their net assets.

Baseline Estimates of College Financial Health: Edmit’s 2019 Model - No COVID-19 Shocks

• 235 institutions were “low financial health”

• 215 institutions were “medium financial health”

• 485 institutions were “high financial health”

New Estimates of College Financial Health: COVID-19 Effects (with change from baseline)

• 345 institutions were “low financial health” (+110 / 47%)

• 207 institutions were “medium financial health” (-8 / -3%)

• 385 institutions were “high financial health” ( -100 / -21%)

Note: through our partnership with New America, we have introduced one additional category as of November 2020. New America presents the data in the context of "risk" as opposed to "health":

What Does it Mean to be “Low Financial Health?”

“Low financial health” institutions are at risk of depleting their net assets in the near future. These institutions are sometimes associated with increased cash/credit monitoring by the U.S. Department of Education, lower U.S. Department of Education Financial Responsibility scores, and lower Moody’s bond/debt ratings. “Medium financial health” institutions are probably not at risk in the near term but need to address their long term sustainability. “High financial health” institutions typically have substantial endowments or have very healthy enrollment, revenue, and expense trends over the last two decades which would suggest that they can weather changes in the coming decades if trends continue.

Experience with Distance Education

We collected federally reported data for these institutions from NCES IPEDS, where colleges report the share of students enrolled in none, some, or exclusively distance education. We examined the data for all students and all degree types and classified colleges according to the percentage enrolled in at least some distance education. The levels are as follows: 0-25% (“low”), 25-50% (“medium”), 50%+ (“high”).

Reliance on International Students

We collected federally reported data for these institutions from NCES IPEDS, where colleges report the share of first-time full-time freshmen who are of foreign residence. We classified colleges according to that percentage: 0-5% (“low”), 5-10% (“medium”), 10%+ (“high”).

Model Omissions

Room and Board: Some institutions heavily rely on room and board revenue, but we don’t separately analyze room and board revenues or associated expenses in our model. COVID-19 has affected, and is likely to continue to affect, room and board, and so we may overstate the financial health of those institutions that heavily rely on room and board revenue.

Demographic Changes: Demographic changes in the U.S. suggest a trend of lower numbers of American high school graduates, as well as changes in the makeup of that population. We do not account for demographic changes in our analysis, and so we may overstate the financial health of those institutions that are likely to be negatively affected by these demographic changes.

Asset Restrictions: NCES IPEDS did not consistently report “unrestricted” investment returns until 2010; as such, our analysis accounted for investment returns on all assets. “Unrestricted” assets are more readily available for institutions to cover operating losses or to use in the event of a budget shortfall, and so our model may overstate the financial health of those institutions that have a high portion of their net assets restricted.

CARES Act Funding: We do not account for CARES Act funding in our analysis, and so we may understate the financial health of those institutions that received adequate funding.²

Acknowledgments

Edmit would like to thank Corine Bewa, Brandeis M.S. Finance 2020, for research assistance with the updated model approach and data updates.

We're eager to collaborate with others who are working on this topic. For more detail on Edmit's methodology or to connect with us about this research, please email us. 

¹ See, for example, https://www.insidehighered.com/admissions/article/2020/05/04/surveys-reveal-bleak-picture-colleges-fall

² A survey in June showed that losses were in fact close to -13.4% on average in Q1. https://www.insidehighered.com/quicktakes/2020/06/15/endowment-values-dropped-134-average-q1

³ Ben Miller of the Center for American Progress has compiled information on the funding for individual institutions here.