How to Tell If a College Will Go Bust

Colleges that you’ve never heard of sometimes offer the most tantalizing bargains for students pursuing a bachelor’s degree. Plenty of families worry whether these colleges could implode and call it quits.

The truth is, it happens. From 2005 to 2014, closures of public and private colleges averaged five per year, according to a report by Moody’s Investors Service. During that period, mergers averaged two to three annually. Moody’s predicts that the closure rate is likely to triple in the next few years and mergers will more than double.

It is important for families to keep in mind, as the Moody’s report notes, that the number of closures and mergers is miniscule. The number in the next few years will remain below one percent of the more than 2,300 public and private, four-year colleges.

If you are worried about the financial viability of colleges on your list, here are some things to consider as you play detective.

Look at Enrollment

The smallest institutions face issues if their enrollment slips because they have less revenue to support their operations. For instance, a campus with 700 students that falls 50 students short of its freshmen admission goal is going to experience greater financial pain from that shortfall than a campus with 5,000 students.

According to the National Center for Education Statistics, colleges enrolling under 1,000 students only had 2.5% of the market share. Look to see what the enrollment pattern has been at a particular college in recent years. It’s a red flag if the enrollment has significantly decreased during that period of time.

You can check enrollment size for recent years at an institution by looking at a school's Common Data Set. This is a standardized and annual document that many colleges and universities use, which includes a variety of statistics on enrollment, admissions, financial aid and merit awards. To find an institution’s Common Data Set, Google the term and the name of the college.

Check for Deferred Maintenance

When you walk around a campus, does the facility look neglected? Is the paint peeling on buildings? Are the sidewalks cracked? Is the landscaping neglected? Do students complain that the air conditioning and heating don’t work well? Is the college’s Wi-Fi a mess?

Also, talk to students and faculty about the shape of the campus. Inquire about whether the college is investing in new technology for classrooms. Colleges that are strapped for cash often divert money away from their maintenance budgets and the practice eventually becomes noticeable.

Tuition Discount

Schools rarely charge students the full price of tuition to attend their institutions. Institutional scholarships and grants are referred to as tuition discounts. Colleges and universities that have more difficulty attracting students may offer greater and more plentiful discounts.

According to the National Association of College and University Business Officers, the average tuition discount for freshmen at private colleges and universities is now 56%. Although it’s possible to obtain the average tuition discount rate, you’d have to educate yourself on how to use the federal database known as the Integrated Postsecondary Education Data System or IPEDS. IPEDS is not easy to use.

As an alternative, ask the institution what the average tuition discount rate was for the last few years. This way, you can see if the college had to increase it to attract new students. If it’s well above the national average, you might have reason for concern. When a college’s discount rate exceeds 80%, it has reached the point of diminishing returns and cannot fix the financial problems by increasing tuition.

Check News Reports

Closures and mergers don’t happen in a vacuum, according to Luke Behaunek, the dean of students at Simpson College, who co-authored a new study on the tuition discounting practices of small colleges.

There should be plenty of signs of trouble at a college on the brink and you should expect that these problems would attract media coverage. Use Google to search for news about the colleges on your tentative list. Also set up a news alert on Google for these campuses.

And don’t overlook student newspapers. These publications are more candid about what’s going on in contrast to what administrators say. Look for reports of faculty and staff layoffs, merger talks and the curtailment of academic programs.

Check the Percentage of Students Paying Full Price

Another way to evaluate a college’s financial viability is to check how many freshmen are paying the full price for tuition. A university where 40-50% or more of students are paying the sticker price means that the institution is attracting an enviable percentage of high-income students.

The most elite research universities, which enjoy high U.S. News & World Report college rankings such as the Ivy League members, Carnegie Mellon, Stanford, Northwestern, Emory, Rice and MIT all fall into that category. Half of freshmen at Ivy League colleges are paying the full sticker price.

Obviously, no one is worried that a university like Stanford or MIT will fail, but there are plenty of elite colleges without national brand recognition that don’t have to worry about this either. Here are some examples.

“If you have wealthy students wanting to go to your school that are paying the full price, that is a good sign that they aren’t going to go bust,” says Ann Gansemer-Topf, assistant professor in higher education at Iowa State University, who also co-authored the college tuition discount study.

You can find the percentage of freshmen that receive institutional grants and/or scholarships at a college via the federal College Navigator. You’ll find this statistic by clicking on the college’s Financial Aid link and then checking the Institutional grants or scholarships line item. This includes both need-based and merit-based institutional grants. Subtract this figure from 100% to obtain the percentage of freshmen who do not receive institutional grants.

Look for a Change in the College’s Mission

Has a college offered online programs or master’s degree programs? This shouldn’t automatically be a warning sign and, in fact, it could be promising. That’s because it could signal that a college is being flexible enough to find alternative ways to generate more revenue that could support undergraduate programs. You want to make sure, however, that an undergraduate priority remains strong. 

Closures Do Not Suddenly Happen

“I wouldn’t be too concerned for any institution that isn’t showing signs at the time of the application that they are in dire straights,” Behaunek says. “By and large, institutions are very resilient. From a consumer perspective, viability shouldn’t be too large of a concern in my mind.”

Lynn O’Shaughnessy is a best-selling author, speaker and journalist. Her book, The College Solution: A Guide for Everyone Looking for the Right School at the Right Price, is available on Amazon.com.