Countless businesses have been negatively affected by the COVID-19 pandemic, and colleges are no exception. In addition to all the “normal” considerations that students and parents have when it comes to choosing a college, an additional factor this year is whether colleges are financially stable and if they are at risk of closing.
What should you look at to try to determine a college’s financial health? Jeff Selingo, former editor of The Chronicle of Higher Education and author of several books on higher education, recently told The New York Times, “The colleges most at risk are small (under 1,000 students) and attract very few applicants.” (Note: few applicants equals low selectivity.) Selingo continued, “Other risk factors are those with low or falling retention rates (the number of students who return for their sophomore year). Given the average retention rate at four-year colleges is 81 percent, anything well below that should give families pause, especially if it’s been falling in recent years.”
Selingo also stated that students and parents should be wary of colleges that have cut certain programs, as this is an indication of financial difficulties. He suggests avoiding colleges that are not well known for the major a student is interested in and/or where that major is not very popular. Last month, Ohio Wesleyan University cut 18 majors and consolidated several other departments. Although students in these majors will be able to complete the required courses, no new students will be accepted to these programs. These cuts will save the university $4 million, but they were enough to convince one of my students, who had previously been very interested in Ohio Wesleyan, not to apply.
In addition to looking at a college’s size, selectivity, and retention rate, there are several resources you can use to evaluate a college’s financial health. It’s important to keep in mind that none of these metrics are perfect, but here are some you might want to check out:
- IRS Form 990: All non-profit organizations, including private colleges, must submit this form to the IRS every year. You can search for these forms on ProPublica’s website. Jeff Levy, a college consultant who is very knowledgeable about financial aid, cautions that if a college’s ratio of total liabilities to revenue from services is approaching 100%, that is a warning sign.
- Bond Ratings: This is another suggestion of Levy’s. Moody’s requires a subscription, but Fitch Ratings are free to access.
- Hechinger Report’s Financial Fitness Tracker: Released in August, the tracker serves as a financial “stress test” of 2,662 private and public four-year and two-year colleges, using factors such as enrollment, tuition revenue, public funding, and endowment health. (Although the data is pre-COVID, it can give you a sense of where colleges stood before the pandemic.) A detailed explanation of the stress test and overall findings can be found here, and you can search for specific colleges here.
- Forbes 2019 College Financial Health Grades: As with the Hechinger data, this analysis does not reflect the effects of COVID-19. Furthermore, Jeff Levy compared the financial health grades to the U.S. News college rankings (which, as I’ve explained in other blog posts, has numerous flaws) and stated that “people more expert than I found that methodology suspect.” So, take these grades with a grain of salt. Although Forbes has released this report annually for several years, I couldn’t find any information about a forthcoming 2020 version.
- Edmit’s College Financial Health Center: Edmit used 937 private colleges’ financial data from 2002-2018 but also “incorporated assumptions about the effects of COVID-19 into [its] model.” According to Edmit’s website, “‘Financial health’ is defined based on how soon the combination of revenues and net assets could fail to cover operating expenses.” For a thorough explanation of the methodology, a searchable list of colleges, and more, click here.
- Scott Galloway’s analysis: Galloway is a marketing professor at NYU and a higher education blogger. In July, he published a report in which he assessed the financial prospects of 441 private and public colleges. Galloway used data from a variety of sources to determine colleges’ value and vulnerability and then separated the colleges into four categories: thrive, survive, struggle, and challenged (originally called “perish”). Not surprisingly, the report was met with an uproar from college administrators (such as this one, whose response was published in Business Insider). Galloway himself stated that “This dataset should not be taken as peer-reviewed or final. It’s a working document that seeks to analyze and understand the US college and university landscape and to help universities craft solutions.” Thus, as with the Forbes grades, Galloway’s analysis should be taken with a grain of salt. If you really want to get into the weeds, here is a link to the spreadsheet with all of Galloway’s data.
Again, I want to stress that none of these measures are perfect, and to get a complete picture of a college’s financial status, it would be wise to look at several of these resources. Finally, Jeff Selingo suggested to The New York Times that families simply ask colleges for the data they need to assess colleges’ financial health and added, “If they won’t tell you, that should send up red flags.”