The Higher Ed Domino Effect

A recent article in the Chronicle about various attempts to measure the possibility of failure of private institutions had me thinking about things in a slightly broader perspective. The article itself was about a “Doomsday list” (as they described it) from a company that used a bunch of publicly-available data to say which schools were in financial trouble. Obviously this stirred up a huge amount of controversy, including threats of legal action against the company from named schools. The data eventually was not released.

But, in a broader sense…having worked at a small, liberal-arts college in the northeast, facing stiff headwinds of changing demographics and the realities of discount rates and admission pools, I started thinking about the domino effect of failed schools. Muhlenberg College is actually in a very strong position – it’s not a top 50 school, and it’s certainly not Bates or Williams or Amherst – but it has a solid endowment and an excellent reputation on a regional scale and a notable one on a national scale. It’s in a relatively healthy situation. But the fact is that there are a lot of institutions in that geographic and demographic area competing for the same students. Many of them are in fact in worse financial situation (at least on the surface, using the same partial-story-telling metrics like admit rates, discount rates, endowment size, etc.). This post isn’t really about Muhlenberg. It’s about the large number of schools like Muhlenberg.

Let’s look at discount rates. While it’s scary to think of an institution at 65%+ discount rates and it’s hard to imagine such measures being sustainable, the fact is that if an institution is discounting that much, that means they are offering a huge amount of aid to prospective students. This pulls students to those institutions, in these days of incredibly high tuition, and away from other, arguably more stable institutions. Rankings don’t matter if the first financial aid offer is 65% of sticker. The more stable institutions begin to face more and more pressure to meet class size, and then they suffer. The only ones left that are having a good old time are probably the top 25 schools (not even 50 is good enough) and that small handful of truly elite institutions.

But 65% isn’t sustainable. That’s just a slipper slope to higher and higher discount rates to make class size. We know that. So the healthier-but-not-affluent mid-level schools end up in a waiting game for the less healthy institutions to inevitably crack under the pressure. Then the competitive landscape changes, and there is less pressure for recruitment and making classes. It’s a terrible thing to think of – waiting for competitors to fold – but it’s the truth, as far as I can see.

I have no great conclusion to this post or line of thought. It’s just a sad reality right now. Can mid-level schools hang on long enough? Is the writing really on the wall for those schools with high admit and discount rates (and other metrics)? And most of us know that the writing is not bold enough yet to know when the dominos really will begin to fall.

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