Financial Health of Colleges

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 most important. But in today’s world, the financial health of colleges is a huge factor that families must consider because it can have rippling effects on the educational experience the college can provide.

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As everyone knows, this year has seen historic changes due to COVID-19. The personal tragedies of sickness are coupled with so many people losing their jobs. Businesses are closing. The stock market has plummeted. Like every other sector, the financial health of colleges has been impacted – big time. Some colleges were already in trouble due to declining enrollment, but now their struggles are amplified.

Just to give you the full picture, here’s the reality for most colleges:

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. The University of Akron recently announced they were cutting six of their eleven academic colleges. Financially struggling colleges have been pushed over the edge and are closing. The first to fall are mostly small private liberal arts schools – view a full list of closures here. With the current COVID-19 crisis, even public institutions will face challenges. The University of Wisconsin said it expects COVID-19 to cost $100 million—mostly the result of room and board refunds.

In a recent interview with the Wall Street Journal, a University of Pennsylvania professor and co-author of a book about the financial health of colleges estimated that 200 private liberal arts colleges could close in the next year. Previously, he estimated 100 would close over the next five years. That impact is huge!

What’s up with endowments?

You hear a lot about endowments in the news. Harvard’s endowment is over $36 billion. (This page has a cool chart visually demonstrating the relative size of endowments.) You may wonder why colleges can’t simply dip into their endowments.

Endowment money is supposed to last in perpetuity. 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. A larger endowment will provide larger returns on the investment and allow an institution a larger unrestricted income stream. (You can see endowment amounts per student on this page. You can sort by state for easier reading.)

How can families figure this stuff out?

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—”grading them on balance sheet strength and operational soundness, plus certain other indicators of a college’s financial condition, including admission yield, percentage of freshmen receiving institutional grants and instruction expenses per student.” Their full methodology can be found here.

You can find the complete list of rated private colleges at the bottom of this article. Keep in mind these ratings were last updated in Nov. 2019, but it’s still quite eye-opening. Ohio colleges include University of Dayton with a B rating, Case Western with an A-, and Otterbein with a C+.

According to Forbes, “most Cs and Ds are so-called tuition-dependent schools—meaning they squeak by year-after-year, often losing money or eating into their dwindling endowments.” Just because a college has a C rating, it 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.

Another good tool is this Financial Fitness Tracker created by The Hechinger Report and developed with data from the Department of Education. “The scores show the estimated amount of financial stress on an individual institution after the 2019-20 academic year without attempting to quantify the still-uncertain effects of the coronavirus crisis.”

Last, the College Financial Health page on edmit.me is a treasure trove of information. You can find lots of college data (costs, financial aid, merit scholarships, etc.) as well as a guide to evaluating the financial health of schools on your list.

Smart decisions about choosing a college also need a clear understanding of a student’s strength, interests, values, etc. If your student is struggling with this thinking and needs help choosing their major, find out about Guided Self Assessment.

What are colleges doing?

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.

For example, Pine Manor College recently merged with Boston College. Pine Manor was struggling before, but the coronavirus pandemic pushed them to the brink. Boston College assumes the assets and liabilities of Pine Manor and is offering employment to Pine Manor’s staff. In return, Boston College gains Pine Manor’s “educational model of proven success for underserved, underrepresented first-generation students owing to outstanding faculty and staff, programming and a commitment to social justice.”

The financial health of a college includes so many variables, and their long-term viability is not always clear when just looking at numbers. What will their fall enrollment look like? What will NEXT year’s enrollment be? 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 college on their list. It’s a huge investment to make, and as with all investments, careful research is required.


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