{"id":2407,"date":"2026-08-29T20:39:11","date_gmt":"2026-08-29T20:39:11","guid":{"rendered":"https:\/\/knowacademia.com\/?p=2407"},"modified":"2026-08-29T20:39:13","modified_gmt":"2026-08-29T20:39:13","slug":"why-saving-a-college-in-financial-distress-is-so-difficult","status":"publish","type":"post","link":"https:\/\/knowacademia.com\/?p=2407","title":{"rendered":"Why Saving a College in Financial Distress Is So Difficult"},"content":{"rendered":"\n\n

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.<\/p>\n

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.<\/p>\n

Here are a typical set of factors must be resolved to end deep financial distress.<\/p>\n

Debt<\/strong> \u2013 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.<\/p>\n

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  1. Purpose of the Debt \u2013 is the debt for residence halls, classrooms, sports facilities, or other types of facilities that do or do not generate revenue?<\/li>\n
  2. Holder of the Debt \u2013 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?<\/li>\n
  3. Scale of the Debt \u2013 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?<\/li>\n
  4. Covenants \u2013 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.<\/li>\n
  5. Collateralization \u2013 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.<\/li>\n
  6. Debt Rating \u2013 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.<\/li>\n
  7. Delinquent Payments \u2013 is the college episodically delinquent or continuously delinquent in debt payments.<\/li>\n<\/ol>\n

    Financial Condition<\/strong> \u2013 this refers to the financial health of the college in terms of its budget, asset, liability, net assets, and cash.<\/p>\n

      \n
    1. Budget Condition \u2013 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]<\/a><\/sup> 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.<\/li>\n
    2. Assets \u2013 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?<\/li>\n
    3. Liabilities \u2013 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?<\/li>\n
    4. Net Assets \u2013 are net assets shrinking due to deficits and increasing debt?<\/li>\n
    5. Cash \u2013 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?<\/li>\n<\/ol>\n

      Financial Drivers<\/strong> \u2013 include enrollment, compensation, ratios or rubrics for estimating the number of positions needed, and the labor market that shapes student decisions.<\/p>\n

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      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.<\/li>\n
      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.<\/li>\n
      3. Ratios and Rubrics \u2013 are values that colleges and universities use to estimate the number of administrative, faculty, and staff positions that are needed.<\/li>\n
      4. Labor Market Conditions \u2013 affects student choice about going to college, what to take at college, and the amount of debt that they are willing to incur.<\/li>\n<\/ol>\n

        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\u2019 musts understand the specific factors that determine the cause of their college\u2019s financial decline and must also understand what factors must change and how to change them to return to financial health.<\/p>\n

          \n
        1. \n

          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. \u2191<\/a><\/p>\n<\/li>\n<\/ol>","protected":false},"excerpt":{"rendered":"

          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 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","om_disable_all_campaigns":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0},"categories":[29],"tags":[],"coauthors":[24],"_links":{"self":[{"href":"https:\/\/knowacademia.com\/index.php?rest_route=\/wp\/v2\/posts\/2407"}],"collection":[{"href":"https:\/\/knowacademia.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/knowacademia.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/knowacademia.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/knowacademia.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2407"}],"version-history":[{"count":3,"href":"https:\/\/knowacademia.com\/index.php?rest_route=\/wp\/v2\/posts\/2407\/revisions"}],"predecessor-version":[{"id":2410,"href":"https:\/\/knowacademia.com\/index.php?rest_route=\/wp\/v2\/posts\/2407\/revisions\/2410"}],"wp:attachment":[{"href":"https:\/\/knowacademia.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2407"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/knowacademia.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2407"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/knowacademia.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2407"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/knowacademia.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcoauthors&post=2407"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}