The Economic Crisis - I

It's important to consider which institutions are most at risk and why, writes Richard Kneedler.

October 23, 2008

The world is in a full-blown financial crisis that threatens to produce a new Great Depression. It may or may not get to that point, but wherever it goes, it will have significant impacts on higher education -- in the United States and around the world.

Up to now, higher education coverage has been focused on the freeze of a cash management fund for colleges run by Wachovia Bank for the Commonfund and speculation about the likely large losses experienced by colleges with the largest endowments in the country. Whatever ultimately happens, we can be pretty sure that this story, plus the few additional lines on higher education, notably Boston University’s decision to freeze most hiring and to conserve cash, will be augmented by many others. Where may these stories come from? What should leaders in higher education, especially trustees, executives and other responsible for the long-term health of our colleges be looking at today to help make the future as good as we can for an enterprise vital to the world’s future?

It would be wonderful if we had real, current data about the financial health of colleges that would allow us to see what the most current trends are, how the lines of the various institutions are intersect and diverge. Which ones are well-positioned? Which ones may have made and then doubled down on less wise bets?

We cannot know that because, unlike the world of publicly-owned corporations, that are required to report their financial results on a quarterly basis, 501c(3) organizations report only annually and with a significant delay, on the IRS Form 990. Currently, the forms are available for FY 2006 for almost every private college and for FY 2007 for some, mostly smaller, institutions. Those forms do not predict the future that we are now living, but they do permit us to make some inferences about constituent elements of that future.

The 990 Form, among many matters, requires institutions to divulge information about indebtedness and overall capital base. Those two numbers provide important insight on the health of individual institutions a year or two ago. They also can be aggregated by states, regions and institutional type in suggestive ways to help people ask the right questions now and, one hopes, to mitigate damage, guide decision-making and look for opportunity in a scary landscape.

I have developed an interactive, spreadsheet database compiling Form 990 and other information on 675 private colleges and universities that can be used to look at a variety of institutional variables, including leverage.

A search of the database by state and debt level shows two groups of institutions of special interest today: very highly-indebted colleges and universities with debt comprising over 50 percent of total capital, and significantly-indebted institutions with debt comprising at least 37.5 percent of capital. Of the 675 institutions, 43 were in the first group in FY 2006 and/or 2007, or very highly indebted, and 78 were in the second, significantly indebted, group. (Data on the colleges studied for this piece are available at I have opted not to name the colleges studied because data such as these are indicators, not absolutes, and individual institutional circumstances have probably changed since the filing of the last IRS Form 990 on record.) Here are some observations, and inferences, from the database search:

1. Debt-stressed institutions were geographically concentrated rather than evenly spread across the country. Debt-stressed institutions were most common in the Northeast and in what have been, until recently, some of the country’s fastest growing areas. In the following states 25 percent or more of the private colleges were very highly or significantly indebted: Northeast (in descending order) - New Hampshire, Connecticut, Rhode Island, New Jersey, Maine, Vermont, Pennsylvania, and New York; Midwest – Illinois; South – Florida and Alabama; West – Alaska, Arizona, and Nevada.

2. Low-debt institutions were concentrated in mostly slower-growing areas in the center and south of the U.S. In the following states, no institutions in the survey met the study’s criteria for high-indebtedness: South – Arkansas, Delaware, Louisiana, Mississippi, South Carolina, and Virginia; Midwest – Minnesota, Nebraska, North Dakota, and South Dakota; West – Hawaii, Idaho, Montana, New Mexico, Texas and Utah.

3. The other 19 states (Wyoming at the time had no private colleges) and the District of Columbia have 7-24 percent of their institutions in the debt-stressed categories. These states are: South – District of Columbia, Georgia, Kentucky, North Carolina, and Tennessee; Midwest – Indiana, Kansas, Michigan, Missouri, and Wisconsin; and West – California, Colorado, Oregon, and Washington.

4. Contiguous states tend to have similar institutional debt profiles, reminding one of Chaos Theory. There are only four exceptions to the rule, Alaska, Georgia, Hawaii, and Illinois, two of which share no border with another state. I suspect that the Georgia and Illinois exceptions relate to two relatively isolated metropolitan areas – Atlanta and Chicago. They have dramatically outperformed the areas surrounding them and have created mini-regions that have been more like the boom areas in other areas where numbers of metro areas have connected. See below.

5. Due to geographic patterns and population concentrations, one would expect to see more institutions in the Northeast, Illinois, Florida, and Alabama than elsewhere feel the pressure of the credit crunch. The states with the highest predicted number of severely debt-stressed private institutions would be, in descending order: New York, Pennsylvania, California, New Jersey, Ohio, Connecticut, Florida, Illinois, Iowa, Maine, New Hampshire, Kansas, Kentucky, North Carolina, Rhode Island, Tennessee, Vermont, and Washington.

6. Higher levels of indebtedness are disproportionately concentrated in two of the Carnegie general classifications for Higher Education institutions – the “Master’s” institutions and the “Doctoral” institutions that are not research-intensive. Bachelor’s level institutions are underrepresented in both high-debt groups and research-intensive institutions are entirely absent from both lists.

Category # of Institutions % in Category # Very High Debt % With Very High Debt # Significant Debt % With Significant Debt
Bachelor's 267 40% 11 26% 16 21%
Master's 42 6% 4 9% 10 13%
Doctoral 309 46% 28 65% 52 13%
Research 57 8% 0 0% 0 0%
Total 675 100% 43   78  

The data would cause one to expect non research-intensive doctoral institutions and master’s institutions to be disproportionately affected by the debt crisis, since they are significantly more debt-reliant for their capital than are their peers in the bachelor’s and research-intensive categories.

7. When one looks at “social” measures for higher education institutions, the proportion of minority students in the full-time undergraduate student body and the percentage of students qualifying for Federal Title IV student aid (a proxy for an institution’s enrollment of economically-challenged undergraduates), the picture is mixed. Institutions that enroll 10 percent or more minority students actually are somewhat less debt-challenged than are private colleges and universities as a whole. Institutions that enroll 25 percent or more Title IV eligible students are slightly more debt-challenged than the average:

Category # of Institutions # Very High Debt % With Very High Debt # Significant Debt % With Significant Debt # Significant + High Debt % Significant + High Debt
Minority enrollment of at least 10% 485 35 7% 29 6% 64 13%
Title IV recipients of at least 25% 308 29 9% 34 11% 63 20%
All institutions 675 43 6% 78 12% 121 18%

The difference may be an artifact of the screen chosen for the two measures. Arguably, had the minority cut-off been set higher, the debt-dependence of the institutions remaining might well have increased. As the group stands, wealthy institutions are much more likely to make the “cut” for minority enrollments than they are for Title IV.

For the purposes of this analysis, one can see that the debt crisis may have a significantly negative effect on institutions enrolling economically-challenged students in greater numbers. This would present a potentially significant social policy issue for access.

The current debt market conditions look likely to have a negative impact on independent colleges and universities with the following characteristics:

  • States with large numbers of private institutions.
  • The Northeast and high-growth regional or local urban cores and corridors now slowing.
  • Serving economically disadvantaged students.
  • Master’s and doctoral (not research-intensive).
  • History of low fund-raising performance.
  • Serving high proportions of minority students (e.g. 20 percent or higher).
  • Founded by a religious group and now serving a wider clientele.
  • Urban/suburban.

While panic will certainly not serve an institution’s long-term interests, neither will unreflective persistence in carrying out previously settled tactical decisions. College and university trustees and administrators need to understand where their institutions stand now, not where they thought they would stand just a few months or weeks ago. The longer institutions wait to conduct a strategic and tactical review, the more they will use up the resources and flexibility they will need to respond to our fast-changing and threatening environment. Institutions with high or growing debt, whatever their Carnegie categories, would do well to consider the recent actions of Boston University to do just that. Now is the time to ask what each institution’s risk factors are and how they can be mitigated as promptly and as non-destructively as possible.


Richard Kneedler is president emeritus of Franklin & Marshall College and a higher education management consultant on executive compensation for Yaffe and Company and with new presidents for the Presidential Practice.


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