Disruptor 50 Industries: Education

The other college debt crisis: Schools are going broke

Key Points
  • As many as 1 in 5 small private colleges is facing serious financial stress, according to a Moody's analysis.
  • Enrollments are declining, particularly in the Northeast and Midwest, due to changing demographics, tuition price wars and greater emphasis on career training.
  • Schools that have survived are making tough choices, including mergers, curriculum changes and budget cuts.
  • There are few options for students and parents to check out a school's financial condition.
Some small private colleges going broke
Some small private colleges going broke

HIRAM, Ohio — Small, private liberal arts colleges — a staple of American academia since before the founding of the republic — are colliding with new realities including changing demographics, ever-increasing demand for technical skills and competition with bigger and richer schools.

The result, in many cases, is not pretty.

Moody's Investor Services estimates 1 in 5 small private colleges faces "fundamental stress" due to declining revenues, rising expenses and little pricing power when it comes to tuition. Analysts project 15 of the colleges will have closed in 2019 — the largest number in recent memory, and three times the rate just 10 years ago.

And the trend shows no sign of letting up.

"It's here to stay," Moody's associate managing director Susan Fitzgerald said in an interview. "I think we see the higher education sector is in a period of real transformation in terms of how students learn and where they learn."

The closures are concentrated in the Northeast and Midwest, Fitzgerald said, where the demographic pressures — including an aging population — are the highest.

They include Green Mountain College in Vermont, which closed at the end of the spring semester after 185 years. This spring also marked the end of Newbury College in Brookline, Massachusetts, which announced last December that it would be closing after 57 years.

"It is no secret that weighty financial challenges are pressing on liberal arts colleges throughout the country. Newbury College is no exception," the college's then-President Joseph Chillo said in a statement.

Also in Massachusetts, Mount Ida College abruptly closed in 2018, sending nearly 1,500 students scrambling for alternatives and helping spark a Massachusetts law enacted this year requiring state education authorities to screen private institutions for financial issues.

Schools that have survived the shakeout are being forced to look at sweeping and sometimes difficult changes in order to stay afloat, while still trying to hold on to the intimate, personalized approach that attracts thousands of students to the schools every year. Many schools are merging, establishing partnerships, and making sometimes wrenching budget cuts.

Rethinking liberal arts

At Hiram College, a 169-year-old school of about 1,000 full-time students 40 miles outside of Cleveland, President Lori Varlotta knew as soon as she arrived on campus in 2014 that the institution needed some updating.

Hiram College
Katie Young | CNBC

"I knew that small colleges like Hiram need to be thinking about change," she said.

Varlotta, who was previously an administrator at California State University, Sacramento, figured the changes would be marginal. But around the same time, she said, the school needed to refinance its long-term debt, and lenders were not looking kindly on the old liberal arts model.

The result was a top-to-bottom makeover of the school's curriculum and its overall approach. Gone were majors seen as stodgy or less aligned with a career path — including religion, art history and music. In their place are programs in sport management, international studies and crime, law and justice. There is a new emphasis on technology, and all students are required to complete an internship, a study-away trip or a research project in order to graduate.

The college has dubbed its approach "the new liberal arts" and trademarked the term.

"We've added new majors to our conventional liberal arts programs majors that we call market-driven majors that pave a very concrete pathway to various types of 21st-century careers," Varlotta said.

The school points to students like sophomore creative writing major Yidiayah Box, who is also minoring in film studies. She sees the program as a path to a career in media, but without the impersonal nature of a large school.

"I can't even imagine me at a public school," she said. "I'm sure I would still excel, but I wouldn't have that same college feel. I feel at home at Hiram."

Jeffrey Robb, a sophomore majoring in political science and international studies, said Hiram still feels like the small liberal arts school he signed up for.

Hiram College campus
Katie Young | CNBC

"It's very emphasis-heavy on things like the humanities, English, philosophy, stuff like that, that you should have to kind of understand the world around you," he said.

The school also lowered its published tuition rate this year to $24,500 from $37,710. But at the same time, it eliminated some financial assistance programs, replacing them with the option of two free summer classes each year. The idea was to cut back on some of the tuition discounting that typically erodes small colleges' pricing power.

Hiram did manage to get its refinancing — a $25 million tax-exempt bond offering in 2014 at what Varlotta said are favorable terms. But the changes did not come without some pain. The college eliminated more than 20 percent of its faculty — six positions immediately due to the change, and 12 more later through attrition.

But Varlotta said the changes ultimately put the school back on solid footing.

"It was done in a methodical and deliberate way that served us well and has positioned the campus from a financial perspective in a healthy way for the future," she said.

Decision time

The sweeping changes among small, private colleges are yet another source of stress for the thousands of high school seniors who are in the thick of the application season for the 2020-21 academic year: Will the college of their choice be around long enough to grant them a degree?

Moody's Fitzgerald said many schools have been less than forthcoming about their finances until it is too late.

"Most colleges operate as long as they can. What typically causes them to close is that they run out of cash. It's like any other business a liquidity problem. And therefore, the closures are not always orderly," she said.

Mount Ida College in Massachusetts announced its closing on April 6, 2018, just weeks before the end of the academic year.

The new law in Massachusetts requires the state's Board of Higher Education to develop procedures for screening private colleges in the state. College trustees will get new training to recognize financial problems, and the public will be notified of institutions that are at risk.

That type of information can be difficult to come by, particularly when it comes to small private schools where there are no standard requirements to disclose their finances. Colleges are also wary about releasing information that might discourage students from applying, exacerbating their declining enrollment.

The president of the Association of Independent Colleges and Universities in Massachusetts, which represents 57 schools in the state, was critical of the law as it worked its way through the Legislature last spring.

"We should also be vigilant to avoid regulatory overreach that could inadvertently lead to more college closings," Richard Doherty wrote in a Boston Business Journal op-ed in May.

A Moody's analysis of the new law said the legislation could increase the regulatory burden on the schools, but on balance it should be a positive for colleges' creditworthiness if it smooths the closing process.

"There really isn't a lot of easily available financial transparency into some of these schools," Fitzgerald said.

Varlotta encourages students and parents to ask about a school's financial condition.

"Is the college able to pay its debt? Is the college in a good relationship with its bank? Has the college received a clean bill health from its accreditors? Regional accreditors do monitor by the institutions' finances" she said.

Varlotta said she is happy to be transparent about Hiram's finances. But she acknowledges that students and parents rarely ask those kinds of questions.

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