A Looming Enrollment Crisis for Midwest Colleges

The demographics of college students are rapidly changing. By 2025, the applicant pool of new first-year students will shrink by 20 percent—and the shrunken applicant pool will persist for five years, which could result in as much as a 50 percent decline in enrollment for many institutions. Midwest colleges are particularly at risk of enrollment declines. To try to better assess an institution’s financial situation, balance sheet financial ratios can provide a high-level, easily understood tool for understanding an institution’s relative health. This article shows how seven ratios across six Midwest institutions highlight how financial ratios can assess institutional financial health.

In 2025, higher education will experience a shock that no amount of money alone can ameliorate. That is the year the applicant pool for new freshmen will shrink by 20 percent.¹ This is not a guess since it is based on birth rates that declined around the turn of the century. The shrunken applicant pool will persist for five years, which could result in as much as a 50 percent decline in enrollment for many institutions.² Michael Horn, a professor at Harvard University, projects that 25 percent of colleges will fail within the next 20 years.³ Others project up to 50 percent closings. All agree that the Midwest will be hit the hardest.

ENROLLMENT. The three years prior to the pandemic are displayed. Colleges to the left of the line experienced declines in enrollment over that three year period. Our Example 191 saw a drop of 21 percent over just three years; obviously a troubling development. Similarly, Example 201 declined 11 percent.

Background

There are 57 private colleges in the four-state region surrounding Kansas City: Missouri, Kansas, Iowa, and Nebraska. During the three-year period preceding the pandemic, 37 (65 percent) of those experienced declining enrollment ranging from 1 percent to 21 percent. Of the 37, nearly half (18) are in towns with populations under 20,000; eight in towns under 10,000. This is significant because of the outsized impact a college has on a community. Industries bring jobs to a community, a college brings jobs and customers, i.e., students, who shop in the stores, eat in the restaurants, bring their parents to town on the weekends, etc. When a college in a small town folds, the community may never recover.

Obviously, there will be winners and losers. The challenge for administrators and board members of these Midwest institutions is how to ask relevant, fact-based questions that will help guide their discussion as they grapple with this crisis. This article demonstrates that balance sheet financial ratios provide a high-level, easily understood tool for understanding an institution’s relative health.

REVENUE AND INVESTMENT RETURNS. This measure suggests how much financial flexibility an institution has as it prepares for the coming crisis.

INSTRUCTION. Instruction is the core function of a college or university. This ratio tracks the portion of the budget allocated to this activity compared to the peer group.

Higher Education Ratio Analysis

In 1973, John Minter, the coauthor of this article (who supplied data), joined with educational economist Howard R. Bowen of the Claremont Graduate University to conduct a survey of the independent sector of higher education. Their five-year study was the first use of balance sheet ratios as a tool for comparing performance across a group of institutions. Minter went on to lead the team that developed the WICHE Management Information System that later evolved into the National Center for Higher Education Management Systems (NCHEMS).

Comparing and contrasting are basic tools of thought and expression. When we compete in the same marketplace with other institutions for students, resources, and various forms of recognition, it is only reasonable that we will want to compare our performance along several dimensions with those institutions. Ratio analysis formalizes and adds rigor to that process.

The financial ratios are subsumed under the standard categories used in higher education accounting: instruction, research, public service, academic support, student services, institutional support, operation and maintenance of plant, scholarships, and auxiliary enterprises. The data used to construct the comparisons are all in the public domain.

Selecting the most appropriate comparison cohort is the critical first step. The process is an opportunity to draw the board, faculty, and staff into a productive discussion. When comparing salaries, similar institutions in the state and region are probably most appropriate. When comparing expenditure patterns, all similar institutions nationally provide an instructive picture. Next, once ratios are developed for the cohort group, questions should be asked such as: “If we say, “Students come first,” shouldn’t our expenditure patterns reflect that commitment? or, “Why are our expenditures for physical plants so out of line with similar institutions?”

While static ratios are informative, compound average growth rates (CAGR) provide the most robust picture for an individual or group of institutions. What they reveal is the institutions’ comparative growth histories. As we compare percentages of allocation we can also compare percent rates of growth regardless of great differences in size.

How They Work

To illustrate how ratios can be used to help evaluate an institution, we tracked the 57 private colleges in our four-state region over a three-year period. The institutions range in size from 37 to 16,413 students; all but two are or have been church affiliated.

As previously mentioned, the data used to construct the following graphs are all in the public domain at NCES-IPEDS. “Position” on the Y axis refers to the institutions’ absolute standing among its peers. (For example, the number of enrolled students.) “Performance” on the X axis refers to the three-year CAGR (Compound Average Growth Rate) of that particular variable. (For example, the direction and speed at which the institution is growing or shrinking.)

We selected seven ratios to analyze for the cohort group. Six institutions are highlighted to illustrate the different challenges faced.

THIS TABLE compares our six sample institutions across the seven ratios. Reading horizontally one can see that all of the institutions have experienced declines in enrollment and all but one institution has increased administrative expenditures. All of the institutions have shown some gain in revenue and investments, but of course the significance of this measure has to be compared to its base. Example 191 appears to be in serious difficulty. Enrollment has declined and investments in instruction have declined while institutional support (i.e., administrative costs) have gone up slightly. Example 221 has similar problems.

Additional ratios could be selected for analysis. The seven displayed here are illustrative of the type of information gleaned from this type of comparative analysis.

Conclusion

What we have done with this example is show how ratios can be used to gauge the current health of an institution. More importantly, from an internal perspective these same ratios can suggest areas where expenses could be reduced while maintaining the balance needed to provide a well-rounded educational experience. Of course, such choices ultimately reflect values. Our values lead us to advocate for preservation of instruction while focusing on reducing administrative overhead and other nonteaching areas.

Institutions that successfully weather the coming enrollment storm will need to develop multipronged strategies. Deciding early on where reductions in spending can occur will create emotional space on campus for productive discussions regarding recruiting and other programmatic strategies.

ACADEMIC SUPPORT includes libraries, museums, media services, academic computing, academic administration, and other services that support the institution’s primary mission.

STUDENT SERVICES include academic support services, academic advising, admissions, career services, campus ministries, community service and service learning, counseling, financial aid, fraternities and sororities, health centers, housing and residence life.
STAFFING includes non-instructional staff such as maintenance, custodial, secretarial, and the like.
INSTITUTIONAL SUPPORT includes senior administration such as the president and vice presidents.

Endnotes

1. Nathan Grawe, Demographics and the Demand for Higher Education (Baltimore, Maryland: Johns Hopkins University Press, 2018).
2. Clayton M. Christensen and Michael B Horn, “Innovation Imperative: Change Everything,” (New York Times, 1, 2013).
3. Clayton Christensen, noted for his theory of “disruptive innovation,” is quoted extensively in making this prediction, including in an article in Inside Higher Education, April 28, 2017.

Dean L. Hubbard, PhD, retired after 34 years as president of three higher education institutions, with 25 years at Northwest Missouri State University. He served as a member of the Board of Examiners for the Malcolm Baldrige National Quality Award and was a founding member of the Excellence in Missouri Foundation, the Governor’s Oversight Panel for Quality in Missouri Government, and chaired the Judge’s Panel for the Missouri Quality Award. He received the Missouri Governor’s Quality Leadership Award, chaired the American Association for Higher Education (AAHE) Academic Quality Consortium, and was a member of the TQ Leadership Steering Committee and the American Society for Quality. Hubbard taught Quality Management as an adjunct in the Executive Doctoral Program at the University of Pennsylvania. Hubbard’s international experience includes graduating from Yonsei University in Seoul, Korea, developing and consulting to language programs throughout Asia, and consulted for educational institutions in Eastern and Western Europe. In addition to his earned doctorate, he was awarded an honorary PhD from Gloucester University in the UK in recognition for promoting quality in British universities. He was a member for eight years on the board of the Alliance of Universities for Democracy, an organization formed to promote democracy in former communist universities.

W. John Minter, PhD, was the leader of the design team (from 1965–74) creating Western Interstate Commission for Higher Education Management Information System for Higher Education. Its purpose was to create standard data definitions and reporting forms for information exchange across state lines. Funded by NCES (1968). This effort evolved into the creation of the National Center for Higher Education Management Systems (NCHEMS). Minter formed John Minter Associates in 1974 to offer peer institution comparison services, which had contracts with national, state, and denominational associations of private, not-for-profit institutions. With Howard R Bowen, Education Economist, Minter conducted a five-year study of independent four-year colleges and universities (1975–1980). The study introduced financial trends based on audited financial statement coded to standard definitions and format so institutions could compare the cumulative impact of financial events. Now retired, Minter maintains a blog reporting institutional growth rates for both public and private sectors at jmabenchmark.net.