Fate of small colleges appears to be dire amid mixed higher ed sector

When Northeastern University announced its intentions to merge with Mills College in 2021, students attending Mills responded with protest and a series of campaigns to halt what they called an “acquisition” of their beloved institution. 

Mills College, a small, historically women’s private school, in Oakland, California, had announced its intention to close after years of declining enrollment and financial struggles. Despite backlash from Mills students, Boston-based Northeastern successfully merged with the institution in July 2023. 

Mills’s story exemplifies the challenges that many smaller colleges throughout the nation continue to face. The end of COVID-19-based federal aid, alongside shifting demographics, enrollment decline and widespread financial hardship, have resulted in smaller colleges closing at an increasingly fast rate.

“Mergers and closures are the fate of a lot of schools … it’s a trend that will continue,” said Christopher Brigati, senior vice president and director of strategic planning and fixed-income research at SWBC. “I expect this to be a decade-long kind of decline, and there will be a lot of chaos as a result.” 

According to the New York State Education Department, the Empire State alone saw over 15 colleges closing or announcing closures just this year. Nearly all of these institutions bear striking similarities to Mills: small, private and highly specialized. 

Rating agencies have taken notice. In S&P Global Ratings’ 2024 Midyear Outlook Report, the agency described the higher education sector as mixed, with 10% of all rated public and private universities receiving a negative outlook. Outside of the healthcare sector, higher education has the most dire economic forecast, trailing behind cooperative utilities, transportation infrastructure and charter schools. 

While federal aid given to colleges and universities at the height of the pandemic provided much-needed assistance, the funds only masked institutions’ fiscal burdens. Yet the sector’s downturn began prior to 2020’s global shutdown. 

“I identified this all quite a few years ago, when I was trading and I bought a lower-tier [school’s] credit, though it was at least investment grade. I bought it at the widest spread that I had seen for a credit like that, but when I tried to resell it, I was having a hard time getting buyers,” Brigati said. “And a lot of the feedback I got was they just don’t like the credit … you could see that there’s a liquidity factor.”

After digging into the financials a bit, Brigati said he realized that endowment programs at the major institutions provided a “ballast of underlying support that was basically absent” in smaller institutions.

“The smaller institutions do not have large endowments and they rely heavily on the cash flows and day-to-day operating revenues to function, and that comes through enrollment,” he said.

Susan Shaffer, vice president and senior credit officer at Moody’s Ratings, agrees that the financial cliff facing smaller institutions has existed “for at least a decade.” Shaffer points to the 2008 financial crisis, rising inflation and shifting demand. In recent years, consumer belief in the necessity and strength of the college degree has dwindled, alongside the shrinking population of high school graduates. As a result, institutions have been forced to grapple with diminishing enrollment, effectively crippling their fiscal health. 

With the end of COVID-19 aid, colleges once again must confront their financial realities. In the current environment, colleges must face both the end of federal aid and the additional consequences of the pandemic on enrollment. And for schools that previously differentiated themselves with online learning, the pandemic fully shattered the once-niche format’s appeal. 

Doug Kilcommons, managing director of public finance at KBRA, noted the nature of the sector’s mixed character.

“It’s all about the mission and the brand. When you start to go down the credit spectrum, you generally see schools with a very narrow focus, including professional schools serving a discipline in decline, faith based institutions, and single sex colleges,” Kilcommons said. “If you happen to be a college or university with one of those profiles, and are heavily tuition dependent, credit quality can decline quickly once you start to narrow your funnel of prospective students absent other mitigants, such as an active alumni base and established fundraising apparatus.”

In June, Houghton University, a liberal arts school in Western New York established in 1883, saw its rating downgraded to junk status by S&P Global Ratings. That same month, Moody’s downgraded University of La Verne’s rating to Baa1 from A, and University of San Francisco’s rating to A3 from A2. Loyola University of New Orleans had its rating lowered from stable to negative by S&P in July. For each school, agencies cited weakening enrollment and slowing revenue. 

For state schools, the Ivy League and colleges with a widely understood name-brand, the aforementioned pressures are null. It is these institutions that benefit from state-backed funding, large endowments and a strong, committed alumni culture. For these universities and colleges, the market and revenue are strong. The higher education sector has become “a competition between the haves and the have nots,” said Jessica Wood, managing director of education at S&P. 

It is a competition that many smaller schools are unable to hold their own in.

Pat Luby, head of municipal strategy at CreditSights, spoke to the perspective of potential students. 

“Schools have been able to get away with increasing their costs at rates faster than inflation… And now, we’re in a different inflationary environment. There’s less dollars in families’ pockets, and there are more demands on every dollar that every family has,” Luby said. “It’s pushing some families in different directions, because they just don’t have the finances. They are more likely to attend these bigger, state schools with more resources, more financial aid and which are cheaper. All of this has really squeezed these smaller schools.”

For many analysts, there is little hope for turnaround. With no hope for future federal funding and increasing inflation, the fate of small private universities is in the hands of their potential students, many of whom are turning away from them. 

To Shaffer, it is much more likely that schools, if not forced to close, will turn to mergers like that of Mills and Northeastern. 

“Families are deciding where to spend limited resources. They might choose a regional public university that’s significantly less expensive than a small private college that doesn’t have a brand that really is going to translate, that may already be struggling, and that hasn’t had the money to invest in its resources and in its programs,” Shaffer said. “After a period of years, that smaller school may become less competitive, and it’s very hard to break that cycle… I don’t think this is something that’s going to reverse.”