Is Your College Financially Healthy?

Is Your College Financially Healthy?

Your student has worked hard to make their list of preferred colleges, visited them in person or virtually, written the essays, and filled out the applications.

The colleges know a lot about your student – and your family’s finances, but what do you know about theirs?

 

Why Assessing a College’s Financial Health Is Important

Based on a review of audited financial statements and data collected by the National Center for Education Statistics, it is reasonable to assume that many small to medium-sized private colleges you may be considering will not have the financial resources to remain viable or even to provide you with the type of education you have come to expect.

We explain how to easily interpret the financial health below.

The consequences of choosing a financially challenged, and potentially non-viable college include:

• The need to transfer colleges and the emotional and logistical challenges associated with it
• Potential loss of transfer credits and the need to re-take some classes at the new college
• Faculty and staff turnover at the troubled college
• Safety issues associated with deferred building and grounds maintenance
• Increased time and costs to complete your degree

 

Signs That a College Might Be in Financial Trouble

Here are some traditional indicators of colleges that most frequently face viability challenges:

• Enrollment less than 1,000 with a trend of decreasing enrollment
• Endowments less than $50 million
• High tuition discount rates (greater than 50%) that are reflected in lower tuition revenue

In most cases, scholarships offered by colleges are simply tuition discounts – like discounts you might get when buying groceries, clothes, or cars.

Those scholarships are not funded with real money. If a college is desperate to fill seats, it commonly offers “scholarships” that are not funded by any real money.

They are simply lowering the price of tuition to get your enrollment commitment.

Certainly, these tuition discounts are good for students and their families, but they are not always good for the college’s finances.

Faculty need to be paid, lights kept on, buildings maintained, and a long list of other expenses are incurred.

Decreased revenue from tuition will be one of the leading factors in colleges that choose to go out of business or completely change their business model.

 

How to Measure College Viability

Below, you will find some straightforward guidance on how to interpret and understand some basic financial, enrollment, and outcome data related to private colleges.

We’ve used six pieces of information from 2013-2018 to help you understand how to better compare one private college to another.

Compare each of the six indicators to look for any big differences among the colleges you are considering.

Below is a detailed description of the factors we track in the College Viability App and how they can help you become more informed about your private college options.

FTE : Full-Time Enrollment

The FTE effectively shows full-time enrollment for each of the years 2013-2018. It is easy to compare one college’s six-year trend with another.

Positive trend: FTE is a calculation showing how many students would be attending if all were enrolled full time. You want to see consistent increase in the FTE enrollment. Larger enrollment typically provides more revenue to a college.

Negative trend: Either big changes from one year to the next or a consistent decline in enrollment. The first suggests inconsistent discounting and the college may be having difficulty bringing in students without substantial discounts. This hurts their ability to generate revenue to stay financially healthy.

Tuition and Fees

The main revenue source for almost all private colleges is tuition and fees. While enrollment is often reflected in the tuition and fees colleges collect, in recent years there has been a lot of market pressure to discount tuition. This has contributed to decreasing tuition and fees and could indicate trouble for a college you are considering.

Positive trend: Consistent increase in tuition revenue over six years

Negative trend: Consistent decrease in tuition revenue over six years

Admissions Yield

A negative number suggests more students are not accepting a college’s admission offer. A positive number can suggest more students are accepting their admission to a college.

It is not as strong of an indicator of viability challenges as other factors, but it can build on the pattern seen by other data.

Positive trend: An increasing admissions yield can suggest a college is able to enroll more students who they have accepted.

Negative trend: If the yield is decreasing, for some reason(s) more student are choosing other options instead of enrolling in a college that accepted them.

Endowment

Positive trend: Simply speaking, this number represents financial gifts private colleges have received. While there are different types of gifts, look for those colleges whose endowment has grown more than its competitors.

These organizations will have the extra resources to survive tough economic times.

Negative trend: Compare the 6-year changes from all of the schools you are considering. The larger the increase and the higher the overall endowment, the better. If you see that a total endowment amount has decreased in the 6-years of data, it could mean the college is using those funds just to keep the lights on.

As general guidance, any endowment total that is less than $50 million is also reason for concern about a college’s financial health.

Six-Year Graduation Rates

The education outcome the College Viability app tracks is six-year graduation rates. There are typically not big swings in graduation rates over six years. Just look for colleges with higher graduation rates.

Positive trend: The larger the number, the better.

Negative trend: A lower percentage suggests a college is not as successful in graduating its students as those colleges with higher percentages.

If the graduation rate hovers around 50% or lower, there are legitimate reasons to have concerns about that college’s quality of education and the systems and processes needed to enhance retention and create graduating students.

Core Expenses

It is best to compare both core expenses and core revenues for each of the years listed. Any significant expense imbalance is worthy of concern.

If expenses go up year after year, it is reasonable to expect revenues to at least trend upwards also. Watch for colleges whose expenses have increased, but their revenues have not.

Remember, you are looking at a six-year trend. If a college can’t reverse a bad expense and revenue pattern in six years, there is reason to be concerned about their viability.

Positive trend: Expenses have either decreased more than the core revenue has decreased, or the increase in core expenses should be a smaller number than the increase in core revenue.

Negative trend: Expenses have increased faster than core revenues, or the decrease in expenses has been slower than the decrease in revenues.

Core Revenues

If revenues are trending downward and expenses are not decreasing in a similar trend, there is reason to consider whether a college with that pattern has the capacity to do what is necessary to survive and thrive.

Tuition and fees are part of core revenue. As one goes trends, the other usually goes in the same direction.

Positive trend: Core revenues have increased faster than expenses have increased, or revenues have not decreased as much as expenses have decreased.

Negative trend: Any trend where the revenue decreases is concerning. However, if a college can keep its expense changes in line with its revenue, that works for a while.

Any business strongly prefers consistent revenue growth. It’s an indication of a good product or service.

Remember, it is the trends that are most important to consider. If you see differences that concern you among the colleges you are considering, share your concerns with your admissions representative.

Ask them to share explanations of why the numbers in any category don’t compare well to other private colleges you are considering.

Use their responses and the data in the College Viability App to make a more informed decision about the college(s) you are considering.

 

Summary

  • The FTE (full-time enrollment) should be positive. The larger the increase over the six years, the better. If it is a negative number, the trend over these years suggests your college may not be as strong as its competitors with better enrollment numbers.
  • Admissions yield with a negative number suggests a larger number of students are not accepting a college’s admission offer. A positive number can suggest more students are accepting their admission to a college.
  • You will want to see the graduation rate increase over the reporting period. More importantly, if you access the College Viability App, click the “Grad Rates” button. Any number around or below 50% is not good. A graduation rate of 70% and above is a reasonable minimal target.
  • The change in core expenses should be less than the change in core revenues. When expenses are not keeping up with revenues over a six-year period, it can be viewed as a significant indicator of bad financial health.
  • Increasing endowments suggest a college maintains a financially fruitful relationship with alumni and other charitable groups. The larger the increase in the endowment assets, the better. Small increases indicate the college has yet to develop those resources. A negative number in the endowment suggests a college is in deep trouble. It probably has drawn down that money just to keep the lights on – not a good use of endowment funds.

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The CV App is available at no charge through September 30, 2020 to Road2College followers. Click here for your courtesy access.

The College Viability App was created to provide families with an easy-to-understand resource of what to look for regarding a private college’s financial health. 

The College Viability app does not predict whether a private college will close or not. Some colleges have performed better than others over the past six years. You can compare and make your own judgment. It is important to note that we use the most recent federal data available. There is usually a 12-18 month lag time before a private college’s data is posted. Here is a link to a YouTube tutorial. 


Gary Stocker

Gary Stocker

Gary Stocker is a college finance professor and former Chief-of-Staff to a small college president. His research on the financial health of private colleges provides families the opportunity to make a more informed decision about the viability of their college selection.
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