Protecting Students from Colleges and Colleges from Themselves

Financial Forecasting and Catastrophic Closure in Higher Education

I am honored to have Gerard O’Sullivan, senior vice president for accreditation and compliance at Emerge Education and former provost and vice president for academic affairs at several universities and colleges, take the lead on co-authoring this article with me.

Twelve small colleges have closed in Massachusetts in the past five years. They have begun to address the issue, but it’s time for elected state officials to make changes that protect college and university students from the disruptive effects of catastrophic closure.

The Governor, Attorney General and the Massachusetts state legislature are correct to work together to prevent sudden closures, like that of Mount Ida College, from reoccurring, but bolder action is needed. A recent working group report proposes a new metric for monitoring institutions’ fiscal health and mitigating disruptions associated with closures.

States Should Take Lead on Higher Education Oversight

In the past, states granted charters to colleges and universities that included a binding condition: The institution must develop a dissolution plan and update it regularly. In reality, most state-level higher education agencies are too understaffed and underfunded to maintain consistent oversight of dissolution planning.

Very few institutions of higher education have such plans in place. Unless required by the states that authorize them to operate, colleges and universities have no incentive to do so.

It is a business best practice to prepare and update dissolution plans in other nonprofit sectors like community hospitals. Higher education has been curiously slow to adopt such practices. No one wants to imagine that their beloved employer or alma mater might close.

This is a dangerous form of nostalgia that imperils higher education, especially private colleges. Closures are accelerating, but regional and specialized accreditors do not require their members to develop such plans — nor should they.

The burden of higher education oversight should fall to the states, which have an affirmative responsibility to protect students, families, and localities from the dizzying consequences of catastrophic college closures.

Protecting Students from Sudden Closure of Cash-Strapped Colleges

That said, there is another and more serious gap in the proposed solution in Massachusetts that measures the financial ability of financially challenged colleges by evaluating their ability to “teach out” their students in the event of sudden closure.

The international financial strategy firm EY-Parthenon supported the Massachusetts working group that developed the plan to monitor cash-strapped colleges in the state. Not surprisingly, the working group proposed that the state adopt EY-Parthenon’s metric for “stress testing” the ability of ailing colleges to help students complete their degrees on their home campuses or, in the case of imminent closure, on other campuses willing to accept them as transfer students.

The working group proposed the creation of an Office of Student Protection within the Massachusetts Department of Higher Education to guard student interests when campus closings occurred. They also advocated the adoption of EY-Parthenon’s “Teachout Viability Metric.”

Shortcomings of the “Teachout Viability Metric”

The “Teachout Viability Metric” would use publicly-available financial data to assess the ability of a college to “teach out” its current students to their graduation. If a college was found to be incapable of funding student completion for eighteen months, the state would require that the institution submit a contingency plan to graduate or transfer its students.

The “Teachout Viability Metric” is an eleventh-hour intervention that insufficiently aids colleges working to move back from the precipice of catastrophic closure.

This is, at best, a minimalist approach to a burgeoning problem in higher education: the inability of anyone, and at any level, to accurately ascertain the financial viability of institutions of higher education.

Higher education’s over reliance on federal composite scores further muddies the waters. To receive Title IV funding, all aid-worthy colleges must report Financial Responsibility Composite Scores along a scale from negative 1.0 to positive 3.0. A score greater than or equal to 1.5 indicates the institution is financially responsible. If a college scores between 1.0 and 1.5, it is subject to cash monitoring. An institution with a score of less than 1.0 may continue to participate in the Title IV programs but only under provisional certification. Participant institutions must post a letter of credit equal to a minimum of 10 percent of the Title IV aid it received in the institution’s most recent fiscal year.

There are three significant problems with composite scores:

  1. they often provide boards of trustees with a false sense of security about the future of the institutions they oversee as fiduciaries;
  2. they have a less than 17% rate of predictive reliability for closure, according to our research and;
  3. they are easily gamed.

Baby Steps are Good But It’s Time to Solve the Problem

We call upon the Commonwealth of Massachusetts to set the nationwide standard for institutional accountability by taking two additional steps:

  • move beyond teach out plans to adopt reasonable financial viability plans for all colleges and universities taking the “public optics” stigma away from the oversight.
  • devise a better means to diagnose financial standing than the current federal scoring system.

Over the past several years we have been working with research colleagues to identify better metrics to diagnose and address the problems of sustainability in higher education. We look forward to sharing our findings in the very near future.

In the meantime, we applaud the Commonwealth of Massachusetts for a good baby step. Now, it’s time to solve the problem.