Liberal Arts Colleges in Crisis

By Joe Messinger, CFP®

March 22, 2019

3 min READ

Green Mountain College in Vermont is closing its doors after 185 years. Mount Ida College closed abruptly in May 2018. Southern Vermont College is the latest announcing their closing in the beginning of March. Newbury College is closing at the end of the spring semester. Hampshire College in Massachusetts is exploring ways that they can remain open. The closures are not limited to the northeast. “Bennett College, a historically black women’s college in North Carolina, is at risk of losing its accreditation, which would likely lead to the college’s closure.” In New York, the College of New Rochelle is struggling to remain in business. These closures are due to financial challenges across the country. What do we need to know about these liberal arts colleges in crisis?

Why are these colleges closing?

As with any business, it is all about the money. The truth is that demographics are 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.

“Among the private colleges, those most susceptible to closing are the 800 private colleges with enrollment of (fewer) than 1,000 students.” 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.

The declining numbers of students and the focus on larger more “known” colleges are causing these smaller schools to suffer. 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.  

In addition, some colleges took on too much debt during the recession financing new buildings and academic programs. Some colleges like Hawaii Pacific University felt that spending more money on perks like dorms, a fitness center, and other spaces would attract more students. It hasn’t. All that spending has done is rack up huge debt. “By 2015, the most recent year for which the figure is available, it owed $75.3 million in municipal bond liabilities, plus $10 million in mortgage and other debts, federal tax records show.” The total debt burden of today’s colleges tops $240 billion.

Do we care about these closures?

These small liberal arts colleges serve a real need. Many students bloom in this environment of personalized attention where they can fit in with small class sizes. When colleges close, currently enrolled students are left without a finished degree and newly admitted students who turned down other offers are in a mad scramble to find a place.

The loss is keenly felt as in this comment: “So thankful for my time here, for the life change I experienced here, [the] healing I experienced here. So blessed especially to learn under the amazing professors who always gave above and beyond. So much time spent in these walls for my master’s and undergrad …sad my kids will never even have the chance to attend this school.”

The future landscape for some small universities remains bleak, but some are much more financially stable and innovating ways to drive additional revenue.  

It isn’t all gloom and doom for small colleges.

Some are more successful financially than others. This article digs deep into financial viability and reserve ratios from a study covering 14 years of data. “The report says that 88 percent of the colleges in its sample had maintained or improved their CFI scores over the course of the 14 years examined.” (CFI is the composite financial index, an indicator of financial health.)

Colleges are looking to new sources of revenue like adult learners, international students, online education, attracting students from other parts of the country, more first generation students, but some predict that these plans can only go so far without thoughtful planning and forecasting.

What do parents need to pay attention to?

Forbes did a great piece analyzing and rating the financial health of colleges. They used several factors in their ratings including “balance sheet strength and operational soundness, plus certain other factors indicative of a college’s financial condition, including admission yield, percent of freshmen receiving institutional grants and instruction expenses per student.” The Forbes article probes some additional financial measures of health like endowment assets, ratios, and operating margins.

You can search for colleges by name:

• Click here for Forbes 2017 Financial Grades for colleges A to D
• Click here for Forbes 2017 Financial Grades for colleges E to M
• Click here for Forbes 2017 Financial Grades for colleges N to Z

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. Small liberal arts colleges 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.