Dive Brief:
- Researchers with the Federal Reserve Bank of Philadelphia unveiled a new model that can predict college closures and the most at-risk institutions with a relatively high degree of accuracy, according to a recently released paper.
- The team forecast that in a worst-case scenario for the higher education sector — an abrupt 15% decline overall in enrollment from a 2019 baseline — as many as 80 additional colleges could close each year. That would more than double the average annual closure rate.
- A more gradual enrollment decrease of 15% would translate to an 8.1% increase in annual college closures from the average, representing about roughly five institutions each year.
Dive Insight:
The Philadelphia Fed team released their closure model as colleges face what they describe as “unprecedented fiscal challenges in today’s economic climate.”
Aside from the famed demographic cliff — a dropoff in the population of traditional-age college students expected to start around 2025 — institutions have to contend with costs that generally rise faster than the overall inflation rate and widening skepticism about the value of college degrees.
Because of the obvious financial challenges posed by a sudden downtick in college enrollment, the researchers zeroed in on the possibility to measure its potential effects.
“We conclude that the demographic cliff is predicted to significantly increase the number of institutions at risk of severe financial distress, including closure,” the authors wrote.
To make their predictions, the Fed team collected what the team described as “the most comprehensive data set to date,", which included various measures of enrollment, staffing, revenue, expenses, assets, debt, and financial metrics, such as operating margins and cash on hand.
Using a machine learning model that could analyze many variables and fill in data gaps, the Fed researchers found that out of the 100 most at-risk institutions per the model, 84 actually closed within three years.
The researchers noted that colleges are often major area employers and play a critical role in training the workforce, as well as contribute to the social and cultural life of a region. When they shutter, the ramifications run deep.
But the authors also wrote that focusing on those impacts “should not be taken to suggest that regulators or localities should seek to prevent college closures,” not without a comprehensive study of its value to the area.
“Indeed, extending the existence of an educational institution destined for failure may actually compound the locality’s fiscal problems if the college is never able to survive on its own,” they note.
They also point out that, while nonprofit college closures often grab attention, the “vast majority” of those that close are for-profit.
The authors note that for-profit colleges derive some 90% of their revenue from tuition, making them particularly vulnerable to enrollment changes. They also “are much more likely to exit the marketplace if they do not see the opportunity to make a profit in the future,” the researchers wrote.
Their data also found that “public institutions hardly ever close,” though they might be subject to mergers and consolidation.
