Sunday, May 15, 2022

Is Your Private College Financially Healthy? (Gary Stocker*)

 


College viability is best determined by comparing the private colleges you are considering (Click on the image.)


You have worked hard to make higher education a smart, informed investment. You have talked with  college admissions counselors, developed a list of preferred colleges, visited the schools in-person or virtually, written the application essays, and filled out the common app. The colleges know a lot about you - and your family’s finances- but what do you know about theirs?

Will your college close? It is a question being asked with increasing frequency by students and their families. There is consensus of college researchers and experts that college closing will continue to happen in 2022 and beyond.

We have reviewed audited financial statements and data collected by the National Center for Education Statistics, and it is reasonable to assume that many small to medium-sized private colleges you may be considering will not have the financial resources to remain viable or even to provide you with the type of education you have come to expect.




We explain how to easily interpret the financial health below.

The consequences for you of choosing a financially challenged and potentially non-viable college include:
 
*The need to transfer colleges and the emotional and other challenges associated with a college closure
*Potential loss of transfer credits and the need to re-take some classes at the new college
*Faculty and staff turnover at the troubled college
*Safety issues associated with deferred building and grounds maintenance
*Increased time and costs to complete your degree
*A college closure could cost you more than $50,000 in additional costs and lost income from delayed graduation.

Here are some indicators that a private college is at a higher risk of closing.

*Enrollment less than 1,000 with a trend of decreasing enrollment. (Our College Viability App provides you with this information.)
*Endowments less than $50 million
*High tuition discount rates (greater than 50%) that are reflected in lower tuition revenue
*The popularity of the college is decreasing based on the number of students who accept an admissions offer. (Known as 'yield'.)

In most cases, scholarships offered by colleges are simply tuition discounts – like discounts you might get when buying groceries, clothes, or cars. Those scholarships are not funded with real money. If a college is desperate to fill seats, it commonly offers ‘scholarships’ that are not funded by any real money. They are simply lowering the price of tuition to get your enrollment commitment.

Certainly, these tuition discounts are good for students and their families, but they are not always good for the college’s finances. Faculty need to be paid, lights kept on, buildings maintained, and a long list of other expenses are incurred. Decreased revenue from tuition will be one of the leading factors in colleges that choose to go out of business or completely change their business model. Desperate colleges may do desperate things to get you to commit to them.

Below, you will find some straightforward guidance on how to interpret and understand some basic, private college financial, enrollment, and outcome data. We just use 6 pieces of information from 2013-2018 to help you understand how to better compare one private college to another. In general, compare each of the six indicators to look for any big differences among the colleges you are considering.

Quick Summary

FTE (Full-Time Enrollment) should be positive. The larger the increase over the 6 years, the better. If it is a negative number, the trend over these years suggests your college may not be as strong as its competitors with better enrollment numbers.
 
Admissions yield with a negative number suggests a larger number of students are not accepting a college’s admission offer. A positive number can suggest more students are accepting their admission to a college.
 
You will want to see the 6-graduation rate increase over the reporting period. More importantly, if you access the College Viability App, click the ‘Grad Rates’ button. Any number around or below 50% is not good. A graduation rate in the 70% and above is a reasonable minimal target.
 
The change in core expenses should be less than the change in core revenues. When expenses are not keeping up with revenues over a 6-year period, it can be viewed as a significant indicator of bad financial health.
 
The larger the increase in the endowment assets, the better. Increasing endowments suggest a college maintains a financially fruitful relationship with alumni and other charitable groups. Small increases indicate the college has yet to develop those resources. A negative number in the endowment suggests a college is in deep trouble. It probably has drawn down that money just to keep the lights on – not a good use of endowment funds.

Below is a more detailed description of the factors we track in the College Viability App and how they can help you become more informed about your private college options.

Enrollment:

This effectively shows full-time enrollment for each of the years 2013-2018. It is easy to compare one college’s 6-year trend with another.

Positive trend: FTE stands for full-time enrollment and is a calculation showing how many students would be attending if all were enrolled full time. You want to see consistent increase in the FTE enrollment. Larger enrollment typically provides more revenue to a college.

Negative trend: Either big changes from one year to the next or a consistent decline in enrollment. The first suggests inconsistent discounting and the college may be having difficulty bringing in students without substantial discounts. This hurts their ability to generate revenue to stay financially healthy.




Private college 6-year graduation rates for undergraduates (Click on image.)

 


College admissions yield, private Minnesota colleges (Click on image.)


Tuition and Fees

The main revenue source for almost all private colleges is tuition and fees. While enrollment is often reflected in the tuition and fees colleges collect, in recent years there has been a lot of market pressure to discount tuition. This has contributed to decreasing tuition and fees and could indicate trouble for a college you are considering.

*Positive trend: Consistent increase in tuition revenue over 6 years

*Negative trend: Consistent decrease in tuition revenue over 6 years


Admissions Yield

A negative number suggests more students are not accepting a college’s admission offer. A positive number can suggest more students are accepting their admission to a college. It is not as strong of an indicator of viability challenges as other factors, but it can build on the pattern seen by other data.

Positive trend: An increasing admissions yield can suggest a college is able to enroll more students who they have accepted.

Negative trend: If the yield is decreasing, for some reason(s) more student are choosing other options instead of enrolling in a college that accepted them.

Endowment

Positive trend: Simply speaking, this number represents financial gifts private colleges have received. While there are different types of gifts, look for those colleges whose endowment has grown more than its competitors. These organizations will have the extra resources to survive tough economic times.

Negative trend: Compare the 6-year changes from all of the schools you are considering. The larger the increase and the higher the overall endowment, the better. If you see that a total endowment amount has decreased in the 6-years of data, it could mean the college is using those funds just to keep the lights on.

As general guidance, any endowment total that is less than $50 million is also reason for concern about a college’s financial health.
 

6-Year Graduation Rates

The education outcome the College Viability App tracks is 6-year graduation rates. There are typically not big swings in graduation rates over 6 years. Just look for colleges with higher graduation rates.

Positive trend: The larger the number, the better.

Negative trend: A lower percentage suggests a college is not as successful in graduating its students as those colleges with higher percentages. If the graduation rate hovers around 50% or lower, there are legitimate reasons to have concerns about that college’s quality of education and the systems and processes needed to enhance retention and create graduating students.
 

Core Expenses

It is best to compare both core expenses and core revenues for each of the years listed. Any significant expense imbalance is worthy of concern. If expenses go up year after year, it is reasonable to expect revenues to at least trend upwards also. Watch for colleges whose expenses have increased, but their revenues have not. Remember, you are looking at a 6-year trend. If a college can’t reverse a bad expense and revenue pattern in 6 years, there is reason to be concerned about their viability.

Positive trend: Expenses have either decreased more than the core revenue has decreased, or the increase in core expenses should be a smaller number than the increase in core revenue.

Negative trend: Expenses have increased faster than core revenues, or the decrease in expenses has been slower than the decrease in revenues.


Core Revenues

If revenues are trending downward and expenses are not decreasing in a similar trend, there is reason to consider whether a college with that pattern has the capacity to do what is necessary to survive and thrive. Tuition and fees are part of core revenue. As one goes trends, the other usually goes in the same direction.

Positive trend: Core revenues have increased faster than expenses have increased, or revenues have not decreased as much as expenses have decreased.

Negative trend: Any trend where the revenue decreases is concerning. However, if a college can keep its expense changes in line with its revenue, that works for a while. Any business strongly prefers consistent revenue growth. It’s an indication of a good product or service.

Remember, it is the trends that are most important to consider. If you see differences that concern you among the colleges you are considering, share your concerns with your admissions representative. Ask them to share explanations of why the numbers in any category don’t compare well to other private colleges you are considering. Use their responses and the data in the College Viability App to make a more informed decision about the college(s) you are considering.

Data Source: National Center for Education Statistics - Integrated Postsecondary Education Data System (IPEDS) 2013-2018



We created the College Viability App to provide students and their parents an easy-to-understand resource of what to look for regarding a private college’s financial health. You simply select the colleges you are considering, and we provide you with six years’ worth of comparisons on 6 key viability indicators.

The College Viability App does not predict whether a private college will close or not. It simply provides you with an easy-to-use, customizable comparison of colleges you are considering. Some colleges have performed better than others over the past 6 years. You can compare and make your own judgement. It is important to note that we use the most recent federal data available. There is usually a 12-18 month lag time before a private college's data is posted.


Here is a link to a YouTube tutorial on the College Viability App.

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