The financial health of colleges and universities is much in the news these days. An enrollment cliff – a drop-off in traditionally aged college students – will hit in the next decade and may threaten more small, regional and marginally resourced public and private colleges and universities. A recent article in Forbes offered some sound advice recently: “If you are worried or even curious about the financial health of a college, ask them. It’s a good, reasonable question for any student, parent or community leader to ask.” But what are the right questions to ask? As long-time university administrators with experience in both the public and private college sectors, we suggest beginning with these five questions:
1. What physical shape is the school in?
Institutions with cash flow problems often put off millions of dollars of maintenance – and it shows. As you tour a campus, you will probably get a feel within the first few minutes of what the campus is like. Is it clean and neat? Is there evidence of disrepair? Do the buildings appear well cared for and technologically up-to-date? All these things shine light on whether an institution has the resources needed to keep its facilities in good operating order. The more you see that concerns you, the more you should wonder if a school has enough money to provide a quality educational experience.
2. How big is the endowment?
When it comes to a college or university’s endowment, size matters. An endowment is a permanent fund that universities and their foundations use to collect and invest funds given by philanthropic donors. Most schools use interest and dividends earned from the funds in their endowment to pay for various things, such as student aid programs and financial support for study abroad and internships.
You can find out what the institution’s endowment is through an online search. Generally speaking, the larger the endowment, the better able an institution is to finance its operations and the more stable it is for the long run. Only 106 institutions have endowments of more than US$1 billion. But the size of endowment isn’t the only thing to consider.
To preserve the value of the endowment spending for both current and future students, historically, colleges were advised to spend only about 5% of their endowments each year. Institutions that spend above that amount over a longer period of time can potentially erode the value of their endowments, unless they attract more donations or gain other sources of revenue.
For that reason, institutions that spend more than 5% assume larger risks for the future market value of the endowment.
An endowment spending rate of more than 5% may be also a sign of budget stress and another potential red flag. There is no single place that you can go to find out the spending rate of the endowment. Some institutions, such as Elon, where we both work, and Yale, publish this information on their websites. Many do not.
Often, the only way to find out is to ask. You might start by asking the director of admissions or chief financial officer.
3. What is the tuition discount rate?
At private colleges, you should ask, “What is the school’s tuition discount rate?” These discounts are actually tuition dollars that families or students pay that are redistributed – for very good reasons – to support students with high financial need or to attract students with special talents. Learning environments that are diverse and vibrant benefit all students. This tuition money gets redistributed in the form of need-based financial awards, merit financial awards and athletic financial awards.
According to the National Association of College and University Business Officers, the average tuition discount rate for incoming freshmen in 2018-19 was 52.2%. When an institution is using 52% of every dollar they take in for discounting, that leaves only 48% for everything else, such as faculty and staff salaries, student support services, facilities and utilities. A tuition discount rate higher than the average rate can be a sign of trouble.
If you have never understood why the sticker price of college is not what you end up paying, a big part of that answer for private colleges is the tuition discount rate.
4. Check databases
Check out federal databases to get key measures about a school’s performance. The College Scorecard, for instance, is a free U.S. Department of Education site that provides information on a variety of measures, including the size of the student body, cost, graduation rates and how much students are expected to earn after they graduate.
The education department also publishes a Financial Responsibility Composite Score for each institution in the U.S. that receives federal aid. This score rates each school’s ability to meet the standards of financial responsibility necessary to participate in federal financial aid programs. The range of scores is a high of 3 to a low of -1. While this simple score might not tell the complete story of a school, it is a key indicator of whether a school is in good financial health.
5. Search online
Get online and broadly research institutions you are considering. Many state university systems are considering mergers because of declining enrollment. Your research will also help you uncover potential trouble spots: Is the school’s accreditation threatened? Has enrollment been on the decline? Has there been frequent turnover in leadership? None of these things bodes well for a college or university in the future.
There are more than 4,500 colleges and universities in the U.S. Most of them can make a major difference in a student’s life. But some are in danger of closing and – in the most egregious cases – are revolving doors of failure. Before you invest your money by paying your own costs or footing the bill for a loved one to attend a particular college, understand that the responsibility for doing research and asking questions is on you.
Author Bios: Leo M. Lambert is President Emeritus and Professor of Education and Gerald Whittington is Senior Vice President both at Elon University