It is no secret that much of the American higher-education system is facing considerable financial challenges. Fewer high-school graduates and older students are enrolling in college, operating costs are rising faster than tuition revenue, and students are increasingly drawn to a small number of flagship public universities and wealthy private colleges. This leaves the vast majority of colleges fighting over a dwindling pool of potential students who generate less revenue.
Along with the expiration of federal pandemic-relief funds, these forces have resulted in an increase in the number of colleges closing over the last two years. The actual number of closures is far below what many breathless media reports and even federal data sources claim to show (approximately 10-20 private nonprofit colleges each year out of approximately 2,000 institutions), yet closures are incredibly devastating for students and employees alike.
But even though the level of pain is high for those affected, the number of people in that position is relatively small. For example, the University of the Arts, which closed this summer, enrolled about 1,300 students and had 263 full-time employees, according to federal data from 2022. Most colleges that close are even smaller; the Delaware College of Art and Design enrolled just over 100 students, and Wells College enrolled fewer than 400. The number of students and employees affected by closures in a particular year is comparable to a midsize university.
But closures do not tell the full story. The same financial challenges that cause closures have broader implications across higher education. Nonprofit colleges are typically driven by a mission to serve their communities, and they will do nearly anything in order to continue operating in spite of challenging circumstances. Finlandia University in Michigan borrowed against most of its campus buildings three decades ago to stay afloat; this long-forgotten fact led to the institution’s recent closure. Driven in part by consultants and media that reaches governing-board members, a growing number of institutions are seeking to cut programs or even declare financial exigency in an effort to address current or anticipated financial risk.
As a scholar of higher-education finance who has done research on college closures and financial distress, I am regularly asked about potential warning signs. How can we tell when a college is facing substantial cuts or even closure? Here are the metrics I recommend examining to get a sense of a college’s overall position.
Consistently losing money. Public and private nonprofit colleges are not in the business of generating outsized profits, but healthy institutions typically have revenue exceed expenses by a modest amount so they can reinvest the proceeds in improving their college. Year after year of posting losses is probably the clearest sign that a college is at risk of closing, either because they have not sufficiently cut costs or because cost-cutting efforts were unsuccessful in turning around the institution.
I tracked 10 years of operating margins for private nonprofit colleges and found that 18 colleges posted losses at least eight times between fiscal years 2013 and 2022. Nine of these colleges have already closed or announced an upcoming closure, eight remain open, and one (Bacone College, in Oklahoma) has stopped enrolling new students. (You can see the full list here.) Many of these colleges have implemented substantial cuts in an effort to remain open.
Data about operating margins can come from three sources. The U.S. Department of Education’s Integrated Postsecondary Education Data System (IPEDS) contains data for all colleges receiving federal financial aid, although the information usually lags by about two years. Many public colleges and some larger private colleges post financial statements on their websites, but the majority of small private colleges — the ones at greatest risk of being in financial distress — tend not to do so. Fortunately, ProPublica’s terrific Nonprofit Explorer contains annual IRS Form 990 filings that nonprofit colleges submit to the federal government; this is often more detailed than financial statements. If a college consistently has expenses larger than revenue or posts steep losses (which happened at Wells College), it is time to start asking difficult questions.
Low or declining enrollment and revenue. A sharp decline in enrollment can be a sign that a college is in trouble. But for students and faculty, enrollment within a given program of study is also crucial, as more colleges consider cutting programs seen as being in low demand. Some universities, such as the University of North Carolina at Greensboro, have used student enrollment and credit-hour production as key metrics in deciding which programs to eliminate. Other institutions, such as Miami University, in Ohio, have told low-enrolled programs to reinvent themselves or merge with other programs to avoid discontinuance.
Institutional-enrollment trends are readily available in IPEDS, as are the number of graduates by field of study. Departments may have information about their number of majors or student credit hours provided by institutional-research offices or published in fact books, or they may calculate the numbers themselves. On a departmental level, the key is getting a sense of how the institution evaluates enrollment success. Is it by credit hours generated, the number of credentials awarded, or a combination of the two? That will provide insights about how to focus efforts.
A caveat: Increases in institutional enrollment do not necessarily imply an improvement in financial health. If enrollment increases are due to large increases in financial aid or large increases in costs (such as adding resource-intensive pre-professional programs), then the existing financial issues are only exacerbated. This is what happened at Iowa Wesleyan University, which closed last year even after posting an enrollment increase following the pandemic.
Similarly, declines in revenue are also a red flag. Traditionally, colleges have tried to grow their way out of financial difficulties by starting new programs or expanding their scope. But amid a great deal of discussion about the demographic cliff among trustees and policymakers, academic leaders are being pushed to rightsize their budgets by mothballing buildings, not filling vacant positions, and jettisoning low-performing programs. This creates the same pressure on programs as enrollment issues.
Drawing heavily from the endowment to plug budget gaps. Endowments are highly unequal in our system, with 120 colleges and systems controlling three-fourths of the nearly $1 trillion in nationwide endowment funds. Most colleges have endowments of less than $100 million, and these endowments primarily consist of a series of accounts restricted for donor-specified purposes along with a limited pool of unrestricted funds. With the recommended spending rate being between four and five percent per year, endowment income is just a small part of most colleges’ budgets.
Yet struggling colleges may choose to pull larger amounts from the endowment and even attempt to remove restrictions from donor agreements to make more funds available. This is a risky strategy, because if investment income fails to keep up with increased spending, the endowment’s value will decrease over time. Many colleges increase endowment spending to plug consistent holes in budgets, which is not a financially sustainable strategy. Some others attempt to use their endowment as the final opportunity to turn around the institution by making strategic investments in new programs and facilities. This strategy comes with the risk of shortening a college’s runway before major cuts or potential closures loom. But taking a calculated risk could help make the college financially sustainable in the long term.
IRS Form 990 submissions contain useful information on how much money private nonprofit colleges spend from their endowments each year and whether the funds are used for student financial aid, administrative expenses, or other expenditures. Increased spending on scholarships can indicate heavy tuition discounting to attract students, while the “other expenditures” category covers both general spending to plug budget holes and new strategic initiatives. Birmingham-Southern College did both before closing, spending $28 million from its $52-million endowment over a two-year period. But with some local context about institutional efforts, students and employees can understand the extent to which spending in this area is a serious concern.
Other potentially drain-circling events. Some indicators of financial distress may be more unique. Here’s what I would recommend keeping an eye on:
- Frequent leadership turnover or excessive use of consultants to provide leadership. Leadership turnover is easy to see, but getting information on consultants may require examining trustee documents at public institutions and examining vendor payments in IRS Form 990 submissions for nonprofit institutions. Leadership turnover may not lead to closure, but each new leader may bring in their own to-do list of cuts to make to try to survive.
- Accreditation sanctions. Accreditors have a long history of sanctioning colleges for financial issues instead of academic issues, and accreditation is required for federal financial aid. Many accreditors publicly list their actions online.
- Sudden federal restrictions. Requiring a college to post a letter of credit or delaying federal financial-aid disbursements can cause a teetering college to collapse, so keep an eye on the list of actions that Federal Student Aid takes regarding individual colleges.
- Missed bond payments. Once a college is unable to pay its bills to its largest creditors, employees should not expect to be paid on time. This is a strong indicator of closure.
As much of higher education faces financial challenges that are unlikely to abate in coming years, it is crucial for academic citizens to gather as much information as possible about where their college stands. With a few data points and an ear to the ground about potential issues, students, faculty, and staff can have a sense of what is going on before leadership takes action — and take steps to help insulate themselves from the fallout.
