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When Schools Fail: Why Colleges are Going out of Business
by Adam Torkildson
August 30, 2022

From 2016 to 2019, 86 colleges either shut down or merged with other schools. In the 2019-20 school year, 53 colleges closed permanently. COVID-19 may have been the final straw for these schools, but it was a continuation of an existing trend: colleges are going out of business.

Colleges and universities get the bulk of their revenue from student tuition. When enrollment falls, so do revenues, potentially closing college doors for good. From 2019 to 2021, undergraduate enrollment fell by 7.8%, the largest 2-year decline in 50 years. By 2022, a million fewer students are enrolled in college than before the pandemic began. Some of the reasons behind declining enrollment are COVID-related. 56% of American college students said they could no longer afford their tuition in 2020 due to pandemic impacts. Some looked for new ways to pay while others unenrolled in favor of full-time employment. 

However, education costs were rising before the pandemic as well. Until the pandemic halted tuition increases, college costs outpaced both inflation and family income growth, making it less affordable. Moreover, almost 100 million Americans have a bachelor degree or higher, but 73% have a job unrelated to their major. Young Americans are seeing a lower return investment to higher education. Beyond that, there are fewer young Americans in general. By 2029, college enrollments are predicted to fall more than 15% due to a smaller college-age population. 

Institutions are feeling the pressure. Their future is bleak; nearly 3 in 4 of higher education professionals say their institution is facing significant financial constraints already. Colleges compete with each other for business, and some institutions are feeling more heat than others. While community colleges saw enrollment drop 15% from 2019 to 2021, highly selective colleges were able to rebound to pre-pandemic levels. Smaller, less selective schools are more likely to struggle in the coming years. 

What gives selective schools their competitive advantage? Part of it is name recognition; sought-after degrees are perceived as more valuable than public or community college diplomas. Perhaps more important is the institution’s endowment. Endowments are financial assets created from charitable donations. They are designed to create a permanent pool of investments for the college without too much risk. Universities can use their endowment funds for public service missions, student aid programs, research, fellowships, and more. The larger the endowment, the more generous financial aid a university can offer to attract students. Just 106 universities have endowments over $1 billion.

As a rule, schools should spend less than 5% of their endowment each year. Schools that spend more may be in financial danger. Many colleges make their endowment reports available online. Prospective students can use this information and more to ensure the financial health of a college before enrolling. Other places to look include the US Department of Education’s Financial Responsibility Composite Score and news reports. If one sees news of frequent leadership changes, accreditation issues, or potential mergers, those are signs an institution’s door is about to close.

Why Colleges Go Out of Business

About the author
Adam Torkildson
Adam Torkildson
Adam is a long-time resident of American Fork, UT. He serves in several local service organizations and advises several startups that he's invested in or founded.
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