How To Identify A College Or University That May Close Down

Level 3 - Advanced Concepts

Welcome back! Last time, we discussed the dangers of applying to colleges that are in danger of closing. You can read more about that here:

The Dangers of Closing Colleges

But as a concerned parent or educator, how do you know that a school is closing? It is not exactly advertised on their websites.

When colleges close, they typically fall into one of two categories:

• Sudden, immediate closures

• Long-term non-viable colleges that slowly fade away over time

In the first category, a college or university provides little to no notice of its change in status. Students typically receive notice and are provided options (if there are any) almost immediately. For example, a student may be notified that

1. College A is closing, effective X date

2. Whether the college intends to allow its students to complete their degrees and if so, under what circumstances

3. If they college will not allow students to complete their degree, what options there may be for them to finish their program (e.g., teach out agreements with other colleges and universities)

In these situations, there is not much you can do. You have to make the best of the situation and find an opportunity to complete your degree.

But what are some of the signs that a college may be in distress?

Part 1: Signs of Distress In A College

Although there are no sure-fire ways to know that a school is in financial distress, there are some ways to be able to identify colleges and universities that may not be in a strong position. These are factors, meaning that while one factor is usually not enough cause for concern, several factors in a given college or university should be reviewed with caution.

1) The college has declining application numbers over a long period of time

Application volume is not everything for colleges, but it can be a canary in the coal mine. Year to year, colleges may see some fluctuation with the number of applications, particularly in the US. The cause for concern is when you see a consistent decline over at least 5 years. As a general rule of thumb, an annual decrease of applications of around 5% per year over 5 years is usually a worrying sign. For those who are more visually inclined, assume a college with 1,000 applicants in year 1 across two scenarios:

In the Normal Range, there is fluctuation, but the overall number of applications are relatively consistent over time. In the Concerning Range, you are seeing a steady decrease over time.

What to do: If you see trends like this, ask the college why they are seeing a decrease in applications. It could be due to a change in major or degree program, or it could be that they are targeting fewer students.

2) A decrease in the number of accepted students OR an significant increase in the acceptance rate

If you notice that a college is keeping either steady or declining number of applications and see a decrease in the number of accepted students, that can a red flag. It means that the college or university is struggling to find qualified students. Colleges usually have two responses: lower admissions standards or attempt to increase spend to attack more qualified students. Most colleges will choose to increase the acceptance rate.

This is very different than a single “weak” class. This is a trend toward lower admissions standards.

Look at the table below for a hypothetical University of X:

If the University of X continues to keep admitting the same number of students, then the competitiveness of the applicants will decrease over time. This means that the students who would have been rejected in 2000 would have a much better chance of being accepted in 2015. The downstream impact is:

• The university shifts down in competitiveness

• College rankings will drop

• Top applicants who may have once seen the college as a “target” school will instead see it as a “safety” and may choose to go elsewhere because of it.

When you add all of this together, the result is a downward cycle: you need to accept more applicants to keep the college going, that downgrades the competitiveness of the college, which then means you begin to lose top applicants, which then leads to an even greater reduction in the strength of the class, and so on.

3) Lack of endowment/heavy reliance on tuition

This can be a bit tricky, but you want to know how reliant a college is on its endowment and tuition to subsidize its operations. Generally speaking, the best thing a college or university can do is to rely exclusively on the interest and dividends it receives from its endowment. That means:

• College A has an endowment of $1,000,000

• College A can produce an annual return of 5% (or approximately $50,000)

• College A’s operating budget would need to be $50,000 to be completely self-sufficient based on the endowment returns

For many colleges, this is simply not possible. Instead, they are reliant in part on a variety of other sources of finances, including tuition.

While being heavily tuition dependent as a revenue source is not inherently problematic, it does make you dependent on student enrollment. For illustrative purposes:

• A school is 70% tuition dependent (meaning that 70% of its budget comes from the tuition dollars it brings in annually)

• The same school has 100 tuition paying students

• That means that on average, every student is worth approximately .7% of overall budget (70%/100 students)

Part of an operating budget is made up of fixed costs, and some are variable. For example, the cost to feed students goes up or down based on the number of students you have as a variable cost. But you must have faculty and staff on campus, whether you have 50 students or 100.

A college or university that is too reliant on tuition dollars runs the risk that they will need to rely on some other unsustainable source of funding (e.g., alumni donations) to continue operating, or they will have to close part or all of the university.

4) The college is on a federal watchlist

The US Department of Education keeps a list of colleges that are being watched for financial reasons in a spreadsheet on their website. Anyone can access it online and search a potential school to see if the federal government is tracking it.

This is a huge red flag. If you find a college on that list, apply and attend at your own risk. Each college and university must submit audited financial statements that are used to provide a composite financial score. This financial score evaluates the overall financial strength of the college or university, not the underlying educational strength.

In other words, you could attend a terrible university from an educational standpoint that is financially strong, while another student attends the best university in the world that has no financial reserves.

5) Graduation rates are declining

One of the other factors to consider is the historical graduation rates of the university. It is important to note a few things about graduation rates:

• Graduation rates DO NOT automatically correlate with the quality of the education received

• Graduation rates usually only look for the number of first-time students who start in a freshman fall and graduate from that specific college or university in 4 years - which would explicitly not include transfers in or out of the college

• Graduation rates vary by institutions - Private tend to have higher graduation rates than public schools, and graduation rates tend to improve based upon household income.

That being said, college graduation rates can be used as a comparison point. If a college has a low graduation rate, investigate how long it has had the rate. If you start to see a trend where the graduation rate is consistently low or is getting even lower, that is cause for concern.

Graduation rates are a factor of students in vs. students that graduate over a certain time. The lower the rate, the fewer students that enroll that are graduating. This usually happens if:

• Support structure is removed (usually due to financing)

• Admissions requirements are being relaxed (usually due to a college or university trying to increase enrollment)

In either situation, it is cause for concern.

Conclusion:

There are many other factors or warning signs.. If you see a college struggling with any or all of these factors, heed the warning signs and do your research before a student commits to this school.

If you know someone applying to or considering college in the future, forward this post to them.