Annual college closures are likely to increase above their current rate if the anticipated decline in higher education enrollment transpires, according to a Federal Reserve Bank of Philadelphia working paper released this month.
The report, Predicting College Closures and Financial Distress was authored by Robert Kelchen, professor and head of the Department of Educational Leadership and Policy Studies at the University of Tennessee, Federal Research Bank of Philadelphia researcher Dubravka Ritter and Douglas Webber, principal economist for the Board of Governors of the Federal Reserve.
Their analysis is based on a massive dataset of college and university information, including institution type, staffing patterns, sources of revenue, enrollments and enrollment changes, tuition revenue, measures of liquidity, financial distress, and other financial data from 2002 to 2023.
Using these data, the researchers compared the accuracy of various statistical models in identifying those institutions that eventually closed. Because public institutions rarely close, the analysis was restricted to private for-profit and nonprofit two-year and four-year schools.
The best model — one that used machine learning and was able to compensate for the missing data that plagues many prediction formulas — revealed that of the 100 institutions it assessed to be at most financial risk, 84 had closed within a three-year time span.
The researchers then conducted simulations to predict the likelihood of future closures assuming that the widely predicted “ demographic cliff” enrollment decline of 15 percent between 2025 and 2029 actually occurs. They considered two different, but reasonable, scenarios by which that decline could unfold:
- A one-time 15% drop in enrollment from a 2019 baseline, with no further declines, but a permanently lower level of enrollment, and
- A gradual annual enrollment decline resulting in an aggregate enrollment decline of 15% by 2029.
Under the abrupt, one-time-drop scenario, as many as 80 additional colleges could be forced to shut down annually, almost double the average rate. If enrollment were to drop at the slower pace, about five more colleges would close every year, an increase of 8.1% over the average number of annual closures.
The researchers conclude that their simulations “point to the precarious potential situation facing postsecondary education in the coming years, especially if the demographic cliff materializes in a moderate to severe fashion.”
They added that although the estimated increase in closures “might seem small at the national level, they would be significant for the handful of localities predicted to experience college closures in a given year.”
Although most of these additional predicted closures will be institutions that are not well-known outside of their local communities or states, “their closures could be quite disruptive to those communities. Some institutions can be considered significant employers even in small and medium-size communities, and often act as anchor institutions in those communities,” according to the report.
The economic consequences of college closures include a loss in employment resulting from the shuttered college plus “the immediate spillovers from establishments that provide goods/services to schools (most notably, retail, healthcare, and food services). Moreover, most students work while attending college, so any working students who are either attracted to or kept from leaving the community because of the presence of the educational institution will also contribute to local economic effects.”
It’s important to keep in mind, as the authors observed, that most colleges and universities have a low probability of closing, especially those that are public.
The vast majority of institutions that closed between 1996 and 2023 were two-year schools in the for-profit sector that had small enrollments and were highly dependent on tuition as their single source of revenue to fund their operations. During those same years, of 850 four-year public institutions, only two closed their doors, and among 2,002 private nonprofit four-year colleges, only 142 shut down.