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Moody's: Private-College Closures at 11 Per Year

July 25, 2018
 
 

Private college closures have risen to a rate of about 11 per year, and the rate at which campuses are shut down is expected to increase in the future, according to a new report published by Moody's Investors Service Tuesday.

The report comes a few years after a notorious prediction the ratings agency made in September 2015 -- that closure activity would as much as triple and mergers would double by 2017. As of the prediction, private nonprofit closures were averaging five per year, meaning as many as 15 institutions could have been ending operations annually by 2017.

Although the headline-grabbing tripling of closures has yet to come to fruition, a significant uptick has indeed taken place. And Moody's is still projecting a future increase in closures toward the range of 15 per year.

Moody's has consistently noted that private colleges are tenacious in the face of pressure and that while it projected increasing closure rates, it was still predicting a relatively low closure rate of less than 1 percent annually that could add up if it were to continue over multiple years. Nonetheless, the ratings agency is pointing out that continued stress from falling tuition revenue and rising expenses will drive colleges to close, merge or make drastic changes like cutting a significant amount of programs.

In the past, favorable demographics and growth in federal funding helped keep closure rates for private college low. But now, demographic changes, most notably in the Northeast and Midwest, are likely to create an “increasing amount of churn” in the higher education sector.

A bottom group of about 750 small private colleges recording less than $100 million in total expenses is increasingly struggling to cover costs with revenue. The median net revenue per student for this group covered about 65 percent of the median expense per student in 2012. In 2016, it covered just 53 percent. The gap between revenue and expenses is becoming unsustainably high, Moody's found. About one in five small private colleges is under fundamental stress.

While colleges have other sources of revenue, like gifts and endowment income, “for a few each year, these other sources will not be enough to make up for lost student charge revenue, leading to deep stress and existential questions,” the ratings agency wrote.

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