EWA Tip Sheet: How to Tell If Your College Is Going Bankrupt
By scrutinizing enrollment data, external financial pressures, operating revenue and expenses, and tuition discounting, reporters can start spotting red flags in the finances of public and private colleges they cover.
Participants who contributed to this advice:
- Sue Menditto, senior director of accounting policy at the National Association of College and University Business Officers
Main points of the presentation
- Which colleges are most at risk of closure due to financial problems? While small private not-for-profit and all types of for-profit colleges are under the most financial pressures and have seen the most closures in recent years, some public school are also under pressure, as this list of the 11 colleges closed in 2019 shows. Menditto said any college with the following risk factors is under financial pressures: (Trend data on these factors for every college are available in the Integrated Postsecondary Education Data System, or IPEDS.)
- Declining enrollment.
- Declining net tuition revenue (Net tuition revenue per student can be calculated by subtracting the average amount of institutional aid awarded per student awarded in any particular academic year from the average tuition sticker price for that year.
- Cash flow problems caused by operating deficits and/or investment losses.
- AAUP guide to researching a college’s finances
- Chronicle of Higher Education guide to audited financial statements for colleges and universities
- NASBO Guidebook on state budgeting for higher education
- Data on university salaries can be requested from the College and University Professional Association for Human Resources (CUPAHR).
- EWA’s guide to higher education finance
- EWA blog post: Finances and Politics: Big Challenges for Public Universities
- EWA webinar: How to Cover College Mergers
- EWA webinar: The Debate Over College Endowments and How to Cover Them
- Why are some kinds of colleges facing worsening financial pressure? Menditto listed five major reasons:
- Drastically reduced state spending for higher education. State funding for public colleges in 2018 was $6.6 billion less (after accounting for inflation) than what states spent in 2008, according to the Center for Budget and Policy Priorities. (Additional data on state-by-state tax support of education is available through the State Higher Education Executives Officers Association.)
- Aging infrastructure. Students today increasingly demand modern facilities. And the longer a school defers maintenance, the higher the rehab costs will be.
- Instructional costs. Salaries of instructors are one of the biggest costs in any college. Since the cost of hiring humans isn’t generally driven down by technological advances, education suffers from what economist William Baumol called a “cost disease.”
- Fewer rich students. Demographic changes inside the U.S. and policies that are serving to drive away international students mean there are fewer students able or willing to pay a college’s price, or even a slightly discounted “net price.”
- Insufficient endowments. Only about 100 of the nation’s approximately 4,000 colleges have endowments over $1 billion. But more than 1,400 report having no endowment at all to the U.S. Department of Education. The vast majority of colleges essentially have to fund their operations with tuition dollars or tax support.
- How can journalists monitor colleges for signs of financial stress? Menditto’s full presentation prepared for EWA’s Sept. 30, 2019 event can be found online. She suggested reporters follow three important measures of a college’s health
- Numbers of applicants and enrollees. The number of applications can be inflated by schools that, say, waive application fees, or accept “postcard” applications. But declining interest from potential students is generally a warning sign. Likewise, the number of students enrolled, especially in schools financially dependent on tuition revenues, is a crucial measure.
- Endowment value. A college’s finances are likely to be pinched if the purchasing power of the endowment starts declining (i.e., if it fails to grow at least as fast as the Higher Education Price Index).
- Net operating margin. Look at the total operating expenses (such as cost of instruction, academic support, student services, overhead, etc.) and then subtract net revenues (typically, revenues from tuition after institutional aid is subtracted and, if applicable, room & board). If expenses are higher than revenues, and the college’s endowment is not about 20 times larger than the net operating deficit (so that the gap can be filled by spending a standard 5 percent of the endowment), then the college is has financial concerns.
- Tuition discount: The percentage of sticker tuition (the tuition published on the college’s website) that the college collects after subtracting out scholarships and grants awarded by the college.
- Net tuition: The posted tuition (or sticker price) minus grants or scholarships provided by the institution. (Do not subtract out federal, state or other outside financial aid, since that comes in as revenue to the college.)
- Endowment spending rate: Typically, colleges spend 4 to 5 percent of their endowments every year.
Data broken out by schools:
- NACUBO/TIAA Endowment Study
- Form 990s give financial information for non-profit organizations including colleges. (Guidestar is one central clearinghouse.)
Data broken out by states:
- SHEEO State Higher Education Finance report
- Center on Budget and Policy Priorities analysis of state funding
Averages across higher education as a whole: