November 19, 2019; Inside Higher Ed
A college-advising company known as Edmit carefully collected data and created a list that examined the finances of 946 private colleges and projected how many years some of them might have until they ran out of money and closed. But you won’t see that list anytime soon, as multiple threats of lawsuits led the project to be scuttled at the last minute.
“The sample,” Paul Fain at Inside Higher Ed reports, “included 946 nonprofit colleges that had provided sufficient data to make projections based on the US Department of Education’s Integrated Postsecondary Education Data System (IPEDS) and other federal reporting sources, such as tax filings. The period examined was from 2002 to 2017.”
At NPQ, we often cover financial challenges faced by universities. Small private nonprofit liberal arts colleges have come under particular strain. Massachusetts’s board of higher education, prompted by the closing of Mount Ida in 2018, is now implementing regulations to “screen and monitor the financial stability of independent colleges and universities in the Commonwealth, with the goal of protecting students from the extraordinary disruption caused by abrupt institutional closures.”
Mount Ida is not the only school to have closed. Others include Southern Vermont College, Green Mountain College, Marylhurst University, Concordia College of Alabama, Marygrove College, Newbury College, and Grace University. Because Edmit examined data back to 2002, one can see whether the model accurately predicted the closure of these schools. Except for Mount Ida, all of those campuses were rated as being in danger of closure. The indicators, in short, are solid, but imperfect.
The need for financial information is clear, but communicating the data is complicated. How does one inform parents and students about financial challenges without causing a “run on the bank” situation? In short, a lack of care could make the projections themselves a cause of institutional decline.
The model analyzed “what the school’s finances are like if they stay on their current path,” Stephen Cecchetti, one of the two Brandeis economists who helped oversee the project, tells Fain. “Put simply, it’s an estimate of financial resources divided by the college’s ‘burn rate.’” Edmit based its model on four primary variables: investment return on endowment funds, tuition prices, tuition discounting, and faculty and staff member salaries.
For students, the stakes are high. As Fain explains, “An abrupt college closure can thrust them into chaotic situations. Even students at colleges that close in an orderly fashion can suffer negative effects. Their credits might not transfer fully, or they might have to travel farther from home to get to class. Some never re-enroll after their college closes.” Before the data set was quashed, Fain reports that Inside Higher Ed planned to write a news article that described the list, interview presidents of some at-risk colleges, and discuss data limitations.
As Rick Seltzer notes in a companion article to Fain’s, “Colleges, universities and the government entities that regulate them have long been skittish about publishing ratios, metrics, and models that seek to make plain which higher education institutions are in financial danger.”
Even so, Edmit might have upped the ante by not only seeking to report on financial health, but by claiming to project, even as an estimate, how many years a college has left before it closes. As Seltzer points out, long-term financial projections, no matter how good the data, have lots of possible pitfalls, because future behavior is uncertain. As Seltzer writes:
Accountants can count the amount of cash a college has in the bank, the revenue it brings in, and the size of its endowment. But it’s much harder to quantify how much money its alumni might be willing to give if they find out it’s in trouble.
So too is it hard to say exactly how much and how quickly any individual college can slash spending. Different staffing structures and facilities costs at colleges can make it much easier or harder to save money by cutting employees or deferring maintenance.
It’s also hard to predict how much a college might be able to borrow in order to bridge certain financial gaps. A good relationship with a local bank might go a long way toward finding financing on surprisingly lenient terms.
Can financial data be shared without sowing panic? Seltzer notes that in 2017 Forbes published financial grades for private nonprofit colleges and universities. “The grades were on a curve—Forbes didn’t hand out any F’s—and drew from IPEDS data,” Seltzer writes. Whether or not the Forbes ratings were adequate, they at least communicated some data, and clearly no panic ensued.
The bottom line: even as one study is quashed, colleges’ financial challenges are not going away. If colleges fail to communicate meaningful financial stability information to parents and students, they shouldn’t be surprised if another Edmit-style study comes their way.—Steve Dubb