Tip Sheet

EWA Tip Sheet: How to Monitor Colleges’ Financial Health During a Funding Crisis

The pandemic and economic shutdown have slashed colleges’ tuition revenues, reduced state government funding for higher education and, in some cases, even wiped out football ticket sales. Colleges’ severe new financial challenges are already forcing many budget cuts and layoffs. 

The repercussions may get even worse. An informal survey of the approximately 60 education journalists and communicators attending a webinar on higher education funding at the Education Writers Association’s 2020 National Seminar showed that most predicted that 5-10% of colleges would go out of business this fall. About a quarter predicted that 10-20% would go out of business. 

Several higher education finance experts speaking at the event agreed that the pandemic will likely force some colleges to shut down entirely, but debated the severity and sweep of the threat to higher education. And they provided some background and tools journalists can use to shine a light on the financial stability of the colleges in their communities.

Participants who contributed to this advice:

  • Michael Volna, associate vice president and assistant chief financial officer, University of Minnesota
  • Robert Kelchen, associate professor of higher education, Seton Hall University
  • Denisa Gándara, assistant professor of educational policy and leadership, Southern Methodist University

Main points

Who Will Close?

“For state-supported institutions, I think the number will be less than 1%,” predicted Michael Volna, associate vice president and assistant chief financial officer at the University of Minnesota. “For small, private liberal arts colleges, I think the number could be 20% or more.”

Robert Kelchen, associate professor of higher education at Seton Hall University, agreed that different types of institutions face different risks. In the past, he noted, about 10 colleges close each year.  The pandemic is likely to push at least double that number of colleges over the edge  in the 2020-21 academic year. “It’s going to be brutal,” Kelchen said. “But 25 is still well below 5% of private colleges.

Volna, Kelchen and Denisa Gándara, an assistant professor of educational policy and leadership at Southern Methodist University, also explained how journalists can figure out just how financially stable the colleges the cover are.

Analyze Each College’s Unique Funding Mix

While each college has its own unique funding model, in general colleges get revenue from five major sources, Gándara explained: 

  • Tuition, the primary funding source for most private and for-profit colleges
  • State governments, a major source for most (though not all) public colleges
  • “Auxiliary” activities, such as rent on dorms, sports sponsorship and broadcast contracts, and events
  • Federal agencies, such as through research grants
  • Donors, either through earnings on previous donations stored away in the school’s endowment fund, or through new donations.

Almost all of these sources are threatened by the pandemic: Skyrocketing unemployment reduces families’ ability to afford tuition, the economic shutdown is decimating state tax collections, campus closures have wiped out auxiliary income, and stock market turmoil has spooked some donors.

Mistakes to avoid

  • Comparing colleges with different financial structures. Any particular college’s prospect will depend on the threats to its own mix. The speakers urged reporters to use caution when comparing colleges. Even schools that look alike on the surface might have very different financial structures. State funding varies widely, even among public colleges in the same state.
  • Big universities with teaching hospitals have very different financial situations than those of similar size without hospitals. And the few colleges that make money from their sports programs are facing different outlooks than those that lose money on sports. 
  • Ignoring inflation when looking at trends. Make sure to note whether historical data is adjusted for inflation or is in each year’s “current” dollars, Gándara suggested. 
  • Assuming colleges can spend down their endowments or cash reserves. As colleges and universities, readers and journalists are looking for solutions it’s important to remember that many colleges have restrictions on what they can spend their reserves on, Volna said.  Some government and philanthropic revenue sources, particularly at large research universities, are restricted and can only be used for specific purposes like faculty positions, he said. That’s also the case for most endowments.  So, schools can’t necessarily just dip into their endowments or savings accounts to refund students for tuition and fees, or pay staff to avoid layoffs and furlough. 
  • Assuming “solutions” will actually solve problems. Several struggling colleges have explored or agreed to mergers with other schools. But a merger of two struggling colleges may just be delaying the inevitable, Volna said.
  • Failing to account for inflation in historical financial data. Because of inflation, $1 in, say, 1990 would buy stuff that, on average costs about $2 today. So when you look at previous years’ tuition or budgets, make sure to check to see if the numbers have been “adjusted” so that they subtract out inflation, or if they are “current,” which means they are in that year’s dollars.

Warning signs to watch

  • Enrollment: Declines in the percentage of the kinds of students who pay high tuition — such as international students and, at public colleges, out-of-state students — are an indicator of declining tuition revenue, Kelchen said.
  • Credit rating actions: When colleges need to borrow for a new project, such as  building a dorm or expanding campus, many find it is cheaper for them to sell bonds to investors rather than take out bank loans. Private agencies evaluate all bonds to tell investors how likely it is that the college will be able to pay back those bonds.The three biggest bond rating agencies (Moody’s, Standard and Poor’s and Fitch) all make public their ratings of colleges’ bonds. Reporters can check with the agencies to see how financially safe the agencies view the colleges are, and can watch for any changes to ratings that indicate a deterioration of the college’s financial situation, Kelchen suggested.
  • Refunds: If a school offers credits instead of refunds to students when campuses shut down, that may be a warning sign that it is struggling financially, Kelchen says.
  • Auxiliary revenues: Room, board and other non-tuition fees can make up a significant part of many colleges’ budgets. Schools that go online and are still stuck with, say, bond or guarantee payments on unused dorm buildings or cafeteria contracts are likely facing financial crunches.

Where to find college finance data

Data:

Resources and Experts: