Published: June 17, 2017 8:01 a.m. ET
Small private colleges are increasingly in financial danger, while larger name brand private schools are doing just fine.
Roughly one-third of the small private schools rated by Moody’s Investor Service generated operating deficits in 2016, an increase from 20% three years ago. On the other hand, the share of large private universities that had an operating deficit last year dropped to 13% from 20% three years ago.
And the money in the private college sector is highly concentrated among the nation’s wealthiest schools. The top 20 richest private universities have 70% of the total wealth in the sector, according to Moody’s.
One big reason for the diverging fortunes: Slow growth in tuition revenue. Over the past few years, private colleges have been offering discounts on their tuition at record levels, a practice that’s financially riskier for small colleges that have fewer sources of revenue to rely on.
Ever since the financial crisis, students and families have become more discerning about the price and value of a college education. That’s made it more difficult for lesser-known private colleges to lure students and, in particular, students who will pay full price. Students and families are “much more sensitive to the return on the investment” of a college, said Pranav Sharma, a Moody’s analyst. “The market has become more competitive.”
That competitive and financial pressure has put a strain on some small schools. St. Joseph’s college, a 900-student school in Indiana, announced in April that it would close this year, amid “dwindling financial resources.” That announcement follows a spate of closures in 2016, including the high profile shut down of Burlington College, which was once headed by Jane Sanders, the wife of Vermont Senator Bernie Sanders.
“We continue to see a rise in small college closures,” said Susan Fitzgerald, an associate managing director at Moody’s. Still, she added, “we’re not expecting wholesale closures across the sector.”
Larger private schools aren’t immune to challenges raising tuition revenue, particularly as the number of students graduating high school continues to shrink. But these schools are able to more easily compensate for any challenges bringing in tuition dollars because they have other sources of income.
And to a certain extent, good fortune begets good fortune. Schools with more resources are able to lure more students who are willing to pay full price, with new buildings and other impressive investments, helping to boost tuition revenue.
Name-brand private colleges are also more likely to have access to resources like investment income and patient care — the money colleges bring in from the hospital systems they operate — both categories that have grown by 33% over the past five years, according to Moody’s.
Larger private colleges are also more likely to receive philanthropic support, Moody’s notes. The top fundraising universities, which raise more than $100 million annually in gifts, typically account for about two-thirds of the money raised by all of the private colleges that Moody’s rates. The result: “The more people give gifts, the more people are inclined to give gifts,” Sharma said.