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Struggling to Stay Afloat

Many colleges and universities face a difficult and uncertain financial future.

By Jesse Saffron

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June 04, 2014

In 2013, 33,000 businesses filed for bankruptcy in the United States. Such normal, healthy commercial losses perform a critical function in a robust market system. Firms that don’t satisfy the wants of customers, attract patrons, and stay within their budgets fall by the wayside, opening the door for entrepreneurs who can more effectively use scarce resources.

Historically, such vigorous turnover has been absent in higher education, as government subsidies have perpetuated a static environment by protecting colleges and universities from economic fluctuations. 

That environment may be changing. 

Total undergraduate and graduate enrollment in the U.S. declined by more than 3 percent over the last two years, reaching 19.8 million in fall 2013. The future of many colleges looks bleak, even bleaker than nine months ago when the Pope Center reviewed the growing concerns about their overall financial condition. Steep enrollment declines have left some campus officials scrambling to attract and retain more students. 

An eye-opening list compiled last month by the National Association for College Admissions Counseling sets forth some of the enrollment struggles. The “College Openings Update” lists 470 American colleges that at the time of publication had not filled their freshman classes and were searching for qualified applicants. The list includes well-regarded institutions like Sarah Lawrence College, Gonzaga University, Knox College, and Wheaton College, among others. 

More than 60 percent of the listed colleges are private, a subset that has been designated by many higher education experts as especially vulnerable to disruption.

Moody’s Investors Service downgraded 36 private colleges’ credit ratings last year and gave the entire not-for-profit sector, public and private, a negative forecast. A study published last year by Forbes looked at the financials of 925 private nonprofits, giving almost 60 percent of them a “C” or “D” grade. Susan Fitzgerald, an analyst at Moody’s, told Bloomberg last month, “What we’re concerned about is the death spiral—this continuing downward momentum for some institutions. We will see more closures than in the past.” Before 2008, on average, about five private four-year colleges closed or merged each year. That number has doubled in recent years, according to Vanderbilt University researchers.

There is a sliver of good news for private nonprofits: nationally, spring 2014 enrollment increased by 2 percent over spring 2013. Schools with large endowments and steady enrollment numbers can survive an economic downturn. However, that fact may not be comforting for small and mid-sized tuition-dependent colleges with meager endowments and diminishing student populations. For example, enrollment at Iowa Wesleyan College, a private liberal arts institution, has declined by 30 percent since 2009. It recently reported a $2.5 million deficit and is eliminating 16 of its 31 majors.

At Kentucky’s Georgetown College, a budget shortfall has ballooned to $4 million. Officials say they will cut 20 percent of the faculty, eliminate four majors, and reduce employee and retiree benefits. The board of trustees at Mid-Continent University, also in Kentucky, has voted to fire all of the faculty and close the school permanently by June 30. Seniors on the verge of graduation were bailed out by volunteer faculty who continued teaching courses and by a local church association, which sponsored the commencement ceremony! 

And last November, after three consecutive years of enrollment declines, Ashland University in Ohio was downgraded by Moody’s and given a Caa2 financial rating, which is eight notches below investment grade. The school has responded with a recovery plan that involves significant tuition cuts, but it’s difficult to see how the cuts, without an accompanying streamlined university budget, will improve its financial outlook.

In addition to cutting faculty positions and eliminating low-demand majors, many “prestige priced” private schools are offering big tuition discounts to offset prospective students’ sticker shock. The National Association of College and University Business Officers says that the average freshman discount increased from 40 percent in 2008 to 45 percent in 2012. 

Coe College in Iowa, for example, has a massive aid package for students. Although annual tuition is listed at $45,550, the school’s average aid package is $32,000. That tuition discount approach can backfire, though. Franklin Pierce University in New Hampshire saw its tuition revenue fall by 14 percent after it increased its financial aid. 

Other schools, such as Yeshiva University in New York, are selling real estate to fill budget holes. Cash-strapped women’s colleges like Chatham University in Pittsburgh and the College of Saint Elizabeth in New Jersey are considering co-ed expansion to increase enrollment. 

The problems faced by the aforementioned private nonprofits also affect—perhaps even more dramatically—private for-profits, historically black colleges, and law schools.

Last fall, for-profit colleges’ enrollment figures dropped by 9.7 percent, and the latest data from spring 2014 show a 4.9 percent drop from spring 2013. Some say the recent decline is a result of heightened scrutiny from federal and state governments and “consumer advocates” who accuse the schools of excessive recruitment pressure and fudged job placement rates. Recently, the Apollo Education Group, which owns the University of Phoenix, received a subpoena from the Department of Education’s Office of Inspector General to produce information regarding the University’s recruitment and marketing strategies. 

Another factor contributing to the stagnation of for-profits, which helped to revolutionize online education, has been competition from private non-profits like Western Governors University and Southern New Hampshire University. SNHU radically changed its business model and now the online division subsidizes the residential. Its TV and radio commercials are becoming as ubiquitous as McDonald’s advertisements, and the marketing campaign may be paying off: the university estimates that 36,000 students will be enrolled in its online division this year. It recently experienced a 16 percent surge in enrollment. 

Some for-profits, like Corinthian College, which enrolls 75,000 students, are also worried about the prospect of the Obama administration’s proposed gainful employment regulations, which would penalize programs in which graduates fail to find jobs and pay down debt.

The trials and tribulations of historically black colleges have become prominent. Many HBCUs face complicated admissions decisions, as they are competing with bigger and better-funded predominantly white institutions that can offer huge scholarships to top-flight entering freshmen. In North Carolina, a push was made in the late 1990s and early 2000s to grow HBCU enrollment, but as Fayetteville State University Chancellor James Anderson said in a recent interview with Raleigh’s News & Observer, “They [HBCUs] were recruiting a lot of students who had no business being there.” 

For some HBCUs, issues about academic standards are of minor significance when compared to their financial stress. A recent audit of St. Augustine’s University—a private HBCU in Raleigh—showed a $3 million reduction in tuition revenue as well as a $700,000 pending lawsuit. Those issues prompted Everett Ward, the university’s interim president, to announce furloughs, administrative job eliminations, and the closing of some campus facilities during the summer.

Law schools are also hemorrhaging. From 2010-11 to 2013-14, only 16 of the country’s 195 law schools enjoyed enrollment increases. The actual declines are staggering. Eighteen schools had enrollment decreases of more than 30 percent. Last fall’s entering class was 24 percent below the all-time high that came in 2010. The total number of law school matriculants hasn’t been this low since 1975. 

So, what is the big takeaway? I believe Matt Schifrin, a managing editor for Forbes online, described it succinctly in an article published last week: “Economics 101 tells us that either college admissions officers and their consultants are inept, or more likely, that the supply of schools offering college degrees needs to drastically shrink. But don’t hold your breath waiting for colleges to go bankrupt en masse; history shows that these government subsidized institutions can linger on for years even when their financial statements bleed red ink.” 

 


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