Fitch Predicts More College Closures And Mergers Are Inevitable

Fitch Ratings is predicting more U.S. colleges will close, merge or undergo significant restructuring in the future as portions of the higher education sector face the continuing challenges of declining enrollments, reduced tuition and other revenues, and increased operating costs.

Calling the higher education landscape “bifurcated,” Fitch analysts wrote, “institutions without strong brands that are located in markets with the steepest drop in college-aged population are the most vulnerable to enrollment declines.” Adding to these schools’ problems is they are often located in areas where several other public and private institutions are competing against them for a shrinking pool of traditional college age students, who still make up the largest share of campus enrollment.

The problem is most pronounced for small, nonselective private colleges and some regional public universities, according to Fitch, which noted that colleges enrolling fewer than 3,000 students saw the steepest average enrollment decline of 4.7% between 2015 and 2019. In contrast, larger universities – those with more than 10,000 students – were more likely to see some enrollment growth.

Fitch cited certain “red flags” signaling an institution’s financial vulnerability, including volatility in incoming class enrollments, frequent or unusual turnover in a college’s student recruiting activities, elevated levels of endowment spending for student financial aid, and declines in net tuition revenue either because of changes in sticker price or tuition discounting.

Coupled with revenue woes, colleges are also facing substantial increases in their operating expenses due to inflation, greater labor costs, increased regulatory expenses, and in some cases significantly greater debt due to capital construction and renovation.

While many colleges in financial peril point to the Covid-19 pandemic as the precipitating cause for their current economic crises, the fact is that their plight may actually have been alleviated somewhat because of the three rounds of Higher Education Emergency Relief Fund (HEERF) grants totaling about $77 billion they received to help keep them afloat throughout much of the pandemic. Now those relief funds have been spent. They’re gone. And it’s very unlikely any more federal bailouts will be forthcoming.

The result? The last two years have already seen an uptick in closures of small institutions like Presentation College in South Dakota, Finlandia University in Michigan, Iowa Wesleyan University, Cazenovia College in New York, and Holy Names University in California.

Mergers and takeovers are also occurring, with one of the largest and most closely watched consolidations taking place in Pennsylvania where six public universities in the Pennsylvania State System of Higher Education recently merged into two regional campuses. And earlier this year, Villanova University came to a tentative agreement to buy Cabrini University, a nearby Catholic institution that has struggled mightily with financial problems in recent years. Under that deal, Cabrini will remain open this academic year and then close its doors in June 2024.

At scores of other campuses, steep enrollment drop-offs and the ensuing financial consequences have required severe cost-containment steps, including reductions in faculty and staff, termination of academic programs, forced furloughs, salary rollbacks and even declarations of financial exigency, resulting in the retrenchment of tenured faculty. Other schools have dipped into their reserves or even sold off physical assets to raise operating cash.

The cost cutting has not been limited to small colleges, as the recent events at West Virginia University have demonstrated. There, facing what they estimated to be at least a $45 million budget hole, WVU administrators took steps to discontinue 28 academic programs and eliminate 143 faculty positions at the state’s flagship university.

Fitch advised that a college’s credit standing will be influenced by its ability to correct structural budget deficits, maintain financial flexibility or find an effective partner. “Colleges will need to proactively make decisions on what programs, departments, capital plans, and assets they believe best fit their organizational and strategic goals,” it added.

Heading into the 2023-2024 academic year, Fitch concluded the higher education sector’s fundamentals remain “challenged,” noting that in addition to a smaller high school graduate pipeline, “the value proposition for a college degree is an issue for many prospective students. The labor market remains a solid high-wage alternative to pursuing a degree, and many employers have relaxed degree requirements for entry level job roles.”