We analyzed 905 private not-for-profit colleges. Here’s a closer look at the results.
Even before the pandemic shocked the nation’s higher education landscape, colleges were troubled. Nearly three in four colleges saw their financial health weaken in fiscal 2020, which ended in June the year the pandemic shut down college campuses. Federal dollars have kept many schools afloat for the past two years, but the full financial consequences of Covid-19 are yet to come.
Florida Memorial University was digging itself out of a financial hole when Covid-19 first arrived on its sunny campus in Miami Gardens. The historically Black university was welcoming fewer and fewer students each year and was saddled with debt from decades-old campus construction projects. With revenues shrinking and no end in sight for burdensome debt payments, something had to change, and fast.
And it did. Almost overnight, the federal government wiped out $41.9 million in debt for Florida Memorial as part of a federal effort to forgive long-standing debt at HBCUs. Soon after, as the university grappled with lost revenues and increased expenses related to Covid-19, more federal aid rolled in. Florida Memorial received two Paycheck Protection Program loans—the first for $2.9 million and the second for $2 million, both of which were later forgiven. Additional funding from the CARES Act and subsequent Higher Education Emergency Relief Funds helped the university patch its budget shortfalls.
“People have been predicting the demise of independent higher education as long as I’ve been in higher education. And we’re still here.”
“The CARES Act money helped carry us through the pandemic,” said Rodney Sobelson, the university’s assistant vice president for finance and administration. “But it also set the stage for us to be able to stand on our own two feet in 2022, as well as 2023.”
Meanwhile, on the other side of a blurry webcam, Paul Friga, a clinical associate professor of strategy and entrepreneurship at the University of North Carolina business school, told a virtual audience in February of 2021 that Covid-19 had the potential to cause the most devastating loss for higher education ever.
“My research suggests that it could be even worse than what you’re hearing,” said Friga, predicting that US colleges and universities could lose $183 billion as a result of the pandemic.
Friga’s prediction was alarming. Higher education officials knew the pandemic posed a serious threat to colleges, but few had floated numbers that high. Experts predicted the pandemic would be the nail in the coffin for colleges that had limped along for years with tight budget margins and no safety net. It was for some, including the California-based Mills College, Concordia College New York and Becker College in Boston. But the feared tidal wave of closures never came to pass.
“People have been predicting the demise of independent higher education as long as I’ve been in higher education,” said Marjorie Hass, president of the Council of Independent Colleges. “And we’re still here.”
Instead, the pandemic and accompanying federal aid had the opposite effect, said Jason Rivera, director of strategic research at the CIC. The relief dollars gave institutions time to rework their business models, make necessary budget cuts, and, supposedly, chart a more sustainable path forward the way Florida Memorial has.
“It’s a weird way to think about the pandemic, but it gave people the space to say, ‘Well, we don’t have time to wait and think and process every single detail. We have to act now,’” Rivera said. “Some things were wildly successful—others not so much.”
Federal relief funding will peter out over the next couple of years, and it’s possible the delayed impact of the pandemic on higher education will begin to reveal itself, Friga said. He is skeptical that most colleges are prepared for that day.
“They are subsidizing their operating deficits with federal support money and doing other things—decreasing cash balances, increasing endowment draws, and in some cases, taking out more debt. All of those are unsustainable strategies,” Friga said. “I anticipate that we are in for a very rocky road over the next five to 10 years, especially for small to medium private and public colleges.”
As colleges prepare for an uncertain future, Forbes took a look at the true financial impact of the first few months of the pandemic. To build our annual college financial grades list, we pulled the latest financial data from the National Center for Education Statistics, which covers the fiscal year that began in July 2019 and ended in June 2020, just three months after Covid-19 began to wreak havoc on campus. In total, we ranked 905 colleges that enroll at least 500 full-time students.
Seven in 10 colleges saw their grades worsen between fiscal year 2019 and fiscal year 2020, which is unsurprising given the immediate effect of Covid-19 on college revenues and expenses. Forty-seven schools earned at least an A, and 31 scored and A+, signaling they were in excellent financial health. Nearly 60% or 539 schools earned a C or worse. No fewer than 226 scored the lowest possible financial grade of D, indicating colleges that are struggling financially. Included in this group are selective eastern colleges like Sarah Lawrence College, Rensselaer Polytechnic Institute and Hampshire College, which nearly was forced into a merger in 2019.
A few dozen colleges saw their financial grade improve this year—among them, San Diego’s National University. (Read about how National is thriving by embracing adult learners, taking a business-first approach and acquiring rivals, including troubled for-profit universities.)
Forbes College Financial Grades are designed to assess a private not-for-profit college’s balance sheet health and operational soundness using the following nine measures. Our data is derived from the Department of Education’s National Center For Educational Statistics. Only schools with more than 500 full-time students were included and public colleges were not graded.
1. Endowment Assets Per FTE (15%): This measures schools’ endowment assets at year end per full-time equivalent student. Stanford, MIT, Harvard and Yale each have more than $1.5 million per student, and Princeton has more than double that. Private colleges generally needed more than $335,000 per student to receive full credit in this category.
2. Primary Reserve Ratio (15%): This ratio broadly measures a college’s liquidity, grading how well its expendable assets could meet its annual expenses without straining its normal operations. Expendable assets are defined as total unrestricted net assets, plus temporarily restricted net assets, plus debt related to property, plant and equipment, minus property, plant and equipment net of accumulated depreciation, divided by total annual expenses. Pennsylvania’s liberal arts and science bastion Swarthmore College, which scored and A+ grade and a primary reserve ratio of 11, could cover 11 years of expenses with its existing assets. By contrast, Georgetown University, which scored a B-minus, has a ratio of 0.64 based on most recent government data. Any college with a ratio of at least 2.4 received full credit.
3. Viability Ratio (10%): This metric analyzes a college’s expendable assets divided by its debt load, similar to the primary reserve ratio’s measurement relative to annual expenses. Schools with no debt received full credit, as did any college with a ratio of at least 2.6. Because of more than $425 million in debt related to its facilities, venerable Williams College (B+) has a viability ratio of only 0.25 versus 6.04 for nearby rival Amherst College (A+).
4. Core Operating Margin (10%): This measures whether tuition, donations and investment revenues cover a college’s educational expenses by subtracting its core expenses from its core revenues and dividing the difference by its core revenues. Little known National University of San Diego, with its adult learner focus, had an operating margin of 59% versus Duke University which had negative margins for fiscal 2020.
5. Tuition As A Percentage of Core Revenues (15%): Diversified revenue streams make any organization more financially secure, and colleges are no different. Schools that get the lion’s share of their revenue from tuition are more vulnerable to enrollment declines and price competition. Tuition accounts for less than 10% of revenues at only 9 colleges, including Yale, Caltech, MIT, Hillsdale College and Brigham Young University.
6. Return On Assets (10%): This metric divides a college’s change in net assets during the year by its assets at the beginning of the year. Full credit went to only 25 colleges with at least a 23% return, including Bard College, National University and Nashville’s historically Black Fisk University.
7. Admissions Yield (10%): Any college would rather be an applicant’s first choice than their safety school. Admissions yield measures the percentage of accepted students who choose to attend, and a higher number is a sign of a healthy enrollment. While top ivy league colleges tend to have yields in the 70% range, tuition-free College of the Ozarks, which Forbes dubbed “Bible Belt Ivy” and has a “work for tuition” requirement, had an admissions yield of 87%. Any school with a yield of at least 52% received full credit.
8. Percent Of Freshmen Getting Grant Aid (7.5%): Colleges that hand out scholarships and grants to a large chunk of their incoming freshmen may be wealthy and generous, but an unusually high percentage in this category is often more indicative of desperation to entice students to enroll. Every school needs well-heeled families paying the full sticker price to boost their coffers. Any college where this is less than 40%, like Wake Forest (34%) receives full credit, but colleges like Ohio’s Oberlin College or Denison University, where 85% and 99% of incoming freshmen receive aid, are penalized.
9. Instruction Expenses Per FTE (7.5%): This measures how much schools actually spend on educating each student. A higher amount reflects a college able to invest in its core purpose. This year, Washington University in St. Louis wins top honors with $140,000 spent per student, with Stanford coming in second at $115,000 per student. Meanwhile the largest Ivy League in terms of students, Cornell University, is spending $31,000 per student on instruction annually.
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