As colleges and universities prepare for the new school year, many are facing as significant an operational challenge as they’ve ever experienced.
Macroeconomic factors are crashing hard against schools’ financial realities, and those that find themselves unprepared now have to make difficult decisions that may upend the landscape of higher education.
The financial warning signs have been flashing for years; schools that have been steadily creeping towards an enrollment cliff now find themselves facing these challenges head on, no longer able to cover their expenses with tuition and student fees.
Part of the issue is the broader economic and political environment; the expanded vetting of student visas has led many international students to rethink their fall plans, while high interest rates make student loans more expensive and inflation is making daily school operations more costly.
It’s a struggle for everyone, but smaller schools in particular—those with fewer than 1,500 students and lower annual revenue—are the ones now facing particularly significant budgetary gaps. In analyzing the finances of schools across the country, it’s these small, nonprofit colleges with less than $30 million in annual revenues that reported a collective loss in 2024, compared to larger schools that saw significant gains.
Overly optimistic budget projections
Now, these small schools are facing a full-blown financial crisis, operating in the red to keep the lights on, with as much as a 50% budget shortfall in some cases.
It’s a result of overly optimistic budget projections that haven’t been sufficiently scrutinized. Higher education institutions have historically been able to rely on a rhythmic cash flow; fall enrollment brings a new wave of tuition fees in, which helps cover the expenses for the year.
Save for minor adjustments to tuition costs, as long as the number of students showed slight growth, schools generally had no reason to be concerned. Even if there was a smaller 10% or 15% budget gap, the school could adjust its admission requirements to increase the number of admitted students to boost enrollment numbers and keep its books healthy.
What’s changed in the last few years is the attitudes and dynamics driving students in higher education. State-run flagship universities are generally growing compared to smaller private colleges, as students opt for larger institutions with more amenities and academic programs and many times an initial sticker price lower than the private alternatives.
As an increasing number of high school graduates are thinking twice about the cost of a degree, the pool of students looking to attend small, private colleges is shrinking.
Already, we’re seeing the fallout. Since 2020, 81 schools have closed or merged, a figure that would undoubtedly be higher were it not for the billions of federal dollars schools received during COVID from programs like the Higher Education Emergency Relief Fund. Between 2020 and 2022, while enrollment went down, revenues at these small schools went up, masking operational shortfalls.
While some schools were able to leverage this cash safety net to better position themselves post-pandemic, others did not—meaning these schools have to act quickly if they’re going to make it.
It’s not an easy task.
The difference between the institutions that are going to survive this moment and the ones that won’t will come down to an involved and informed board governance. Overly large or ceremonial boards that have a bias towards nostalgia will find it hard to make the critical decisions on the timeline needed to save a school.
Building something sturdier
Meeting this moment means that everyone in leadership—from school presidents, board members, administration and staff—needs to take off any rose colored glasses clouding their view.
Do schools have a realistic enrollment projection to base their decisions on or are they looking at overly optimistic forecasts? Are there people on the financial team capable of delivering bad news, and is the board willing to ask uncomfortable questions?
Every option needs to be on the table right now as schools consider both what they need in the short-term, to keep the school operating, as well as in the long-term to build a path towards fiscal sustainability.
Some schools are reviewing restrictions on their endowment for any flexibility to cover 2025 budget gaps, while simultaneously making plans to sell off various assets and portions of campuses. Schools are merging or combining programs with neighboring institutions, while making plans to add graduate and doctoral programs to drum up revenue.
It’s not going to be just a one-time solution that helps schools get out of this budget hole, but a combination of structural changes to how these small colleges are operating, transforming what these schools have historically been into something different.
Not every school wants to make that change, and not every school will. We’re going to continue to see an increase in the number of institutions folding as the landscape of higher education adjusts to these new market realities.
But for those who want to continue, the path to do so is there. Leadership has to be bold, they have to be transparent, and they need to be realistic about what they’re up against—but these schools are not alone. The nature of higher education is such that these institutions have built a community around themselves that they can now lean on.
The financial pressures won’t go away, but schools that are willing to face their challenges head-on can build something sturdier from what remains.
