12. College Closures: The Financial Cliff for Small Schools

The landscape of higher education is shifting rapidly, and for many small private institutions, the ground is crumbling. You may have seen headlines about sudden shutdowns or mergers, leaving students and faculty scrambling. If you are currently enrolled in a small private college, or considering one for the upcoming academic year, it is vital to understand the financial pressures these schools face and how to spot the warning signs before it is too late.

The Perfect Storm: Why Schools Are Closing Now

The surge in college closures is not random. It is the result of a convergence of economic and demographic factors that experts have predicted for years. The most significant factor is the “Enrollment Cliff.”

Beginning around 2025, the number of high school graduates in the United States will begin to drop sharply. This is a direct echo of the 2008 financial recession, during which birth rates plummeted. Fewer babies born in 2008 means fewer college freshmen in 2026.

For elite universities like Harvard or large state schools like the University of Michigan, this is manageable. For small private colleges that rely on tuition for 80% or more of their revenue, a drop of even 50 students can be catastrophic.

Additionally, the expiration of federal COVID-19 relief funds (HEERF) in 2023 removed a financial safety net that was keeping many struggling institutions on life support. Combined with the disastrous rollout of the new FAFSA form in early 2024, which delayed financial aid packages and depressed enrollment numbers, many schools simply ran out of cash.

Critical Signs Your College Might Be at Risk

If you are worried about the stability of your institution, you need to look beyond the glossy brochures. Here are specific, measurable signs that a college is in financial distress.

1. The Financial Responsibility Composite Score

The U.S. Department of Education scores private colleges on their financial health using a scale of roughly -1.0 to 3.0.

• Passing: A score of 1.5 or higher.
• Warning Zone: A score between 1.0 and 1.4.
• Failing: A score below 1.0.

Schools with low scores are subject to increased cash monitoring by the government. You can search the Federal Student Aid data center to find your school’s most recent composite score. If your school has consistently scored below 1.5 for the last three years, that is a major red flag.

2. High Tuition Discount Rates

Small colleges often keep their “sticker price” high but offer massive scholarships to attract students. This is known as the tuition discount rate. According to the National Association of College and University Business Officers (NACUBO), the average discount rate for first-time undergraduates at private colleges hit a record high of 56.2% recently.

If a school is discounting tuition by 60% or 70%, they are bringing in very little actual revenue per student. This suggests they are desperate to fill seats regardless of the financial return.

3. Drawing Down the Endowment

An endowment is meant to be a permanent savings account where the school only spends the interest (usually about 4-5% per year). If a college begins spending the principal of its endowment just to pay the electric bill or faculty salaries, they are cannibalizing their future to survive the present.

4. Sudden “Teach-Out” Agreements

A “teach-out” plan is an arrangement where a closing school partners with a nearby institution to accept their students so they can finish their degrees. While this is a safety measure, if your school suddenly announces a partnership or merger with a nearby university, it often indicates they are preparing for a potential closure.

Recent Examples: Lessons from 2024

To understand the speed at which this happens, we can look at specific closures that occurred recently. These examples show that the end often comes abruptly.

The University of the Arts (Pennsylvania)

In June 2024, the University of the Arts in Philadelphia abruptly announced it would close within seven days. The school had lost its accreditation due to financial mismanagement. Students and staff were blindsided, having already committed to housing and classes for the fall. This case highlights that a school losing its accreditation is an immediate precursor to closure.

Birmingham-Southern College (Alabama)

After years of financial struggle, Birmingham-Southern closed its doors on May 31, 2024. The college had attempted to secure a $30 million loan from the state of Alabama to stay afloat. When the loan fell through, the school had no other options. This demonstrates the danger of relying on “hail mary” financing or government bailouts.

Wells College (New York)

Wells College announced its closure in late April 2024. The administration cited the financial challenges of inflation and a shrinking pool of undergraduate students. Like many others, they did not have the endowment size (roughly $24 million) to weather sustained deficits.

Protective Measures for Students and Parents

You do not have to be a victim of sudden closures. If you suspect your school is on the brink, take these proactive steps:

1. Request Transcripts Early: Always have an official, sealed copy of your current transcript. When schools close, administrative chaos often follows, making records hard to get for months.
2. Check Accreditation Status: Verify your school is accredited by a recognized regional body (like the Middle States Commission on Higher Education or the Higher Learning Commission). If a school is placed on “probation” or “show cause” status, start looking for transfer options immediately.
3. Watch the Bond Ratings: If your college has issued public debt, agencies like Moody’s or S&P Global will rate it. A rating downgrade to “junk” status (below BBB-) is a significant warning from financial experts.

Frequently Asked Questions

What happens to my credits if my college closes?

Ideally, the college will have a “teach-out” agreement with another institution that agrees to accept all your credits and let you finish your degree at a similar cost. However, if no agreement exists, you may have to apply to other schools as a transfer student. In that scenario, the new school decides which credits they will accept.

Can I get my student loans forgiven if my school closes?

Yes, under specific circumstances. If your school closes while you are enrolled (or within 180 days after you withdrew), you may be eligible for a Closed School Discharge. This federal program can forgive 100% of the federal Direct Loans taken out to attend that school. However, if you transfer your credits to a new school and finish the same program, you generally cannot claim this discharge.

How much notice are schools required to give?

This is a gray area. While the WARN Act requires employers to give 60 days’ notice for mass layoffs, colleges often argue they are seeking funding up until the last minute. As seen with the University of the Arts, notice can sometimes be as short as one week. Do not wait for an official announcement if the financial signs are already there.

Is an endowment of $50 million enough to be safe?

Generally, no. In the current economic climate, higher education experts suggest that an endowment under $50 million is considered risky for a standalone private college. Schools with endowments over $1 billion are typically safe from closure, though they may still cut programs.