For small colleges, a major challenge is how to generate enough revenue to sustain themselves. And according to Moody's Investors Service, they're not doing very well in that regard.
Indeed, Moody's predicted in a new report that the closure rate of small colleges will triple in the next few years, and analysts at the credit rating agency also suggested that school mergers will double over the same period.
Moody's estimated that the majority of small colleges in this country are failing to achieve revenue growth above 2 percent per year, approximately the level of inflation. It forecasted that this weak revenue trend will continue.
Smaller schools have fewer students to support their fixed costs and tend to generate lower net tuition per student. Moody's concluded that the net tuition revenue of the smallest schools is covering only three-quarters of their educational costs.
The agency's report looked at the smallest of small colleges. The private schools in its analysis had 2014 operating revenue below $100 million and under $200 million for public colleges.
Schools that have closed since 2010 include tiny institutions such as Marian Court College in Massachusetts, which had an enrollment of less than 200 students, and Lexington College in Illinois, with a student body of less than 100.
The number of closures among four-year public institutions and private nonprofit colleges averaged five per year from 2004 through 2014. During the same time, mergers and acquisitions averaged two to three a year.
Still, it's good to keep these closure figures in perspective. Despite the prediction of more institutional failures, Moody's noted that the number of schools that will close or merge represents less than 1 percent of the 2,300 four-year public and nonprofit colleges.
This report could fuel the worry of parents and students who are attracted to the personalized education you can receive at small schools but are afraid of closures.
The experience this year of Sweet Briar College, a highly regarded women's college in Virginia, didn't help. Sweet Briar announced it would be closing at the end of the 2014-2015 school year, but the uproar over the decision from alumni and other supporters, and action by the Virginia attorney general, led the college to rescind the decision.
Small colleges aren't alone in feeling the financial pinch. According to a report by the National Association of College and University Business Officers, the type of schools that are dispensing the most price cuts are master's-level universities that live in the shadow of the brand-name research universities.
Master's-level universities, which typically have few Ph.D. programs, give tuition discounts to 94 percent of freshmen. Small schools give 91 percent of students price cuts. But research universities, which are the most popular with students focused with college rankings and prestige names, award just 66 percent of their freshmen price breaks.
What parents want to know is how they can identify financially vulnerable schools. Unfortunately, that's not so simple. Sweet Briar, for instance, had a large enough endowment to suggest it wasn't in danger, and a federal ranking of financial responsibility gave it a higher score than Harvard got.
What parents can do is check how many students attend a college and in what direction the enrollment is going. Parents should also look at a school's freshmen retention rate -- how many first-year students return for a second year. The higher the percentage, the better.
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