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 a huge factor that families must consider because it can have rippling effects on the educational experience the college can provide.

As everyone knows, COVID-19 was a financial challenge for colleges. They needed to stay nimble and fiscally responsible. Like every other sector, the financial health of colleges was impacted. Some colleges were already in trouble due to declining enrollment figures, but now their struggles are amplified.

Now that the most serious period of the pandemic has passed, we can look back on some numbers. We see that the pace of closures actually slowed in 2021. “Thirty-five colleges and universities shut down in 2021, a 70 percent decrease from 2016, when a peak of 120 colleges shuttered, according to an analysis of federal data by the State Higher Education Executive Officers Association (SHEEO).”

However, “numbers may spike again as declining U.S. birth rates soon translate into fewer graduating high schoolers after 2025.” Add in rising costs due to inflation, and 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. The University of Akron cut six of their eleven academic colleges. 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 cool chart visually demonstrating the relative size of endowments in 2017.)  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?

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. Their full methodology can be found at the bottom of this article. (Note this article does NOT include public colleges.)

The 2022 Forbes College Financial Grades list has a box where you can type in a school’s name. Ohio colleges include University of Dayton with a B- rating, Case Western with a B+, and Otterbein with a C.

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. 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. Note the data is older–“The scores show the estimated amount of financial stress on an individual institution after the 2019-20 academic year.”

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.

For example, Pine Manor College merged with Boston College. Pine Manor was struggling. The coronavirus pandemic pushed them to the brink. Boston College assumed the assets and liabilities of Pine Manor and offered employment to Pine Manor’s staff. In return, Boston College gains Pine Manor’s proven track record serving underrepresented populations.

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.

Originally published: 5/2020
Updated: 4/2023

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