Liberal Arts Colleges in Crisis

By Joe Messinger, CFP®

August 26, 2020

3 min READ

When we originally wrote this blog back in March of 2019, we focused on the small liberal arts colleges that were struggling financially and closing their doors. Small names like Green Mountain College, Mount Ida, Southern Vermont, Newbury, and more were all closing their doors. Today in the time of COVID-19, we know that it is not just the small liberal arts colleges facing cuts and closures. Ohio colleges like University of Akron are slashing academic and athletic programs and laying off staff. Ohio University is cutting staff. Even the mighty Stanford is facing cuts and increased use of their unrestricted endowment funds. Today in 2020, more colleges are in crisis than ever before.

Why are these colleges closing?

Even before COVID-19, demographics were working against them, with the birth rate dropping to 13% after the recession, the number of college-bound high schoolers is shrinking. Without those tuition dollars flowing in, colleges cannot stay open. They do not have other sources for funding. Many are selling real estate or laying off personnel and cutting salaries.

Take that shrinking birth rate and add in a pandemic where students are choosing not to go to college right away, and the number of available students shrinks even more.

Many liberal arts colleges are small and are totally dependent on tuition dollars. They do not offer the high-tech majors that are in demand in today’s career landscape. Grace University in Omaha, NE closed in late 2017 because their primary majors, education and psychology, were not attracting the number of students needed to pay their expenses.

But liberal arts colleges are not the only ones dependent on tuition dollars. Universities of all sizes have varying degrees of reliance on tuition alone and are seeing incoming revenue shrink. When faced with shrinking demand over the past several years, many colleges sought out international full paying students who won’t be coming to the United States this year. Also, colleges are feeling the pressure to cut those tuition bills because courses are being taught online and not in person–despite the fact that the expenses colleges are facing are increasing and not decreasing.

At liberal arts colleges, the declining numbers of students and the focus on larger more “known” colleges are causing these smaller schools to suffer even more. They are struggling to market their brand and be found by students who would be a good fit. They simply can’t compete with the marketing machines at large universities that are recruiting students from all across the country.

Tuition decreases are not the only problem. States who are facing their own financial crisis are cutting funding to colleges. In March 2020, Ohio cut $110 million from colleges for the last two months of their budgets. State funding had already been shrinking drastically over many years. In addition, some colleges took on too much debt during the recession financing new buildings and academic programs. Finally, college endowment investments are impacted by market performance.

It isn’t all gloom and doom for colleges.

Some are more successful financially than others and a lot of that success depends on management. How will colleges respond? Will they be nimble enough to make the smart decisions? Some argue that simply seeking out alternate sources of income like vocational certificate programs and increasing marketing is not enough to save colleges that neglect their primary product–a quality education that meets the needs of today’s students.

What do parents need to pay attention to?

Forbes analyzes and rates the financial health of colleges. They used several factors in their ratings including endowment assets, primary reserve ratio, viability ratio, core operating margin, tuition as a percentage of core revenue, return on assets, admission yield, percentage of freshmen getting institutional grants, and instruction expenses. The complete ratings list can be found here (scroll to the bottom…you can search by name.) Note, this list is from 2019.

Families will have to be a little bit like a detective and dig a bit to find out more. Pay attention to the news coming out of the college. Read the local newspapers. How are they handling things? How is their enrollment trending? Are they cutting tuition for practically everyone in order to fill seats?

In addition, families can search for the college in the College Financial Fitness Tracker from the Hechinger Report which is based on data from the National Center for Education Statistics, a part of the federal Department of Education. However, “the scores show the estimated amount of financial stress on an individual institution after the 2019-20 academic year without attempting to quantify the still-uncertain effects of the coronavirus crisis.”

The financial health of colleges is just one more factor families need to keep in the back of their minds when they are searching for a university. All colleges are feeling the financial impact of the pandemic. As far as those small liberal arts colleges, they serve a real need and are a great fit for certain students; however, be sure that they have the financial strength to serve your student well in the years to come.

Originally published 3/2019
Updated 8/2020