Financial Health of Colleges: What Parents Need to Consider

Once upon a time, picking a college was simpler. Was it a “fit?” Did it have your major and other stuff you needed? Could your family afford it? Those criteria are still vitally important. But in today’s world, the financial health of colleges is another factor that families must consider because it can have rippling effects on the educational experience the college can provide.

Colleges are seeing declining birth rates, rising costs due to inflation, and higher interest rates for loans. Families need to pay closer attention to a college’s viability in the long run than ever before.

What no one wants…

No one wants their student to start college and, mid-way through the journey, the college closes or the major program is axed. Majors with fewer students can be at greater risk of termination if a college faces cut backs. In addition, financially struggling colleges can be pushed over the edge and close.

What’s up with endowments?

You hear a lot about endowments in the news. Harvard’s endowment is over $50 billion. (This page has a chart visually demonstrating the relative size of endowments. The numbers are from 2017, but the visual is still impactful.)  You may wonder why colleges can’t simply dip into their endowments.

Endowments are made up of donations, and often the funds have a designated purpose. Most donors want their donation to be used for financial aid, certain types of projects, or specific research. The endowment is invested, and the university can draw from the profits from that investment each year, but only for the endowed purpose. (You can see endowment amounts per student on this page. You can sort by state for easier reading.)

Colleges with smaller endowments are more dependent on tuition.

How can families figure this stuff out?

First, we have to say figuring out a college’s financial health is not easy. Check out this article from the Chronicle of Higher Education. Like any business, many factors are at play–leadership, mission, enrollment, operating costs, tuition discounts, graduation rates, historical performance, competition with its peers, state funding, debt, etc.

If you are a whiz with financials, you can search for federal 990 forms for tax-exempt organizations. Are schools running a deficit? What exactly is a college’s endowment and how much of that are they drawing from each year? (Withdrawals of more than 5% per year can be a red flag.)

Forbes analyzes the financial health of private not-for-profit colleges in the US with enrollments greater than 500 on certain key variables. The Forbes College Financial Grades list has a box where you can type in a school’s name. Ohio colleges include University of Dayton with an A- rating, Case Western with an A+, and Otterbein with a B+. Their full methodology can be found at the bottom of this article. (Note this article does NOT include public colleges.)

Colleges with Cs and Ds are most likely tuition-dependent schools. Their potential income is dependent on students enrolling. A C rating does not necessarily mean that college shouldn’t be on your list. It just means that you need to be aware of what they are doing now to make smart decisions.

Other Recommended Tools

Founded by Gary Stocker, College Viability has created an app families can purchase that looks at several key indicators to compare the health of private colleges including enrollment, yield, and graduation rate.  This YouTube video specifically compares some Ohio schools. (The video and data in it are older; however, it demonstrates the kinds of things to research on this topic.) We appreciate how Gary notes that any one particular data point is not a deciding factor in whether a college is “good” or not, but it is important to keep an eye on trends. You can find more resources on Gary’s YouTube page.

Another good tool is this Financial Fitness Tracker created by The Hechinger Report and developed with data from the Department of Education. (Again, the data is older–“The scores show the estimated amount of financial stress on an individual institution after the 2019-20 academic year.”)

This article from USA Today has additional suggested resources for families to use in their research including ProPublica Nonprofit Explorer. The author also suggests reviewing the university’s Common Data Set enrollment data in Section B and the “amount of institution non-need-based scholarships and grants in Section H2A, line O.” Are colleges desperately trying to lure students with more scholarships?

Management is key.

In all this conversation about numbers, it is important to also keep in mind the management of the college. This part is difficult to quantify, but it’s undeniable – management drives the decision-making in a college, and those decisions define whether it can keep the doors open.

Is the college trying to do things to put them on sounder footing? For any college you’re considering, make the effort to read the latest news about the college. When they are making changes that are for the better, they will want you to know about it.

The financial health of a college includes so many variables, and their long-term viability is not always clear when just looking at numbers. If a school is facing declining enrollment year after year, tuition is rising, and their debt is high, be wary.

While there is no crystal ball for the future, parents need to at least be aware of the financial health of colleges on their list. It’s a huge investment to make, and as with all investments, careful research is required.

Updated: 8/2024

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