Why Saving a College in Financial Distress Is So Difficult

by Michael K. Townsley | Aug 29, 2026 | Private Colleges & Universities in Crisis

This brief focuses on financial problems that make saving a college in deep financial distress. The challenge in these cases is that all the financial problems have to line-up and be resolved with the acquiescence of third parties, the willingness of the board of trustees and the faculty to support the changes. Support and lining-up the financial problems can result in delays and contradictory actions that may unsolvable.

Since the financial problems are often large, complex, and exceed simple solutions like cutting costs or raising money, the work of returning the college to a state of financial stability can exhaust the leaders physically and emotionally to the point that they may abandon the process.

Here are a typical set of factors must be resolved to end deep financial distress.

Debt – whatever form it takes, the problem with negotiating or eliminating debt depends on: purpose of the debt, the holder of the debt, scale of the debt, covenants, collateralization of the debt, debt rating of the college, and whether debt payments are up-to-date or delinquent.

1. Purpose of the Debt – is the debt for residence halls, classrooms, sports facilities, or other types of facilities that do or do not generate revenue?
2. Holder of the Debt – is the debt held by a local bank, a regional or national bank, a debt investment house, or a capital investor in a campus project?
3. Scale of the Debt – does the debt represent a significant portion of assets, which represents to lenders, auditors, and debt rating services measures of the capacity to support the level of debt?
4. Covenants – define the conditions that a college must follow to avoid the calling of the debt by the lender. Typical covenant measures include deficits, debt ratios, or adding new debt.
5. Collateralization – is the percentage of college assets used to protect the lender if the college fails to make debt payment or the college closes or goes bankrupt. This constraint can severely restrict what the college can sell in the event of severe financial distress.
6. Debt Rating – typically bond or credit rating agencies determine a colleges debt rating based on national standards or upon the set of other colleges that the credit agency rates. Low ratings besides increasing interest rates on new debt may make lenders reluctant to loan money.
7. Delinquent Payments – is the college episodically delinquent or continuously delinquent in debt payments.

Financial Condition – this refers to the financial health of the college in terms of its budget, asset, liability, net assets, and cash.

1. Budget Condition – does the college report deficits year-after-year suggesting that the college has a structural problem in its business model? For instance, the problem may be due to net prices shrinking to the point where very little cash is generated from tuition revenue. Or, the endowment draws and other revenue sources are too small to make up for the lost revenue and cash from net tuition. Then there is the very real problem that direct student expenses, in particular, student services and academic support^[1] is growing faster than net tuition revenue. Lurking at many private colleges – deferred maintenance – including safety on campus, infrastructure (buildings, heating and cooling systems) integrity, technology (hardware, software, security, and communications) keeping systems up-to-date and current with the market.
2. Assets – is the endowment keeping pace with financial markets and are student receivables net of uncollectible student debt increasing because payments are not being made, which means that they are not being efficiently converted to cash, and is the real value of the plant declining because of deferred maintenance, which reduces the capacity of assets to support more debt? Has collateralization reached a point where there is insufficient asset capacity to support more debt?
3. Liabilities – is the college borrowing more funds using short- and long-term debt to cover operational costs and does the college have the means to keep debt payments current?
4. Net Assets – are net assets shrinking due to deficits and increasing debt?
5. Cash – remains king and must be sufficient to cover operations. If cash reserves are shrinking and cannot be replenished from either short-term loans or endowment draws, then the grand circle of structural deficits, over collateralized assets, and spiking debt make it difficult to break the cycle of the depletion of cash reserves?

Financial Drivers – include enrollment, compensation, ratios or rubrics for estimating the number of positions needed, and the labor market that shapes student decisions.

1. Enrollment drives revenue and expenses at most colleges. The problem is that as the demographic cliff steepens and revenue slides, expenses do not fall at the same rate because nearly all college expenses are fixed rather than variable. As a result, as enrollment and revenue shrink, expenses move down in a discordant step-down fashion.
2. Compensation typically encompasses 70% of total expenditures and is fixed by contract, policies, or government regulations. However, it drives the amount of revenue needed to cover compensation expenses. It also affects the amount of plant needed to house the assigned space of employees, classrooms, labs, and athletic facilities.
3. Ratios and Rubrics – are values that colleges and universities use to estimate the number of administrative, faculty, and staff positions that are needed.
4. Labor Market Conditions – affects student choice about going to college, what to take at college, and the amount of debt that they are willing to incur.

This list is not intended to be a full catalog of all factors that make ending financial distress difficult. While these factors will be different for each institution, presidents’ musts understand the specific factors that determine the cause of their college’s financial decline and must also understand what factors must change and how to change them to return to financial health.

1. Student services and academic support were selected as problematic because IPEDS data over the past decade has shown that these two expense categories have grown faster than net tuition revenue. In addition, instructional expenses have tended to be relatively stable over this period. ↑

Foolish Reponses to Financial Distress

by Michael K. Townsley | Jun 9, 2026 | Private Colleges & Universities in Crisis

Many presidents of private colleges and universities recognize that the demographic cliff, changes in student preferences for degree programs, shrinking donations, and closer auditing by the government could severely damage their institution. However, it seems that a large number of presidents sincerely believe that they can meet the challenges by growing enrollment and increasing donations. This is a massive non sequitur, and therefore is not a rational response to imminent and destructive events that will place unbearable financial stresses on most private colleges and universities.

Unfortunately, impartial observers can only wait and hope that these presidents will see that they are living on the edge of a calamity and have the time to respond. Time is everything as known events unfold and push private colleges into deep financial distress.

Gaming the System in Higher Education

by Michael K. Townsley | Jun 9, 2026 | Private Colleges & Universities in Crisis

There are two different aspects to: gaming the system and incentives, one involves straight out playing gives with rules and goals and the other is to dissemble. As a sidenote, usually, a harsher word like lying is use instead of describing the behavior as dissembling. As softer word describes lying because higher education exists in a regulatory environment that as a result, it cannot afford the truth.

Gaming the system is when a procedure that involves money is easily fooled. For example, if enrollment management is measured by applications and not actual enrollment and attending class for one semester Or, coaches are not required to turn in travel receipts, or when departments are not required to have purchases pre-approved. This list could have hundreds of examples. Gaming happens when results are either not audited or poorly defined and can be easily manipulated.

Another aspect of gamin involves incentives to dissemble. Typically, this happens with government regulations or laws. The dissembling takes place when honesty would lead to federal regulatory sanctions or lawsuits. The first example involves what on its face would be a simple matter, asking for a reference and only getting dates on employment, or calling a previous employer for a recommendation and receiving the same basic information. Why does this happen? Anyone involved in reviewing applications, knows why. If a previous employer provides an honest review of their former employee’s work, they could open the possibility of a law suit for violating employment privacy information. This can lead to a carousel of short-term employees, who are released after a few weeks because they refuse to do the work, or do not accept employment expectations like showing up on time for work, leaving work early, taking long lunches, dressing in a slovenly manner, or arguing over trivial matters. The employer is unable to discover these problems beforehand because the prior employer is trying to avoid the possibility of a lawsuit. Of course, some candidates dissemble because they do not want to reveal shortcomings in their employment history.

An employer can take some control of the system gamer by rewriting goals as precise statements that directly relate to outcomes so that incentive benefit the institution. Unfortunately, in today’s labor market, there is no easy solution for finding the facts about a candidate’s capabilities, short of hiring a private investigator, which encompasses another pack of problems.

Avoiding Major Budget Mistakes
Colleges at the Edge of Financial Distress

by Michael K. Townsley | Jun 9, 2026 | Private Colleges & Universities in Crisis

Private colleges setting on the brink of deep financial distress need to be very careful when the build their budgets. The traditional way of budgeting will not work under those circumstances, especially when faced by the demographic cliff. Rather, the college needs to take the following precautionary recommendations seriously.

• The major focus of the budget has to be cash. Net income in secondary. Therefore, the cash budget for operations, investing and financing should be estimated.
• Do not use marketing forecasts that project increases in enrollment. Market managers want to push higher enrollments, but colleges on the brink of financial distress cannot afford overestimating budgets that typically lead to larger expenditures.
• The budget should be constructed around two enrollment forecasts:
  • Stable forecast that assumes that enrollment for the next fiscal year will be the same as the current year.
  • Demographic cliff forecasts that take into account the estimated decline in enrollment in the college’s student market.
• A single year budget is inadequate given the compounding dangers of the demographic crash It is too risky to assume that budget decisions in the coming year will not adversely affect the budget in the following year.
• The budget should become a major part of a strategic turnaround. There is mounting evidence that financial distress cannot be solved in a single year. Therefore, the college should turn to the Cyert Model to compute scale of its financial disequilibrium. The Data sources are data in the audits.

Computing the Cyert Disequilibrium Gap

Too Many Colleges and Universities Chasing too Few Students

by Michael K. Townsley | Jun 9, 2026 | Private Colleges & Universities in Crisis

Inside Higher Ed recently offered a webcast on mergers, acquisitions, and partnerships because private colleges can no longer afford to wait until they are in deep financial trouble to look for solutions.

Emily Wadhwani, the senior director for higher education at Fitch, a bond rating agency, believes that the “weak [are] getting weaker.” ^[1] Anthony P. Carnevale, director of the Center for Higher Education and the Workforce at Georgetown University, puts the condition of higher education more starkly “There really is an arithmetic problem here. There aren’t going to be enough students to go around.” ^[2] Moreover, as Susan Butrymowicz observed in a 2020 Hechinger Report few agencies will step into the fray to help an institution which is in danger of closing.^[3] The question for private colleges and universities facing the full force of shrinking student markets, aggressive price-competition, inflationary increases to their labor costs, and the uncertainties of AI technology is – how can my college or university survive?

Given the many chasing the fewer, private colleges and universities should take immediate steps regarding a merger; an acquisition, defined as being taken over by another entity; or a partnership. Frankly, the cascade of bad news about private institutions of higher education shows that even at the very edge of the demographic cliff is that they cannot find enough students for 2027. As a result, many private colleges will not make good candidates for a merger or a partnership. Their best hope is to be acquired by another institution whose finances are stable and have better penetration into the student market. The waiting till tomorrow game is over for private institution that see severe financial distress in the near future. They need to prepare themselves as a candidate for acquisition, before their finances erode to a state that they are no longer an attractive candidate for acquisition.

If a college wants to be acquired by another entity^[4], it needs to do the following.

1. Contract with a skilled acquisition specialist who would estimate the value of the college and conduct a comparison financial analysis of interested entities.
2. Collect all legal documents, such as, corporation papers, employment contracts, construction contracts, service contracts, faculty handbooks, employee handbooks, property deeds, loan documents with covenants, and the location of corporate minutes.
3. Prepare an organization chart.
4. Collect copies of most recent catalogues that include all curricular descriptions and student requirements for admission and graduation.
5. Copy of a course load matrix.
6. Copy of most recent accreditation reports with contacts and next scheduled reviews.
7. Unduplicated list of all students by earned credits.
8. Copy of all audits for past three years with management reports and related federal reports, such as the federal financial test for financial aid, and any accreditor or federal issues.
9. Copy of all I 990 reports.
10. Full list of benefits with description of the benefits and contacts.
11. List of all insurance contracts including: D&O, liability, property, umbrella, automotive, and any other insurance. List should include against and contacts.
12. List of any outstanding law suits with a description of the suit and the status of the suit.
13. Description of any zoning or compliance issues with the local government.
14. Description of the IT and communication systems and networks, employees and duties, service contracts, and any major issues with the systems.
15. List of all buildings with specifications, years of construction and renovations, HVAC systems, communication links, and deferred maintenance.
16. Dimensions and layout of the campus.
17. Underground networks, water, sewage, communication networks, and any other buried systems.
18. List of all automobiles, buses and any other means of transportation with dates of purchase, mileage, latest maintenance, and any other relevant information.
19. Description of all major issues that affect the capacity of the college to survive and achieve its goals.

This list may not include everything that is needed when another entity conducts its due diligence. The college should also insist on similar information from the acquiring entity so that is can ensure its students, the community, and governmental offices that the acquisition will serve their needs.

1. Fischer, Karin (August 12,2022); “The Shrinking of Higher Ed”; (Retrieved September 30, 2022); The Shrinking of Higher Ed ; Chronicle of Higher Education; Washington, D.C. ↑

2. Ibid.; Fisher, Karin; ↑

3. Butrymowicz,  Sarah (August 4, 2020); “Dozens of colleges closed abruptly in recent years — and efforts to protect students have failed”; Hechinger Report; Dozens of colleges closed abruptly in recent years — and efforts to protect students have failed (nbcnews.com). ↑

4. I am using the word entity because the college should consider opportunities more broadly that a traditional private college. ↑