How to Assess the Financial Health of a College or University (COVID-19 edition)

Key Takeaways:

  • In recent years colleges and universities have faced financial challenges from many directions.
  • There are new and urgent questions to consider on this topic now, given the impacts of COVID-19 on higher education.
  • If a college closes or has financial difficulties, it will have negative consequences for students at that institution.
  • There is no one indicator of whether a college or university is going to have financial challenges -- but there are ways to get clues.
  • It would be wise to make this one component of your research process if you are applying to colleges.

Note: The coronavirus pandemic has seemingly changed everything - and college admissions is no exception. This is going to be a tough financial time for colleges. Many of them rely on room and board expenses as a source of revenue, and those charges are being refunded to current students and may not apply to future students who might be learning online in greater numbers. Endowments that support colleges’ operations are down with the stock market and could fall further. And the number of students attending college at all, many experts say, may decline. International students, who have increasingly become a large source of income for colleges, are likely to come in fewer numbers. Domestic students whose financial situations and outlooks have changed may also change their college plans.

The advice below applied “pre-COVID-19” but is potentially even more important now. We’ve also added a special section on COVID-19 considerations for college financial health. 

We are working on more ways for families to assess the financial health of institutions on their list -- please stay tuned with Edmit as we adapt our analysis for the changing times.

In recent years, the financial health of public and private universities has been a topic of discussion in policy and education circles. Experts have studied factors like demographic changes (in some regions of the country there are going to be fewer college-age students), declines in public funding for higher education, and whether trends like online instruction, expectations for plush housing and facilities from students, and rising staff costs could be threatening the business model for colleges and universities. Some have even claimed that up to half of all colleges in the US could be in trouble. 

While many colleges and universities are non-profits, this does not mean they do not need to make money. Just as businesses need revenue to survive, so do colleges. And their economics are complicated: there is no one factor that makes it difficult for colleges to keep afloat.

Typically the information that is made public is focused on general trends affecting the universe of colleges and universities -- and so it’s been difficult to obtain information about which particular colleges might be in trouble, and why. Inside Higher Ed published a history of attempts to make such information public - including by state and local governments - showing that colleges and universities have lobbied extensively against them.

But families and college advisors have begun to wonder more and more whether this is a topic they should consider themselves during their college search. They might have seen news about small colleges going bankrupt in their region, such as Green Mountain College in Vermont, or about the fiscal troubles of their state systems, such as Pennsylvania’s.

Edmit has done research in this area, but has not made it publicly available yet. We would like to do so - but our first attempt was foiled by legal threats. Here is a summary of what happened, and another

Why students and families should care about college financial health

Our founders published an op-ed last fall on why Edmit believes this information should be made more available to families. Here’s an excerpt:

A primary reason people to go to college is the promise that a bachelor’s degree will help them earn more over the course of their career. A variety of factors make one college degree worth more than another, but two significant ones are the college’s perception by employers and its alumni network.

If a college closes, that will make local headlines. Colleges are often anchors of communities, and virtually everyone will know that a local college has closed or merged. As a general rule, the best colleges don’t close or merge into another -- it is the struggling colleges ones that do. As a result, the college’s brand association -- to the extent it was positive -- becomes tied to its closure, which is negative.

“If employers have heard of Mount Ida, they’ll say something like, ‘Oh, that’s the college that closed, sorry,’” said Josie Kolbech, a designer who graduated from Mount Ida College in 2009. Over time fewer people will be familiar with the brand, as no more students will be attending and the last ones graduate. The brand value of the degree will thus be flat at best, and is likely to decrease over time. This leads to the next significant factor, which is the alumni network.

If a college shuts its doors, that college’s alumni network will begin shrinking as older alums pass on and no new ones are minted. This means the likelihood of alumni helping you get a job in the future are inherently statistically lower. Nathan Grawe, author of Demographics and the Demand for Higher Education, has said not to underestimate graduates’ willingness to fund struggling colleges (e.g., Sweet Briar). It is possible that alumni might band together in the short term, but over time -- without new, younger cohorts -- they will ultimately dissipate.

A more immediate consideration, and real potential liability, is the time and expense of having to transfer if a college closes before a student graduates. It can take six years or more for a student to complete, so if a college closes or merges during that time, students might be in a position where they have to transfer.

Depending on the geography where they’re enrolled, there might not be good comparable options for their area of study. And those colleges may or may not accept credits one for one. Some colleges in more rural areas might not have nearby options, and students might be forced to move or study online to continue their education. That means students might have to take additional courses -- which costs money and pushes graduation farther out. Also, this will naturally cause a lot of anxiety and could cause some students on the cusp to potentially stop or drop out of college. Persisting to graduate college is hard enough without these additional pressures and costs.

We’re working on bringing more data on this topic into our public resources. In the meantime, we have compiled a guide to the things that you can do now if you’re looking into the financial health of specific colleges.

How to Assess a College’s Financial Health- If You’re A Regular Person

Without becoming a higher education expert, here are some things you can look for while researching colleges.

Look at enrollment trends. Is the college in a region where there will be fewer college-age students in future years? Have class sizes dropped significantly in recent years? If the data is not available, ask the admissions office if they have met their goals. Unfortunately 6 out of 10 colleges did not meet their targets in the fall of 2020, according to a survey from the Chronicle of Higher Education. 

Look at tuition pricing and “discounting.” Unless it’s a very wealthy school, aggressive measures to provide scholarships and reduce prices can be a sign of trouble. This is because colleges who are struggling to find enough revenue are looking to enroll as many students as they can - and reducing prices is one way they can do that. For private colleges, the average discount is already less than 50% of the full cost, and many experts think this is dangerously high. We recommend that you also look at what share of students receive a scholarship (you can ask the college directly for this information). If almost no one pays full price, the revenue of the college is likely to be less than schools with a more balanced class.

Use your observation skills. On your campus visits, look at the state of the physical campus (not just the obvious buildings, as colleges could be spending money they don’t have to update high-visibility buildings like dorms). Listen for what new initiatives are being proposed or promoted to prospective students. Are there signs that budgets are tight? 

Consider the college’s resources. Does the college have a large endowment? You should look at the size of endowment but also the dollars of endowment per full-time student (this is called an FTE in higher education-speak). It’s also important to know whether the college is spending down its endowment more than the recommended 5%. How has state funding increased or decreased, if it’s a public university? How economically healthy is the region where the college is based?

Look for signs of innovation. Colleges that are more adaptable can weather the storms that come. Those that are offering online programs, or have launched new initiatives and partnerships, are likely to have both the resources and mindset that make them more resilient.

Search local news outlets or education news sites. When smaller colleges are struggling or even closing, it’s unlikely to make national news. Look at local newspapers and search education-specific sites like Inside Higher Ed to look for recent articles about the colleges on your list for any hints of trouble or recent moves.

Ask. In any of these cases, if you can’t find the information or don’t know how to interpret it, ask. Remember - you’re the customer! Some colleges might have initiatives or information about the measures they are taking to protect their future (for example, Smith College and Trinity College). Evaluate their answers and whether you feel the college is acting wisely.

Post-COVID-19: Indications of College Financial Health

As the higher education sector comes to terms with the impact of coronavirus, the above factors will take on even more importance. The stronger the position going into this period, the better - and if a college is already struggling, the impacts of the pandemic may make them insolvent. There are decreased revenues and funding, and increased costs (shifting online, refunding room and board, cancelled events) for both public and private colleges.

In addition to the above factors on financial health, it would be wise to look at the following:

  • Does the college rely heavily on international students? Most experts say that fewer students will come from abroad in the years to come - a trend that had already started before the coronavirus. The higher the percentage of international students, the more damaging this will be financially. You can typically find information on the share of international students on a college's website.

  • Has the college refunded current students’ room and board after closing? For most colleges, doing so will be very costly. If they haven’t offered refunds, it may be because they can’t afford to. And that means they will be on shakier financial footing.

  • Has the college frozen or cut salaries and hiring, or is it eliminating programs and sport teams? Most colleges - even the richest! - are, so this could actually be a sign that they are acting conservatively.

  • How ‘online-ready’ is the college or university? What portion of the college’s students already study online? You can find this information in the Department of Education’s College Navigator. Search for the college and look in the “Enrollment” section to find a chart of the percentage of undergraduate students already enrolled in some “distance education” (ie. online). The higher that number, the more likely to have infrastructure in place for online education. If the college closed campus for the 19-20 school year, you can also try to speak with current students to assess how smooth the process to transition courses online has been.

Additional Sources of Information and Data on College Financial Health

If you’re eager for more data and want to get into the weeds a little bit, here are some additional places you can look for information on specific colleges. Some of these sources are made for policy experts rather than the general public. If you do use these sources, it’s probably easiest to compare similar colleges to each other so that you know if a particular number is high or low. Look for ‘red flags’ or question marks.

  • Forbes does an annual grading of college financial health. There are a variety of metrics included - among them the college’s assets, debt, and measures of how many students are enrolling in the college and how stable tuition revenue is. Here is the 2019 report, with a searchable table.

  • Bain, a management consulting company, looked at data in 2014 that showed overall metrics for college financial health related to their balance sheet and profitability. Here is the searchable table. The lower the ratios, the better.

  • NACUBO publishes data on endowment sizes of institutions. 

  • The federal government gives colleges Financial Responsibility Scores which consider various financial metrics similar to those of Bain. “The composite score reflects the overall relative financial health of institutions along a scale from negative 1.0 to positive 3.0. A score greater than or equal to 1.5 indicates the institution is considered financially responsible.”

  • College Viability is an independent site that is gathering information and data on college financial health.

  • The State Higher Education Executive Officers Association (SHEEO) researches state funding for public education. Look at page 28 of this report to find your state, and other materials can be found here.

While there’s no way to predict a specific college’s future, there are many ways you can learn about colleges’ financial health - and it’s wise to ask these questions as you build your college list and make decisions about where to go.

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