Education

Small Colleges Get an F in Finance


At the Dowling College campus in Brookhaven, N.Y., on Long Island’s south shore, a dormitory is shuttered, as are a cafeteria, a bookstore, and some classrooms in the main academic building. Unused shuttle buses sit in an otherwise empty parking lot. “There’s a lot of fear here,” says Steven Fournier, an aviation management major who will graduate in May. “It’s not the same college I arrived at.”

141

Colleges that had credit ratings downgraded by Moody’s in the last five years

Dowling, with a $2 million endowment, epitomizes the plight of many small private colleges that depend almost entirely on tuition for revenue. Soaring student debt, competition from online programs, and poor job prospects for graduates are shrinking schools’ applicant pools. The number of private four-year colleges that closed or were acquired doubled to about 10 annually in the four years through 2011, from about five a year before 2008, according to a Vanderbilt University study. All of the schools that failed in recent years had fewer than 1,000 students, and most had endowments of about $1 million.

“What we’re concerned about is the death spiral—this continuing downward momentum for some institutions,” says Susan Fitzgerald, an analyst at Moody’s Investors Service (MCO), adding that expenses are outpacing revenue at 60 percent of the more than 500 public and private nonprofit colleges and universities her company tracks. Moody’s downgraded the credit ratings of 141 institutions in the five years through 2013, up from 59 in the prior five-year period.

“We haven’t hit bottom yet,” says Glenn Harlan Reynolds, author of The New School: How the Information Age Will Save American Education From Itself. The University of Tennessee law professor says students are shopping for a less expensive education as the cost of college has increased and the job market worsened: “It’s a question of return on investment.”

Faced with steep drops in enrollment, many schools are cutting tuition to attract students. The average freshman discount rate rose to 45 percent in 2012 from about 40 percent in 2008, according to a survey of 383 four-year private colleges and universities by the National Association of College and University Business Officers. At Franklin Pierce University, in Rindge, N.H., net tuition revenue fell 14 percent from 2009 to 2013, to $30.3 million, as its overseers boosted financial aid to attract freshmen and keep students from transferring. In January the university announced it would discontinue six majors.

Ashland University, a 136-year-old college in Ohio, has pared tuition for the coming school year by 37 percent, to $18,908, in the hope of luring students. Moody’s downgraded Ashland’s credit rating to below investment grade in November, saying the probability it will default has increased after three years of enrollment declines. Steve Hannan, an Ashland spokesman, didn’t return calls seeking comment.

Some colleges are looking for more permanent solutions to boost enrollment. Morgan State University in Baltimore, an historically black college, is targeting applicants of Hispanic and other backgrounds. Pittsburgh’s Chatham University, whose undergraduate program is women-only, is considering going co-ed.

Harvard Business School professor Clayton Christensen has predicted that as many as half of the more than 4,000 universities and colleges in the U.S. may fail in the next 15 years, driven out of business in large part by the growing acceptance of online learning. “I’m not sure a lot of these institutions have the cushion to experiment with how to stay afloat,” says Michelle Weise, a senior research fellow at the Clayton Christensen Institute for Disruptive Innovation, a think tank the Harvard professor helped establish in San Mateo, Calif.

An offshoot of New York’s Adelphi University, Dowling College became independent in 1968 and sought to distinguish itself with practical training. As the economy went into decline, enrollment began to slide, falling 45 percent from 2009 to 2013, to 2,438 full-time-equivalent students, according to Moody’s. To stay solvent, Dowling laid off staff and, through attrition and buyouts, shrank the faculty to fewer than 80 from more than 120, says Nathalia Rogers, executive chair of the full-time faculty. It also borrowed from its endowment and sold land to one of its trustees.

Two weeks before its 2013 fall term began, Dowling shuttered much of its satellite campus in Brookhaven. The move bought time for Norman Smith, who became president in June—the fifth in as many years—to initiate talks with creditors about renegotiating a portion of the school’s $55 million debt. Smith is also working to rebuild the Board of Trustees—down to 11 members from more than 20 in years past—and revive a moribund fundraising operation.

On March 26, preliminary results of a review by the college’s accreditor, the Middle States Commission on Higher Education, found Dowling met standards in 11 categories, mostly academic, while failing in three, including financial resources. “Given time, this school can be very successful, in the top 25 of small schools in the Northeast,” says Smith, whose well-appointed, wood-paneled office inside one of Long Island’s 19th century mansions belies the college’s cramped financial situation. “We have to retool.”

The bottom line: The number of private four-year colleges that closed or were acquired doubled in the four years through 2011.

McDonald is a reporter for Bloomberg News in Boston.

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