With Some Colleges and Universities in Financial Trouble, A Checkup is Necessary

Finance
Posted By Donna Fuscaldo on May 28, 2015 at 11:00 am
With Some Colleges and Universities in Financial Trouble, A Checkup is Necessary

Add financial health to the list of things you need to consider when deciding which college or university to attend – particularly if you are thinking of a private one.

The last few months have seen the closure of two private colleges: Sweet Briar, the 114 year-old women’s college that will close at the end of August due to “insurmountable financial challenges,” and Corinthian Colleges, which shut down halfway through the semester and filed for bankruptcy, leaving more than 16,000 students out in the cold.

While most public universities will see their respective states intervene before they go under, some private institutions are at risk, with shaky finances that could cause a problem in the future.

“Across the board, the higher education sector is seeing more significant financial shifts than it has in a long time,” says Jason Lane, vice provost for academic planning and strategic leadership and senior associate vice chancellor for the State University of New York. “The sector with the most concern would be the private, for-profit sector, which has seen significant scrutiny from the federal government and increasing concerns about quality and cost from prospective students, causing a sudden decline in enrollments and eroding their fiscal base.”

Schools facing financial struggles – and sanctions

Earlier this year, the U.S. Department of Education released a partial list of the over 500 institutions that, as of March 1, 2015, were facing financial restrictions called cash monitoring. Those restrictions can be imposed for a number of reasons, including turning in financial statements late or concerns about their financial stability.

Meanwhile, Moody’s Investors Service, which rates over 500 universities in the U.S., including 230 four-year public schools and close to 275 private colleges and universities, found that public institutions have a total of $125 billion in outstanding debt. That amount stands at $85 billion among private colleges and universities.  And things could get worse in the coming twelve to eighteen months. Moody’s is forecasting that operating revenue growth will slow below 3 percent, at the same time that expenses are expected to increase. Meanwhile, although state government funding is growing, it’s still below pre-recession levels and will come with a lot of strings attached.

For further evidence of the shaky state of higher education, consider this: according to Bain & Company, about one-third of all colleges and universities have financial statements that are much weaker than they were several years ago, thanks in part to rising expenses and a significant decline in endowments. Lane says that historically, there have been about five or six closings of higher education institutions each year. He predicts that number will grow over the next decade.

In the past, all families had to do to find a college was follow the rankings from places like U.S. News & World Report. Today, however, that isn’t enough, making the search for the right college or university even more difficult. Understandably, most families and students aren’t experts in poring over financial documents to determine the health of a college or university. But there are ways to spot a school that may be on shaky ground.

1. Check out the bond ratings

Moody’s, Fitch Ratings and Standard & Poor’s, the three major ratings companies, all issue bond ratings on many of the colleges and universities across the country. These ratings are based on the financial stability of the institution and are similar to an individual’s credit report. While these ratings don’t cover every higher education institution and aren’t always spot-on, they can give you a glimpse into the health of a college or university.

2. Review the financial responsibility composite scores

For-profit and non-profit institutions are required each year to submit audited financial statements to the Department of Education. To gauge how the college or university is performing, the Department of Education gives each school a composite score from negative 1.0 to positive 3.0. A college or university with a score of 1.5 or higher is considered financially responsible, while schools below 1.5 but not lower than 1.0 are considered financially responsible but require more oversight. A school with a score less than 1.0 is considered not financially responsible.  You can see where your potential schools fall on the list here.

3. Enrollment trends can provide insight

For-profit colleges are in the business of making money, and they try to recruit as many students as possible to keep enrollment levels up.  If the school you are thinking of attending is seeing an enrollment decline,  it may be a red flag that something is amiss. “All institutions are at least somewhat dependent on tuition revenue,” says Lane.  “If there is an ongoing decline in enrollments, this can be a signal that the institution could be facing financial trouble.”

Although you can never fully guarantee a college will be around for the long term, doing some research and asking the institution about its financial health and enrollment figures are a way to get a sense of its stability. The last thing you want to do is choose a school without doing any homework at all. “Deciding where to go to college is one of the most important investments that one can make,” says Lane. “It’s important to do due diligence to make sure the institution that you decide to attend is going to be around for the long haul.”

Donna Fuscaldo
Donna Fuscaldo is a freelance journalist hailing out of Long Island, New York. She has also written for Bankrate.com, Glassdoor.com, SigFig.com, FoxBusiness.com, Business Insider, Dow Jones Newswires and the Wall Street Journal.

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