Colleges With Empty Campuses Face an Uncertain Financial Future

(Bloomberg Businessweek) -- The coronavirus pandemic threatens to remake U.S. higher education, speeding the closure of small, financially weak colleges and forcing others to make tough decisions about what they can afford. Even state schools may no longer be immune as tax revenue falls.

The most immediate challenge is one that could soon spiral into a crisis: It’s hard to sign up this fall’s freshman class when families can’t travel to visit campuses and many international students are shut out of the U.S. The longer lockdowns continue, the more uncertain schools are about the size of their classes, how much aid they’ll need to offer to fill seats, and the tuition revenue they can count on. “Everybody’s worried,” says Kevin Cavanagh, vice president for enrollment management at Bloomfield College outside Newark, N.J., which draws about 1,700 students, mostly black and Hispanic. “You don’t know what the variables will be.”

Even the richest schools, with immense demand and strong brands, face challenges. Their endowments, which had recently been at record-high values, are in jeopardy as markets go into free fall. Since most endowments don’t report annual returns until autumn, it’s unclear how steep those losses will be. In the wake of the 2008 financial crisis—the nearest parallel to the current moment—both the Harvard and Yale endowments lost around 25% over 12 months. Colleges are giving refunds for room and board, since their students were told to leave campuses. Fundraising is another concern as reunions, crucial for tapping alumni, are being scrapped.

Moody’s Investors Service last month downgraded the credit outlook for the higher education sector to negative. Along with disruptions in enrollment and philanthropy, schools may also see a drop-off in research grants and contracts. And then there’s falling demand from foreign students, who often pay higher tuition. They account for about 5% of total college and university enrollment, according to Moody’s.

Bloomfield is confident it will stay open—Cavanagh points to the last recession, which pulled many students into college when job opportunities were scarce. Some high school seniors may also have to rethink whether they’re able to go away for college, perhaps finding themselves considering schools such as Bloomfield, where most students commute to campus. Even so, Cavanagh says, “we don’t know where the bottom is and how it will ultimately affect the decision-making process of students.”

To encourage this fall’s potential freshmen to sign up, Bloomfield is reducing the deposit fee for students planning to live on campus and scrapping it for commuters. It’s also waiving application fees. The school, which has a $14 million endowment, says it needs about 400 to 450 freshmen in the next class.

Most colleges are already assuming that if they open in September, they’ll have fewer students, says Richard Ekman, president of the Council of Independent Colleges, a trade group for small schools. If they don’t open in the fall and classes remain online, they could lose a lot of their edge—with no prospect of Frisbee on a grassy quad and limited one-to-one interaction with professors and peers, many students may prefer online classes at less expensive public or community colleges, or wait a year. “We don’t know how much of the campus experience is related to the classroom,” Ekman says.

Before the pandemic, Ekman’s group estimated that 2% of its roughly 650 members—about a dozen schools—were struggling financially. It’s not clear how the increased pressure of the coronavirus will change that. Ekman spells it out this way: Imagine if a college of 1,000 or 2,000 students had to return room and board, or give students a credit for it for next year, to the tune of $4 million to $5 million. Add to this fewer—and sometimes late—tuition payments, plus the loss of revenue from summer school and renting out campus space for programs such as band camps. “For some colleges that have very meager reserves, that could be the end,” he says.

MacMurray College, a 174-year-old, 550-student school near Springfield, Ill., announced last month that it will close in May, after students complete the current semester online. Charles O’Connell, chair of the board of trustees, said in a statement on the school’s website that although the pandemic “complicated MacMurray’s financial condition,” it wasn’t the main reason for the closure. The school had struggled with a small endowment, rising costs, and declining enrollment. Enrollment has been a challenge for many small schools in recent years, as the demographic bulge of millennials has leveled off.

Hampshire College has been working for more than a year to avoid MacMurray’s fate. The liberal arts school in Amherst, Mass., decided not to enroll a freshman class this year, though a few students who were admitted early-decision still came. Hampshire set out on a five-year plan to raise funds, control expenses, and update its curriculum. It’s hoping to bring a new crop of freshmen to campus this autumn and has a goal of about 150 of its 650 admitted students saying yes, says Edward Wingenbach, who became the college’s president last August. “I’m not worried about not having a class in the fall unless higher ed doesn’t have classes in the fall,” he says. Despite the growing economic crisis, Wingenbach says he expects the current fundraising plan to continue, as donors have told the school it’s still a top philanthropic priority.

During the last recession, fundraising for colleges overall declined 12% over one year, according to data collected by the Council for Advancement and Support of Education. “We expect to see declines of charitable support of higher education giving in the next two fiscal years,” says Ann Kaplan, who directs the group’s annual survey of fundraising. “When the economy contracts, charitable giving in general also contracts.”

At least 20 private colleges have closed down since 2016, according to Inside Higher Ed, a trade publication. There are about 1,600 private, nonprofit four-year colleges in the U.S, and almost 800 public schools. State schools have largely been spared closure, but regional public campuses could soon come under pressure in parts of the U.S. where populations are falling, especially the Northeast and Midwest, as well as in states where government funding has been curtailed. Many schools have seen sharp drops in enrollment in recent years. “The problem is exacerbated now,” says Susan Shaman, co-author of The College Stress Test, a new book about the financial pressures schools face.

“Higher education is not going to be the first thing on a governor’s list” of funding priorities, Shaman says. “There will be so much less tax revenue, and so many states depend on sales tax. There is no sales tax if there are no sales. It can be a crisis for some going forward. We hope it’ll be a short-lived crisis. But we can’t depend on that.” In a new report Wednesday, Moody's said public U.S. universities are at higher risk than their global peers due to potential government funding cuts and lower investment income from their endowments.

Even if schools remain open, they may have to downsize in ways that change campus life. “The role of athletics is one of those things that colleges should reexamine,” says David Feldman, a professor of economics at the College of William & Mary who studies higher education. This, too, was already starting to happen before the coronavirus hit.

St. Cloud State University in Minnesota said in December it would eliminate football, as well as both men’s and women’s golf, because of the “challenging fiscal environment.” Enrollment at St. Cloud has dropped by almost one-third, to 12,600, over the past decade, and state funding has declined as well. (The school also needed to balance men’s and women’s sports opportunities to comply with federal anti-discrimination law, after a judge last August ordered the school to continue fielding some women’s teams that had earlier been cut; the school is appealing a portion of the judgment.) St. Cloud’s president, Robbyn Wacker, says she’s trying to create a long-term path for the school. “We’re going to have to make reductions,” she says. “We will do it with a future in mind, not just to balance the budget.”

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