Many small liberal arts colleges are closing: Don't borrow money to attend an institution that is struggling to survive

Many small liberal arts colleges are on the brink of closing, making them a poor risk for people struggling to decide where to get their liberal arts degrees. Last year, one-third of colleges with enrollments below 3,000 students ran operating deficits, which is a very bad sign.

Even these schools' chief financial officers, who have every incentive to paint a rosy picture, are worried. According to the Wall Street Journal, only about half the CFOs at private, nonprofit colleges rated their institutions as being financially stable.

Small liberal arts schools are trying all sorts of strategies to survive. Some, like Holy Cross College in Indiana, have sold real estate to get cash infusions. Others, like Wheelock College in Boston and Shimer College in Chicago, have merged with larger institutions. And some, like Sweet Briar, are sending out distress calls to alumni, hoping cash infusions from wealthy patrons will keep them afloat awhile longer.

But the handwriting has been written on those ivy-covered walls; small liberal arts colleges have no long-term future. Some may limp along by selling real estate or drawing down their endowments, and some may continue to exist in an altered form by merging with stronger institutions. But the small, free-standing, liberal arts college is dead.

What are the implications of this shake up in the higher education industry? First, if you are shopping for a college, do not take out student loans to obtain a liberal arts degree from an obscure, private college that may be extinct before your student loans are repaid. How will you feel if you are still writing monthly student-loan payments ten years after your beloved alma mater closes its doors?

And college administrators and trustees should think about the ethical implications of continuing to recruit students when all the insiders know that their college is on its last legs. Is it morally right for a college with a string of annual budget shortfalls to hire an advertising firm to lure new students?

Of course, small colleges have the right to fight for survival and to try various strategies to meet their operating budgets. But the time must come when terminally ill institutions, like terminally ill hospital patients, must face reality.

A small college can keep itself alive from month to month with regular infusions of student-loan funds and Pell Grant money, just like a comatose patient can live from day to day by being fed intravenously.

But the day finally arrives when it is apparent that a dying institution is only postponing the inevitable by rolling out new schemes to raise cash or lure more students. And that day has come for dozens and dozens of small, private, liberal arts colleges.

Melissa Korn. Some Cash-Strapped Private Colleges Cut Programs, Sell Assets. Wall Street Journal, August 31, 2017.

Rick Seltzer. Shimer Will Become Part of North Central College. Inside Higher Ed, May 27, 2016.

Rick Seltzer. The Future of the Tiny Liberal Arts College. Inside Higher Ed, November 11, 2016.

Private liberal arts colleges are discounting tuition by an average of 44 percent--undercutting the credibility of their sticker prices

Rouses Supermarkets, a Louisiana food chain, advertised a wine and spirits sale a few days ago. Three Olives root beer vodka--normally priced at $20 a bottle, was on sale--4 bottles for ten bucks!

Did I rush to my nearest Rouses grocery store to stock up on root beer vodka? No, I did not. Instead I formed a negative opinion of the stuff. I concluded that any vodka that can be purchased on sale for two dollars and fifty cents a bottle is probably not worth $20 a bottle.

Private liberal art colleges are risking their long term viability by slashing their posted tuition prices drastically. Last year, the colleges discounted freshman tuition by an average of 49 percent; and tuition for students as a whole were slashed by an average of 44 percent.

In an informative article for Inside Higher Ed, Rick Seltzer identified  two trends that are driving colleges to heavily discount their tuition prices.  First, students' families need increased levels of financial aid in the wake of the 2008 recession. Second, colleges are heavily competing for students due to a downward demographic trend of fewer college-age students in the population. Ken Redd, research director for the National Association of College and University Business Officers (NACUBO) was quoted as saying he saw nothing on the horizon that would dissipate those trends.

Not surprisingly, small colleges are discounting tuition more heavily than large comprehensive universities.  At the small schools, freshman tuition is being discounted by more than 50 percent.

According to NACUBO's report, tuition discounting is happening even as colleges raise their sticker prices. Unfortunately, for many colleges, this tactic has not increased net revenue. “If you adjust for inflation, many schools are actually seeing real decreases in net tuition revenue,” Mr. Redd said.

Increased tuition discounts is just another sign that private liberal arts colleges are under an existential threat. Several have closed already, and others are taking drastic action to cut their costs.

Holy Cross College in Indiana sold 75 acres of real estate to Notre Dame to bolster its financial picture even as it struggled to quell rumors that it will soon be closing. Wheeling Jesuit University is encouraging faculty members to retire early.  Mills College, a small women's college in California, is laying of faculty members. Mills is running a $9 million deficit on a $57 million operating budget--clearly not sustainable.

At some colleges, administrators are finding that a smaller and smaller percentage of applicants who are admitted actually show up as students.  Mills for example, admitted 1,242 applicants in 2013-2014; and only 217 applicants actually enrolled. In 2015, the enrollment picture was even bleaker: 639 applicants were admitted and only 139 students actually enrolled.

Some small private colleges will survive in spite of the bleak financial picture. Those that have real estate to sell, like Holy Cross, can keep the wolf from the door for a few more years. Colleges that have large endowments can draw down those funds to meet their budgets.

But ultimately, a lot of small liberal arts colleges are going to close. Their target customers won't be hurt by this trend; they will simply enroll at public institutions. But faculty and staff  from closed colleges are going to find it very difficult to find new jobs.

References

Scott Jaschik. 'Financial Emergency' at Mills. Inside Higher Ed, May 17, 2017.

Rick Seltzer. Discounting Keeps Climbing. Inside Higher Ed, May 15, 2017.

Rick Seltzer. Holy Cross College to Sell Land to Notre Dame. Inside Higher Ed, May 15, 2017.

Rick Seltzer. Early Retirements at Wheeling Jesuit. Inside Higher Ed, May 10, 2017.