Another Crack at Measuring Colleges' Financial Strength

Efforts to clearly quantify colleges’ and universities’ financial health are back in the limelight amid two developments at the end of this week -- one relating to regulatory oversight and the other focused on students and families as consumers.

A regulatory body for postsecondary distance education on Wednesday decided to keep using a federal financial composite score over higher education associations’ objections. And a start-up company that last year was beaten back from releasing estimates of individual private nonprofit colleges’ years left before closing is publishing a new, modified version of its findings.

The regulatory development came from the National Council for State Authorization Reciprocity Agreements, or NC-SARA, a group creating common interstate standards under which postsecondary distance education operates. NC-SARA’s board voted to keep using federal financial composite scores as a factor in determining whether institutions are eligible to be members of the group.

That vote came after college leaders pushed to suspend the federal government’s and NC-SARA’s use of the financial responsibility score amid worries about the way institutions’ scores will be hurt by coronavirus-related financial stresses. The federal score has long been criticized as being too backward-looking, too focused on cash and too easy to game, but interested parties have not agreed on a replacement.

The consumer-focused development comes from Edmit, a start-up advising company that in November planned to release findings from a financial model projecting how many years private nonprofit colleges had until they would run out of money and likely close. It backed off after threats of legal action from some colleges. The company is releasing a new version of its findings that takes into account coronavirus-related financial stresses while avoiding a controversial element of last year’s plan -- showing each college’s estimated years to closure.

Now, the company’s findings categorize institutions as being at high, medium or low risk of closure. Institutions deemed at high risk were found to be in danger of depleting their net assets within six years, a period that lines up with the time it takes many students to graduate with bachelor’s degrees.

Edmit did not release information on individual institutions before posting the data. It provided a high-level summary of findings to Inside Higher Ed under strict embargo terms limiting what could be shared externally before the data’s publication.

The summary of findings shows closure risks under two projections: one that did not take into account coronavirus-related disruptions and a new projection incorporating financial hits from the pandemic.

The pandemic projection, which the company is using going forward, estimated COVID-19 will decrease colleges’ tuition revenue by 10 percent in a first year and 20 percent in a second year, cut investment returns by 20 percent, and cause institutions to lower their salary expenses by 10 percent. Data for the projections come from the federal government’s Integrated Postsecondary Education Data System.

Under the baseline, noncoronavirus projection, 235 institutions would have been considered at high risk. Another 215 would have been at medium risk and 485 at low risk.

High-risk institutions spike in number by 47 percent under the pandemic projection. That means 345 institutions are at high risk of closure within six years, 110 more than in the pre-pandemic projection.

Under the pandemic projection, another 207 institutions were deemed at medium risk, and 385 institutions were estimated to have a low risk of closure. The number of institutions at low risk of closure dropped by 100 between models, or 21 percent.

Edmit planned to present information on individual institutions’ risk through a search mechanism allowing users to seek information on a single college or university. Information on risk of closure was to be presented alongside other key pieces of information like an institution’s experience with distance education or its reliance on international students.

The company’s founders made several changes to the data and their planned presentation after an outcry and legal threats forced them to scrap the release of their findings in the fall.

“We continued to work independently and have come up, after talking to a number of different stakeholders, with a way we think provides consumers with the guidance and information they need to make more informed decisions about their college enrollment choices,” said Nick Ducoff, the company’s co-founder and CEO (and an occasional opinion contributor to Inside Higher Ed). “It also hopefully alleviates some of the concerns some of the colleges may have had.”

Criticisms and Defenses Abound

Critics of efforts to show consumers a metric quantifying colleges’ financial outlook often point out that no measure will ever be perfect. Any number of events can change the likely course of history, and any number of factors can make a college stronger than it appears in its audited financial statements.

A popular program can take off, bringing new enrollment and positive attention. A major donor can provide a much-needed infusion of money. Or a global pandemic can hit, draining cash reserves, throwing into question the number of students attending college and making online education a critical competency.

So anyone developing a metric has to ask how specific it can be. They need to weigh the answer to that question against the reality that the future will always be uncertain.

“When we talk to consumers and families, they talk in terms of risk,” said Sabrina Manville, Edmit's co-founder. “It was more important for us to provide a sense of risk profile than to predict a number of years that a college has.”

Edmit isn’t the only nongovernment actor examining colleges’ and universities’ financial prospects. Earlier this year, a group of respected academics published The College Stress Test, a book that provided a framework for calculating market stress scores for colleges and universities.

The authors generated scores for more than 2,000 institutions but didn’t include a list of those scores in the book. Instead, they focused on different market factors and strategies college leaders might be able to use to change institutions’ fortunes.

At least one higher ed strategy consulting firm has since started advertising a service helping college leaders calculate their market stress scores using the book’s framework.

Robert Zemsky is a University of Pennsylvania higher education professor and one of the book’s authors. Before the coronavirus pandemic, he estimated 100 private liberal arts colleges would close over the next five years, but he recently told The Wall Street Journal that 200 could now close in the next year.

In the current environment, the issue facing colleges with 1,500 or fewer students enrolled is how much they can shrink and continue to function, Zemsky said in an interview Thursday. He also emphasized how much the models underlying college operations are changing.

If social distancing requirements mean residential colleges can only enroll one person per dorm room, it will cut sharply into housing revenue. Classes will have to be taught very differently if lecture halls can’t be filled as much as they were previously.

“The old way of running the models doesn’t make sense,” Zemsky said.

Few if any experts will say the future is clear for higher education at this moment. But at least some who’ve seen Edmit’s model say it’s in the right ballpark. The methods used seem reasonable, according to Robert Kelchen, associate professor of higher education at Seton Hall University who is on Edmit's data integrity council. (This article has been updated to note Kelchen is on the data integrity council.)

“The assumptions for revenue losses may even be conservative, but colleges will also try to cut expenses by more if the revenues go down,” Kelchen said.

To some, pandemic-related stresses are likely to hit hardest those institutions that were already weak. The coronavirus is exacerbating existing market challenges while adding new ones.

Trace Urdan is managing director at Tyton Partners, a strategy consulting and investment banking firm. He has no formal connection to Edmit, but the company’s latest work has been described to him.

From a consumer standpoint, mounting market pressures suggest a need for more disclosure, not less, Urdan said. Student populations were already expected to grow less affluent in the coming years, potentially constraining revenue sources for institutions that were already straining to balance budgets.

Even colleges that are not closing abruptly -- that is, the overwhelming majority of all U.S. colleges and universities -- are still going through an incredibly painful process of cuts and budget adjustments.

“The notion that there should be some kind of easy tool for parents and families,” Urdan said. “It’s a product whose time has come, for sure.”

Still, some of higher ed’s defenders have pushed back on the idea that private companies can develop a financial responsibility metric that isn’t self-serving. Even if modeling is drawn from public data, models require assumptions that can be skewed toward one conclusion or another.

But nothing prevents colleges from being self-serving in a debate. Leaders who believe in their institution’s mission would have reason to try to prevent new financial metrics from surfacing. They wouldn’t want predictions of a college’s closure to scare off students and become a self-fulfilling prophecy.

“If you’re experiencing financial challenges and you are trying to claw your way out of it, having somebody flag you in the red zone is not going to help your issues,” Urdan said.

Government-Backed Scores to Settle

The discussion about privately developed metrics is different than the one unfolding in parallel about federal financial responsibility composite scores.

Any privately developed and marketed metric is likely to be consumer focused, affecting how families make decisions in a competitive market. On the other hand, the idea of suspending or changing the federal scoring system can impact what colleges are allowed to do, whether they receive additional federal oversight and whether they need to secure access to credit in order to receive federal financial aid funds.

“In the short-term, suspending the financial responsibility standards will prevent a potential disruption for students studying via distance education,” wrote the leaders of the National Association of Independent Colleges and Universities and the American Council on Education in a March 23 letter urging a waiver of financial responsibility standards for three years.

Any institution with too low a score would be disqualified from participating in the NC-SARA compact, meaning it couldn’t offer distance education to out-of-state institutions at the very time when the COVID-19 pandemic forced students to study from home, they wrote.

“In the long-term, the near total loss of auxiliary revenue at many independent institutions of higher education could force leaders at private nonprofit colleges and universities to consider extraordinary financial decisions immediately regarding employment, student services, or other essential functions in order to make passing scores for the end of the fiscal year,” the letter continued. “Many private nonprofit colleges and universities are expending significant resources and do not have the institutional reserves necessary to weather the current economic storm without a significant impact to their institutional composite score.”

After its board voted to keep the scores, NC-SARA walked the line between affirming financial standards and agreeing that changes to the current metric are needed.

“Now more than ever, NC-SARA has a responsibility to maintain strong standards to assure the quality of interstate distance learning, and keeping watch over the financial health of institutions is an important accountability pillar that will remain a key part of our evaluative process,” said the organization’s CEO, Lori Williams, in a statement. “The NC-SARA Board voted to continue our use of the federal financial composite scores while reiterating our call for the Department of Education to explore new and enhanced standards to better evaluate institutions’ financial standing.”

The financial responsibility score is an “imperfect metric to evaluate the entire sector,” Barbara Mistick, president of NAICU, said in an interview Thursday. Leaders need to find a new measure, she said.

“There is interest across the board to make improvements to a reliable federal metric so that it’s not left up to regional accreditors or left up to state-by-state systems,” Mistick said. “The only way to really resolve this is to have a negotiated rule-making session. That’s the fix that we need.”

How High Are the Stakes Right Now?

The debate over finding the right metrics, who should develop them and what they should be used for is wrapped up in the question of how much colleges and universities are threatened at the moment.

Mistick argued that colleges and universities have more staying power than skeptics acknowledge.

“We have survived other pandemics, we have survived world wars, we have survived recessions, we have survived depressions,” Mistick said. “The idea that everything is going to fall off the cliff tomorrow -- I think that’s an unreasonable amount of angst or fear.”

To be sure, college closures affecting many students have tended to be collapses of large for-profit chains. Private institutions closing this year have been relatively small in size, affecting hundreds of students. For example, Holy Family College in Wisconsin, which announced this week that it will close, enrolled roughly 450 students.

But families affected by closures may care less about the strength of the sector than they do about their own experiences.

Students affected by colleges closing are emotionally attached to the institutions shutting down, according to Heather Maietta, an associate program director and associate professor of higher education administration at Regis College. Maietta has been researching students who are forced to transfer because their colleges close, students she calls forced transfer students.

Such students go through stages of grief, she said in an email.

Would more transparency around financial viability help?

“The short answer is yes,” Maietta said. “In our research, the majority of the forced transfer students we interviewed were searching for receiving institutions similar in size, scope, and culture to their sending institution. In several of these instances, the institutions being considered may themselves be in questionable financial status. Yet it was clear from the interviews the students were unaware of the financial standing, nor had they researched or asked about the financial vitality of the receiving institutions. Students simply do not know how to retrieve this information, nor are they even aware they should be asking financial questions.”

Challenges are likely to be even steeper for those unfamiliar with navigating higher education, like first-generation students, she added.

Still, deciding whether more financial transparency is necessary, or what form it should take, remains elusive.

“Transparency is difficult to do in practice because colleges push back so hard,” said Kelchen, of Seton Hall. “I understand why they push back against things like the financial responsibility score that look at how they were performing three years ago. On the other hand, colleges can’t keep fighting efforts that are trying to use the best data available, because for students and families, this is a major decision about where they go to college. They want to know: Will the college still be around in two years, four years or six years?”