Last week I was shocked to see a credit rating action by Moody’s Investor Service concerning Earlham College. Earlham’s credit rating was downgraded to Baa1 (moderate credit risk) from A1 (low credit risk) and the outlook, according to Moody’s, is negative.
I have a soft spot for Earlham. It’s my eldest son’s alma mater. In many respects, I think he got a great education there. In other respects, I think there were serious shortcomings. (More on that later.)
I was shocked when I read the rating action not so much because of the downgrade (I’ve come to expect downgrades for most liberal arts colleges) but because of what I learned about the depth of Earlham’s problems. For those of you who aren’t familiar with Earlham, it’s a small (~1100 undergraduates) liberal arts college in Richmond, Indiana, founded by the Society of Friends (Quakers). It’s generally regarded as one of the top liberal arts colleges in the country (#65 in U.S. News’ ranking of liberal arts colleges). The median freshmen SAT score is 1240 (math and CR). It’s had the reputation of a school where college professors send their kids.
From what I’ve observed, its reputation as a first-class liberal arts college was well deserved. I admit to being influenced by their past president (now retired), Doug Bennett. I think he was one of the most remarkable college presidents in the country. Bennett set the tone. You got the feeling that Earlham truly cared about its students and worked hard to develop their minds and character.
The small classes and interactive teaching methods did in fact seem effective. Students learned to think critically, write well and have the confidence to stand up in front of a crowd or meeting and represent themselves and their positions well (although, undoubtedly, there were exceptions).
Overall, then, it was fair to characterize Earlham as a superior liberal arts college although not an elite one (such as Williams or Swarthmore), which is why I was surprised by what I read in Moody’s report. Here are the main points:
- Total net tuition revenue has declined by over 22% since 2009
- The discount rate has risen to nearly 60%
- Educational expenses per student have risen by more than 20% over the past five years despite the falling revenue
- Operating cash flow deficits are projected in the $7-9 million range for this year and next (i.e., the college is dipping into its savings)
In short, it’s not a pretty picture from a financial or enrollment perspective. So what do these developments tell us about liberal arts colleges generally? Continue reading