1 in 10 Colleges Is Experiencing “Acute Financial Distress”

Recently, Moody’s Investor Services, the credit-rating company, released a new report on the higher education industry. Its outlook for the U.S. higher education sector is negative. No surprises here. Yet some may be surprised to learn that, in Moody’s judgment, approximately 10% of the public and private rated universities rated by them are “experiencing acute financial distress due to falling revenues and weak operating performance.”

That’s a large number of schools to be on the financial ropes. And I wouldn’t be surprised if the number grows, particularly when we have a stock market correction that cuts into their endowments and the balance sheets of families of prospective and current students.

I also wouldn’t be surprised if Moody’s is understating the number. But I confess part of that comes from my skepticism in Moody’s ability to assess risks well. History has shown that, if anything, Moody’s understates risks (e.g., its rating of junk bonds as AAA leading up to the 2008-09 financial crash).

I’m also a bit skeptical because of my own experience with Moody’s. They have some smart people working for them to be sure, but I’m not certain they have any people with operational experience. They don’t always ask the right questions or pursue the right leads.

Finally, I think Moody’s is far better at looking in the rear view mirror than looking around the corner in the road ahead. The situation had turned negative long before Moody’s spread the word. There are two possible explanations: they didn’t see it coming or they’re more concerned with catering to their client base (those who issue and market bonds).

In any case, Moody’s is now sounding the alarm about higher ed, which should be relevant to two groups of people: those who purchase bonds issued from one of the financially precarious institutions and prospective students. It’s the latter group that concerns me. Continue reading

Really Bad News for Private Colleges

According to this article by Anna Bernasek in The New York Times, the net worth of the typical American household has plummeted by 36% in the past 10 years, specifically, dropping from $87,992 to $56,335. This is really bad news for private colleges.

You might think only well-heeled families send their kids to private colleges. You’d be wrong. In fact, when you look at the income figures for families of students attending many of our private colleges, you’ll find that, in many cases, they are lower than comparable figures at many of the state schools.

Yet, on average, they’re paying a premium for the privilege of attending a private college. Why do they do this? There are several reasons.

Factors include:

  • religion (there remain many religiously affiliated colleges);
  • proximity (most students want to attend college within an easy driving distance of their homes);
  • sports (a third or more of the student body of many private colleges participate in intercollegiate sports);
  • a false sense of quality (many students think private schools are better even though the evidence doesn’t support it); and
  • size (many students are attracted by small campuses).

For these and other reasons, families have been willing to pay a private-college premium. But the data suggest fewer families are able to pay it. There simply isn’t enough money in the family piggy bank.

For the past decade, this shortfall has been bridged by more and more student loans and higher and higher tuition discounts. But that’s an unsustainable strategy.

Eventually, more and more families, both out of necessity and an increasing awareness that an unmarketable degree from a relatively unknown college with a weak reputation has a poor return on investment, will opt for lower-cost public options. And more and more colleges will be unable to sustain themselves on a cash stream that is simply inadequate to keep pace with the competition. Meanwhile, eroding demographics (fewer and fewer high school graduates within private colleges’ market segment) exacerbate the situation.

This is a problem that has been brewing for years. Some institutions have been working hard to hedge these risks. I suspect most have not.

Is Bill Gates Right?

Earlier this week Bill Gates addressed as gathering of college and university business leaders. The forum was the annual meeting of NACUBO (National Association of College and University Business Leaders). My friend Lucie Lapovsky relayed the content of Mr. Gates’s comments in a piece she penned for Forbes.

Gates opined that we’re going to see radical change in higher ed. He expects major innovation. As a consequence, he expects we’ll have fewer schools (i.e., the merger or closure of colleges).

He thinks colleges will have to become much better at measuring and demonstrating the value they contribute. And much more effective in helping difficult students succeed.

I’m not sure Gates is right. Continue reading

Those on the Inside Know Colleges Are in Deep Trouble

The 2014 Inside Higher Ed Survey of College and University Business Officers was just released. You can read about it here (and also find a link to the full report).

As with most of these kinds of surveys, there really aren’t any surprises. There is merely confirmation of what we already knew — in this case, that college and university administrators who are responsible for the financial affairs of the institution are fully aware of the financial crisis enveloping the industry.

The vast majority of the institutions’ chief financial officers concede higher ed is in the midst of a financial crisis. And the majority isn’t confident of their institutions’ ability to whether the crisis with their current financial model.

Yet they’re not doing much about it. Sure, they’re tinkering around the edges, saving a few bucks here and there. But few are seriously considering a revised model, and few are willing to take the significant cost-saving measures necessary to change the equation. (By the way, I can’t blame them, given the lack of support and mean-spirited resistance such measures would surely illicit at many institutions.)

It’s one of the reasons I’m not bullish on the prospects of many institutions to reform themselves. There is simply too much resistance and too little awareness of the reality on the ground and what it means for the long-term prospects of the institutions. Continue reading

The problem is the students, not the colleges. Really?

Libby Nelson in this Vox essay claims the problem isn’t the colleges; rather, the problem is America’s students.

This isn’t the first time I’ve heard this claim. In fact, you’ll hear it quite often if you hang around faculty meetings.

My reply is always the same: if the students aren’t good enough for your college, then don’t admit them.

Of course, admit them they do. Why? Because the colleges want their students’ money. They’re quite willing to take their money even if they think the students aren’t up to snuff. Continue reading

Private Colleges Treading Water At Best

From the annual survey of private, nonprofit, four-year colleges conducted by the National Association of College and University Business Officers (NACUBO), we learn that:

  • the average discount rate for first-time, full-time freshmen jumped 1.6 points this past academic year and now stands at a record 46.4% (meaning that, on average, private college freshmen are charged only slightly more than half of the published tuition);
  • the average discount given to all undergraduates was 40.9%, up from 33.9% just 10 years ago;
  • net-tuition revenue grew by only 1.1% and, over the past 13 years, has essentially been flat; and
  • undergraduate enrollment was down at half of the colleges surveyed.

What’s this mean for students and colleges? Continue reading

Choosing a College Means Managing Your Finances First and Foremost

The level of consumer debt in this country (as a percentage of GDP, per household or any other way you care to measure it) is scary, as is the amount of student-loan debt we’ve accumulated. It’s a recipe for disaster. And, indeed, we’re experiencing one such disaster, which was triggered by the collapse of the housing bubble, and may be on our way to an even worse one. Or not. I’m not in the business of financial or economic forecasting, but I do appreciate risks, which are quite substantial.

So what’s this have to do with choosing a college? A lot. Continue reading

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