5 Important Things About a College’s Finances Parents Need to Know
If you were to look at the college admissions process as a puzzle, you would understand just how many pieces you needed to find in order to complete your masterpiece.
There’s the academic fit piece, the social fit piece, and what can be deemed to be one of the most important, the financial fit piece.
During our recent Zoom Webinar, author Jeff Selingo, NYU professor Scott Galloway, and Susan Fitzgerald, Associate Managing Director at Moody’s, discussed another key piece of the puzzle that many families focusing on their own financial health tend to overlook: the school’s financial fitness.
It is crucial to know how stable an institution’s financial base is, and according to our panel of experts, it should absolutely NOT be ignored.
So, what exactly should a family be aware of in order to assess a school’s financial health?
Here are five points that were agreed upon:
What to Know About a College’s Finances
State & Federal Funding
For public universities, what happens to state budgets is critical to the university’s financial health.
Many public universities are required to run balanced budgets, so they do not have any option other than to cut costs when their own funding is cut. Therefore, state budgets and investments in higher ed are key to the long run health of public institutions.
Public universities are less likely to close, but could be merged with others or have their role change.
Net Tuition Revenue Trends
Private colleges run on a very high cost business model—small class sizes, full campus amenities, significant student support services. Tuition rarely covers the full cost of providing education. Size matters and larger universities have greater economies of scale.
To attract students many schools discount their tuition by offering some form of financial aid (either need or merit based). This practice is called tuition discounting. A high discount rate may be good for individual families, but can jeopardize the financial health of a college.
One indicator of a college’s financial health is the multiyear trend of their net tuition revenue, which is the published tuition minus financial aid provided by the school (institutional grant aid) per student.
If you see net tuition revenue going down, it can be a sign of enrollment challenges or other challenges the college is experiencing. If net tuition revenue is the largest revenue stream for the school and it’s declining, it can indicate a college or university is going to have to cut costs rather than invest in the school, if they want to balance their budget.
Endowment in its purest sense are gifts that have been accumulated over time by a college or university for a specific purpose. The concept that a college can just spend its endowment is not the reality because funds in the endowment may have lots of restrictions attached.
For example, if a donor funds an endowed professorship, the university cannot use the income from that portion of the endowment for financial aid or any other activity.
A big endowment does not necessarily mean that all programs at the school are equally well resourced. For example, a university can have a large endowment for the school of theology, but a very small endowment for the college of arts and sciences, and the difference in endowment funds may determine how much resources are available for any particular program.
A high reliance on spending from the endowment can also mean cost cutting if financial markets are down or volatile.
Small private colleges with low endowments are more vulnerable to financial stress than their larger counterparts, but that doesn’t mean they will close.
Vulnerability vs Value
Another way to evaluate a college’s financial health is to consider it’s financial vulnerability vs the perceived value of it’s brand.
According to Scott Galloway, the short-term vulnerability of a college can be gauged by it’s endowment per student to see how much financial “cushion” a school has. As well as the percentage of international students, who tend to be full pay students.
If a school is heavily dependent on international students, who may no longer be able to attend (in the short-term), that school may lose a disproportionate percentage of their tuition revenue relative to their enrollment decline. So understanding what percentage of the student population is international, is important to know.
A college’s brand equity is a loose measure of how recognizable the school name is compared to comparable schools. As Galloway suggests a quick and dirty way to measure s college’s brand equity is to walk into a room and see how many people have heard of the school.
Specific College Programs and Departments
For a lot of schools which are not in danger of closing, the danger instead may be in figuring out which programs or departments may be reduced or eliminated. This is much harder to decipher. Some suggestions include finding out what percentage of students are in a particular major or program and compare that to larger programs.
It’s also worthwhile to ask for program/department specific enrollment numbers over time, Majors with a small percentage of students or a decline in enrollment may be at risk for being eliminated.
Other Non Financial Data Also Provides Clues
Non financial data, such as retention and graduation rates, can provide a good indicator of whether a college is delivering on the promises it provides to students.
There is also significant opportunity cost to not completing on time—a five- or six-year education journey, even if lower cost up front, can be more expensive that a four-year higher up front cost investment.
Remember, the highest cost education is one that is not completed.
The higher ed sector is very resilient. What ultimately causes a college to close is that they run out of cash, or creditors lose patience.
Will the school your student is considering close? Most likely not, especially if it’s among the top 200 or so colleges. But it can’t hurt to research and understand the school’s financial stability.
Resources where you can find some of the information discussed above include:
- IPEDS data for enrollment and net tuition revenue trends
- Audits and 990s for the overall levels of cash and investments, fund raising and endowments, degree of debt relative to operating revenues and cash and investments
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