Will your college go bankrupt?
By David Ressner
Long before COVID, colleges and universities faced the double whammy of higher costs and lower revenues. Think what you want about comfortable dorms, expansive dining rooms, and other campus amenities, many of the growing expenses schools face today are unquestionably legitimate costs of $ 21.st the higher education of the century, including technology, career guidance and mental health services. The drop in income is largely due to the increase in financial aid and a well-documented decline in the number of college-aged students, which is expected to continue in the years to come.
To survive, many schools have taken drastic measures, cutting departments, reducing services and / or eliminating activities. Sometimes such measures weren’t enough to save even long-established schools like Valparaiso University Law School in Indiana and MacMurray College in Illinois, both of which went out of business in 2020. Over in the past five years alone, these schools and over 60 others have closed. their doors entirely or merged with other schools.
Now, three semesters after the start of the pandemic, COVID has added to these challenges, and education experts are estimating a wide range of potential school closings. For example, Professor Scott Galloway of NYU School of Business, after noting that the university is an expensive operation with a relatively rigid cost structure, writing, “The economic situation of many of these schools is dire…. According to current plans, hundreds of colleges will perish. “
Galloway based his statement on data from the US Department of Education. Measuring 441 schools on their value and financial vulnerability, he predicted that high value / low vulnerability schools would “thrive” after the pandemic. On the other end of the spectrum, he predicted that many low value / high vulnerability schools would be “challenged”. The full scan can be uploaded to his blog, where you might be surprised by some of the schools from both groups.
On the contrary, this data only underscores the importance of seriously considering the financial viability of each school you are considering and not just assuming the books are balanced.
While some colleges are closing completely, perhaps a greater risk is that the major, extracurricular activity, or service that drew you to a school will be reduced or eliminated, leaving you with a difficult decision: stay and do or transfer. and take your chances elsewhere.
So how do you know if your school, or a school you are considering, is safe or in trouble?
In addition to Professor Galloway’s analysis, the following posts allow you to take a look under the hood to determine whether schools are running efficiently or running on steam.
the College viability The app is available in two versions: free and paid ($ 49). Both apps analyze data from the National Center for Education Statistics (NCES). This data covers enrollment, graduation rate, expenses, income, endowment, and admission yield (the percentage of accepted students who enroll). These factors can inform the financial health of a school, especially when the data is observed over a series of years.
Edmit defines “financial health” as the degree to which income and assets are likely to cover long-term operations. His College Financial Health Center also takes into account each school’s COVID-related costs, distance education capacity, dependence on international student tuition fees, and state endowment or funding, if applicable. In Edmit’s analysis, more than a third of schools were considered to be “poorly financially healthy”. For almost half of these schools, COVID-related costs were one of the main reasons for the “low” rating.
For private colleges, Hechinger looked at enrollment, student retention, tuition per student, and the ratio of endowment to total expenditure. For Public colleges and universities, Hechinger looked at the same criteria, but instead of health endowment, he looked at state funding. When it comes to endowments, while managers have stayed the course despite last year’s COVID-related volatility, many have recovered. But the recession has forced many states to cut funding for higher education. For example, Nevada cut UNLV funding by 20% in 2021 and Colorado cut overall support for higher education by 58%. Hechinger’s financial fitness tracking is based on the work of three higher education experts from the University of Pennsylvania and Middlebury College. Their book, “The college stress test, ”Was published in February 2020, just as the pandemic was taking hold. The appendix to the book contains a template for assessing the financial sustainability of schools.
In February, Forbes analyzed 921 U.S. private nonprofit colleges across nine factors, including endowment assets per student, operating margin, admission yield, and student grants. The data – from NCES – predates COVID, which led Forbes to conclude: “Before COVID-19, many private colleges across the country were facing a financial health pandemic. Things are worse, but don’t expect a wave of closures. “
These forecasts are confirmed by the leaders of the colleges. In one September 2020 survey According to the American Council on Education, 43% of college presidents said “long-term financial sustainability” was one of their top concerns, second only to student mental health.
In addition to the resources above, families can do some of their own research. Two major publications are The Chronicle of Higher Education and Inside higher education. They don’t always post information about specific schools, but by subscribing to them or their free newsletters, you can learn a lot about how colleges work, admissions, financial aid, and higher education activities. To create Google Alerts for information on specific schools.
Another informational resource is IRS Form 990, which tax-exempt organizations, including nonprofit colleges and universities, must file annually. It contains data on income, expenses, assets and liabilities, as well as qualitative information that can be revealing. Often a school will post its Form 990 on its website. It can usually be found on GuideStar.org or by searching online for “990” and the name of the school.
In a school’s Form 990, disturbing numbers include high total debt and annual debt payments, consistently large operating deficits, and endowment expenses exceeding 5% per year. Long-term enrollment trends and tuition fee discount rate are not shown in Form 990, but available elsewhere. Reducing tuition fees is common practice, with the average private school charging only about half of its published price. Schools with large endowments or other sources of income can afford this practice, but for some schools the actualization may prove to be unsustainable.
Another way to find out about a school’s financial strength is its bond rating. Much like governments, colleges often issue bonds to fund projects, and these bonds are rated based on the school’s financial strength. If you can find such reports, they can provide additional information about a school’s financial well-being. The main bond rating agencies are Fitch, Moody’s and Standard & Poor’s.
A school’s annual report or the president’s report are often very promotional, but sometimes they contain valuable information about institutional priorities and challenges. Often the more objective sources are the student newspaper and media near the school.
Finally, when visiting the campus, be on the lookout for physical maintenance issues. And if you have questions that can’t be answered, ask them. Feel free to ask questions about each school you are considering. You have the right to an informed decision! Polite questions will not compromise your child’s chances of admission.
A college education is often a six-figure buy. You should inspect a future college at least as much as you would inspect a new car or a new home. If a school does not answer your questions, it could be of concern.
About the Author: David Ressner
David Ressner is a wealth advisor at Strategic wealth of Buckingham. He enjoys advising families on the financial aspects of college planning, as children’s education is the perfect storm of high costs and high emotions. By knowing how colleges work, Dave is able to guide students towards truly formative college experiences, while ensuring that the cost of college education does not jeopardize parents’ long-term financial plans.
Important Disclosure: This article is provided for general information only and is not intended to serve as specific financial, accounting, or tax advice. Individuals should speak with qualified professionals based on their personal circumstances. The analysis in this article may be based on information from third parties and may become obsolete or otherwise superseded without notice. Information of third parties is believed to be reliable, but its accuracy and completeness cannot be guaranteed. By clicking on any of the links above, you acknowledge that they are only for your convenience and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by Buckingham regarding third party websites. Buckingham is not responsible for the content, availability or privacy policies of such sites, and will not be responsible for any information, opinions, advice, products or services available on or through them. The opinions expressed by the authors presented are their own and may not accurately reflect those of Buckingham Strategic Wealth® IRN-21-1841