Will Your College Close?

When things are bad enough, everybody knows. Programs have been closed or neglected; enrollments have declined; a hiring freeze has been imposed; pessimism permeates the campus. While all of that is true of institutions on the brink of collapse, what about those not yet in such dire straits? How can a college monitor its fitness so that it can head off serious trouble — or plan for the inevitable? Our answer is a risk score that quantifies institutional health.

With that in mind, we created the Market Stress Test Score, a composite of measures reflecting an institution’s market position over a period of years, usually 2008 through 2016. Our measures relate to enrollments, revenue streams, and expenditures. Our inputs are the sort of metrics deans and provosts track carefully. Here’s what we learned from examining the financial health of almost every college in America.

Closings will not be nearly as prevalent as some prognosticators have predicted. Just 10 percent or less of the nation’s colleges and universities face severe market risk. 30 percent face some market risk and are likely to struggle. The remaining sixty percent face little or no risk. 

The financially strong — the winners of our test — are pretty much what one would expect. They are the nation’s most competitive and prestigious colleges, and they will only grow stronger as the market further consolidates. Their worries are principally political: Have their ever-higher price tags made them targets, not just of envy, but of political action as well? 

The financially weak — the losers — are those colleges already at substantial risk. Their circumstances are due to a grab bag of causes. Some four-year publics face sharply declining state appropriations. Some of these financially imperiled colleges have mismanaged their endowments and adopted risky pricing strategies that yield ever higher discount rates and little or no enrollment increases.

The really unlucky colleges have suffered a double whammy over the last decade: higher discount rates that yield less tuition income per student coupled with enrollment declines yielding fewer students. Most losers have also experienced financial shifts large enough that budget reductions alone are unlikely to yield sufficient savings to offset losses in revenue.

Leaders of financially stressed colleges may respond to our diagnoses by saying, “Tell me something I don’t know. What I need are strategies that offer the promise of fixing my problems.” This is a tall order. There are no magic bullets. Nonetheless, the fixed nature of the market provides important clues as to what a rejuvenating strategy might look like.

Our proposed strategies fall into two broad categories: (1) those that focus on the market, such as pricing policies, and (2) those that involve changing the internal behavior of a college in ways that might substantially improve its retention of first-year students. We begin with the former because increasing new-student enrollment is the most obvious short-term solution to a college facing substantial risk. 

Before we get to those clues, two brief caveats. First, our analysis focuses on buyers rather than shoppers. It doesn’t account for the possibility that substantial numbers of would-be undergraduates are not currently enrolled in a college or university. Second, our recommendations assume financially stressed institutions have already tried a few things. They have hired consultants who promise analytic insights. They have invested in new marketing materials. They have hired new staff, having first made their chief enrollment officers vice presidents. They have engaged in ever more substantial price discounting in an attempt to lure more students to their campuses.

growing number of colleges have concluded that the wrench in the works is the now decades-old practice of having a high sticker price, which is ameliorated for almost all students with generous amounts of student financial aid, which, in all but name, are price discounts. What is needed, these colleges proclaim, is not a high-price/high-aid pricing model but instead a low-price/low-aid pricing model. Moving from the old model to the new is called a tuition reset.

While a host of private colleges, often spurred on by trustees tired of defending escalating sticker prices, have talked about resetting their tuitions, to date few have done so. Many of those that have have done it in the last five years, making it difficult to judge whether the resets generated enrollments and net-tuition revenue sufficient to cover operating costs. There have been only a few credible studies on the topic, and they ask the same basic question: Is a tuition reset worth the attendant disruption and risk?

One study is by Laura Casamento, at the time Utica College’s executive vice president and now the college’s president. Researched and written while Utica was pursuing a tuition reset, Casamento’s 2016 study was a cautionary tale, warning colleges considering a tuition reset to be both cautious and purposeful. “Most colleges and universities that have implemented a tuition price reset strategy have done so with negative or mixed results,” she explains, “because the strategy was not part of a larger, comprehensive strategy to elevate the brand of the institution.” A comprehensive approach would require, she writes, “linkages to academic quality and program delivery, investment in institutional branding, revenue diversification and risk mitigation.” Simply adopting a tuition price reset in isolation means that “price — and only price — is the story.”

Casamento’s advice is worth remembering. Each of the two institutions in her sample of four whose tuition resets produced the sought-after stabilization of net-tuition revenue had “a story to tell in terms of investment and enrollment growth” in the form of larger freshman classes, new buildings, and/or new academic programs. “Both colleges proclaimed their institutions were resetting tuition from a position of strength, not desperation.” The less successful institutions did not have the financial strength or expertise to effectively market their institutional brand and did not have a story of investment and growth to tell.

Just as important was due diligence. A tuition reset requires complex planning. “The decision cannot be rushed,” Casamento writes. “Only two of the four colleges participating in the study utilized outside consultants and they were the only two colleges in the study that experienced an increase in undergraduate tuition revenue in the first year of the tuition price reset implementation.”

Another study of price resetting, by Andrew S. Armitage, an experienced institutional researcher, was undertaken two years later. Armitage identified 12 private, not-for-profit colleges and universities that had implemented a reset, and then tracked their performance for the two years following the reset. The reduction in sticker price among these 12 private colleges ranged from a low of 8 percent to a high of 43 percent. On average, there was a 25-percent reduction in published sticker prices. The results were mixed.

In the two years prior to the reset, average enrollment at the 12 colleges was on a downward slope. They enjoyed enrollment increases of 13 percent in the year of the reset, another double-digit increase the next year, and then a 3 percent increase in the second year after the reset. Colleges selected as controls for their similarity to those resetting generally headed in the opposite direction. Complicating matters, while enrollments increased, net tuition did not at three quarters of the resetting institutions.

Communicating the pricing cut was key. As one campus leader told Armitage, “The first question the media asked was, ‘How can you do this? How can you cut your tuition 43 percent?’” Most campus leaders Armitage talked with for his study were blunt about the idea that a reduction of a college’s sticker price was an early warning of trouble to come. One interviewee explained: “This must mean they’re in trouble. This must mean it’s a gimmick, and there’s bound to be some fine print in there.”

So when it comes to tuition resets, a positive result is anything but guaranteed. But despite the risks, this is a strategy that can buy time, perhaps as much as five years. In the long run, however, even a fundamental change in pricing policy is not likely to protect institutions at substantial market risk. The alternative is either to grow one’s enrollment or reduce costs. 

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