Lingering Covid stimulus money, and rising stocks in 2021, gave a temporary financial boost to scores of zombie private colleges. Some of the weakest colleges have embarked on desperate strategic pivots but few will likely succeed.
By Emma Whitford with Matt Schifrin, Forbes Staff
Inless than a month, California’s Holy Names University, a 154-year old Catholic college founded by an order of French Canadian nuns called the Sisters of The Holy Names of Jesus and Mary, will be shutting down permanently. Its 60-acre wooded campus, with breathtaking views of San Francisco Bay and Oakland, will be auctioned and its 1,000 or so full time students, 70% of which identify as people of color, will have the option to transfer to another fiscally challenged small liberal arts college 26 miles away, Marin County’s Dominican University.
In January, Dallas-based Preston Hollow Community Capital, a $1.4 billion social-impact oriented private equity firm with an affinity for troubled colleges, sent Holy Names’ CFO a letter announcing it had officially defaulted on the $49 million municipal bond issue it owned paying 7%, issued just three years prior. The financing was part of a five-year strategic plan by the administration and Board of Trustees of Holy Names to somehow reverse its inevitable financial tailspin, in which operating revenues have fallen short of its expenses by several million each year.
2023 Forbes College Financial Grades
The academic portion of its turnaround plan, dubbed SOARS (Social Responsibility, Oakland-Centered, Academic Excellence, Radical Engagement, Sustainable Learning) essentially leaned into what hundreds of other similar colleges across the nation are professing and marketing. The “new” HNU, pledged to attract and retain diverse faculty, target non-traditional learners, including adults looking to complete their degrees and emphasize skills-based training and career prep. Of course, more online and hybrid classes would be offered, along with a computer science concentration and a new degree called “ethnic studies,” and as a sweetener parents of enrolled students had the chance to take two free courses at Holy Names.
“We want Holy Names to be that destination spot, not only for our students who start here, but every member of their family and community who believes that they want to soar the way that Holy Names graduates soar,” gushed then-provost and vice president for academic affairs Sheila Smith McKoy in February 2021.
Unfortunately the resuscitation and quick demise of Holy Names University is scene that is likely to play out more over the coming years. Forbes 2023 College Financial Grades ranking, which assesses the operational viability and balance sheet strength of more than 900 private colleges in the U.S., found that a year after Covid-19 shut down campuses, colleges had, for the most part, pulled off a “return to normal,” and their finances looked better as room and board revenues rebounded as well as a return of in-person events—reunions, conferences, weddings, and sporting events—brought back opportunities for auxiliary revenue. Federal assistance continued to trickled through from the American Rescue Plan. This has given many struggling schools a false sense of hope.
“Many schools are not prepared to throw in the towel,” says higher education finance veteran Fred Prager, Senior Managing Director at HilltopSecurities. Instead of seeking to close, merge, or make a major strategic shift to attract non-traditional students, struggling colleges move to what Prager calls an interim phase, where they’ll independently overhaul pedagogy, programming and delivery to try to build back their enrollment, often using funds they will never be able to pay back. “It’s dilutive and it’s misleading to the most important stakeholders, which are students.”
According to Forbes survey, hundreds of the nation’s private, not-for-profit colleges have dwindling enrollments, puny endowments and little in reserves despite earnest efforts in recent years to belt-tighten.
Says Prager, “Small liberal arts colleges continue to be stressed. All the pandemic did was simply delay the inevitable.”
Higher education experts have long warned of an upcoming demographic cliff, when the number of college-going 18 to 22-year-olds will precipitously decline around 2025. Small private colleges and regional public colleges in some parts of the country, particularly in the northeast, are already feeling its effects.
Hampshire College appears to have successfully pulled itself back from the brink—for now. The small liberal arts school in Amherst, Mass., earned an A- on Forbes’ annual financial grades list this year, up from a D in fiscal 2020. In 2019, then-president Miriam E. Nelson sought to merge the college with another institution after enrollment had declined to around 1,000 students from a peak of 1,500 students in 2011. Students and alumni revolted, and the merger news tanked enrollment even further—only 15 students enrolled in the fall of 2020.
Since then, college administrators have managed to right-size the budget—according to federal data, the colleges’ revenues increased by more than 50% between fiscal 2020 and fiscal 2021, and its expenses decreased by about 20%. Hampshire, whose pedagogy boasts being “Urgent, Unbounded, and Entrepreneurial” and whose students are neither graded or required to select a major, is nearing the end of a multi-year capital campaign that aims to raise $60 million. The college has so far brought in about $40 million, including a $1 million gift from alum and Stonyfield Organic founder Gary Hirshberg, and an anonymous $5 million gift given in honor of alum and filmmaker Ken Burns.
Hampshire has recently deployed a new strategy to boost enrollment. It’s trying to poach disillusioned students from New College of Florida, the progressive public liberal arts college in Sarasota, Fla., that has come under attack by governor Ron DeSantis, who recently overhauled its board of trustees appointing five new conservative members. Hampshire is even offering to match Florida’s lower tuition.
Notre Dame de Namur University, a tiny, 170-year-old Catholic college in Belmont, Calif., about a mile from Oracle’s Silicon Valley campus, is currently in the throes of staving off its demise. In 2021 it ditched offering baccalaureate degrees and jettisoned sports programs to focus solely on graduate and continuing education. (Forbes no longer assigns a financial grade for Notre Dame de Namur because the institution does not enroll undergraduates, but the school scored a C in fiscal year 2019.) The new plan is being financed by the Sisters of Notre Dame de Namur, but in the very crowded market for graduate degrees in areas like business and education, the school’s pivot may be akin to a Hail Mary pass.
For every college that pulls off a successful strategic pivot, most others will fail. This year, Bloomfield College in New Jersey, Medaille College and Cazenovia College in New York, Presentation College in South Dakota, Cardinal Stritch University in Wisconsin and Iowa Wesleyan University announced they would wind down operations after the spring semester. All six institutions have earned low financial grades in Forbes rankings for years, indicating that they had been in severe financial distress.
Tobuild Forbes annual college financial grades list, we pulled the latest available financial data from the National Center for Education Statistics, which covers the fiscal year that began in July 2020 and ended in June 2021. In total, we ranked 906 colleges that enroll at least 500 full-time students. (For more on our methodology, see below).
The numbers revealed a significant bounce back from a dire fiscal 2020. One hundred and eighty-five colleges earned at least an A—nearly four times the number of A-ranked schools Forbes counted in fiscal 2020—and 111 schools scored an A+, signaling they were in great financial health. About 20% of colleges earned a C or worse, compared to 60% of schools in fiscal 2020. Only 20 schools earned a D, the lowest possible grade, down from 226 colleges in fiscal 2020.
These numbers jive with overall ratings for the higher education sector. In December 2021, Moody’s Investors Service changed the outlook for higher education to stable after holding it at negative for several years. S&P Global and Fitch Ratings followed in January, moving higher education’s outlook to stable after four years of negative outlooks. With students returning to campus in the fall of 2020, opportunities for auxiliary revenue increased, enrollment began to bounce back at private, four-year institutions and state funding for public colleges increased.
After the pandemic forced most colleges to offer classes virtually, many institutions embraced online learning and began to expend capital or take on debt to expand these programs. Historically much of higher education borrowing was tied to dorms and athletic facilities, known to accountants as “property, plant and equipment.” However, online-only schools like California’s National University were expanding rapidly and taking on more liabilities, but the borrowings weren’t related to constructing new buildings. To better align our financial grades with the shift toward digital learning and other spending to fund operational growth, Forbes adjusted its viability ratio to take into account school’s total liabilities instead of looking exclusively at debt related to property, plant and equipment.
“What we’ve seen over the past three to five years is most schools have been issuing fixed rate debt because interest rates were so low,” says Jessica Wood, senior director and sector lead for education at S&P Global. While capital needs still make up the lion’s share of colleges’ borrowings, says Michael Osborne, vice president and senior credit officer at Moody’s Investors Service, some colleges have been taking on debt to finance “working capital.”
Higher interest rates and skittish institutional buyers for higher education debt, much of which is tax exempt, has created a difficult environment for needy colleges seeking funding says Moody’s Osborne “Sales volumes are low across the sector and refinancing opportunities are not as common in this higher interest rate environment.”
The other macroeconomic headwind for higher education budgets is inflation. Wages are rising, and faculty, staff and graduate student unions are taking note. Other expenses—utilities, food, supplies—are also pricier.
“At the same time, you have a price-sensitive consumer making more value-based decisions than were made in the past. And what you end up with in many cases is a misalignment of revenue and expenses,” Osborne says. “We expect more of this to occur in fiscal 2024 as higher inflation persists.”
Forbes College Financial Grades are designed to assess a private not-for-profit college’s balance sheet health and operational soundness using the following nine measures. Our data is derived from the Department of Education’s National Center For Educational Statistics. Only schools with more than 500 full-time students were included and public colleges were not graded. Colleges missing more than one of the 19 variables we look at were excluded from our list.
1. Endowment Assets Per FTE (15%): This measures schools’ endowment assets at year end per full-time equivalent student. Amherst, Harvard, MIT, Stanford and Yale each have more than $2 million per student, and Princeton boasts $4.7 million per student. Private colleges generally needed more than $335,000 per student to receive full credit in this category.
2. Primary Reserve Ratio (15%): This ratio broadly measures a college’s liquidity, grading how well its expendable assets could meet its annual expenses without straining its normal operations. Expendable assets are defined as total unrestricted net assets; plus temporarily restricted net assets; plus debt related to property, plant and equipment; minus property, plant and equipment net of accumulated depreciation; divided by total annual expenses. Grinnell College in Iowa, which scored an A+ with a primary reserve ratio of 22.6, could cover 22 years of expenses with its existing assets. By comparison, St. Bonaventure University in New York, which scored a B, has a ratio of 0.9 based on most recent government data. Any college with a ratio of at least 2.4 received full credit.
3. Viability Ratio (10%): This metric analyzes a college’s expendable assets divided by its total liabilities, similar to the primary reserve ratio’s measurement relative to annual expenses. Schools with a ratio of at least 2.5 received full credit, including St. Olaf College, Morehouse College, and Bryn Mawr. Some otherwise financially stellar colleges with high total liabilities relative to expendable assets, like Williams College received lower scores.
4. Core Operating Margin (10%): This measures whether tuition, donations and investment revenues cover a college’s educational expenses by subtracting its core expenses from its core revenues and dividing the difference by its core revenues. Smith College, a women-only school, scored an A+ and had an operating margin of 40% versus Bethel University which had negative margins in fiscal 2021.
5. Tuition As A Percentage of Core Revenues (15%): Diversified revenue streams make any organization more financially secure, and colleges are no different. Schools that get the lion’s share of their revenue from tuition are more vulnerable to enrollment declines and price competition. Tuition accounts for less than 5% of revenues at 14 colleges, including Yale, Pomona, Caltech, Hillsdale College and College of the Ozarks.
6. Return On Assets (10%): This metric divides a college’s change in net assets during the year by its assets at the beginning of the year. Due to a strong stock market in fiscal 2021, full credit was awarded to 266 colleges with at least a 23% return. Benedict College, Albizu University-San Juan, Texas College, Philander Smith College, Allen University, Jarvis Christian University and Claflin University notched a return over 100% in fiscal 2021, and Herzing University-Minneapolis saw its assets rise by more than 420%.
7. Admissions Yield (10%): Any college would rather be an applicant’s first choice than their safety school. Admissions yield measures the percentage of accepted students who choose to attend, and a higher number is a sign of a healthy enrollment. While top ivy league colleges tend to have yields in the 70% range, tiny Martin Luther College in Minnesota and health sciences-focused Clarkson College in Nebraska have yields over 80%. Any school with a yield of at least 52% received full credit.
8. Percent Of Freshmen Getting Grant Aid (7.5%): Colleges that hand out scholarships and grants to a large chunk of their incoming freshmen may be wealthy and generous, but an unusually high percentage in this category is often more indicative of desperation to entice students to enroll. Every school needs well-heeled families paying the full sticker price to boost their coffers. Any college where this is less than 40%, like Tufts University (38%), receives full credit, but colleges like Macalester College and Oberlin College, where 87% and 93% of incoming freshmen receive aid, are penalized.
9. Instruction Expenses Per FTE (7.5%): This measures how much schools actually spend on educating each student. A higher amount reflects a college able to invest in its core purpose. For the second year in a row, Washington University in St. Louis wins top honors with nearly $150,000 spent per student, with Stanford coming in second at $124,000 per student. Meanwhile the largest Ivy League in terms of students, Cornell University, is spending $31,000 per student on instruction annually.
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