(Bloomberg) -- The number of colleges that close each year is poised to significantly increase as schools contend with a slowdown in prospective students.
That’s the finding of a new working paper published by the Federal Reserve Bank of Philadelphia, where researchers created predictive models of schools’ financial distress using metrics like enrollment and staffing patterns, sources of revenue and liquidity data. They overlayed those models with simulations to estimate the likely increase of future closures.
Under the worst-case scenario which assumes a one-time 15% drop in prospective students — known as the “demographic cliff” — 80 additional colleges would shut, impacting more than 100,000 students and 20,880 staff members. If that student decline was spread out over five years, annual closures would tick up by 4.6 schools, the report shows.
“These 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,” according to the report, authored by Robert Kelchen, a professor at the University of Tennessee and a visiting scholar at the Federal Reserve Bank of Philadelphia, along with Dubravka Ritter and Douglas Webber, Fed researchers.
“While some of these estimated increases 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,” the report said.
Higher education has come under pressure the last several years as the number of prospective college students falls, as a result of the decline in the birthrate during the Great Recession. On top of that, a larger number of students are weighing the value of a traditional college degree as tuition prices climb and student debt saddles a generation of attendees. Further, students who needed to borrow from the US government to cover college tuition this fall faced the highest borrowing costs in more than 15 years.
The number of students enrolled in degree-granting colleges and universities fell by 15% in 2021 compared to 2010. The effects of the so-called demographic cliff are amplified by low graduation rates and a shrinking share of high schoolers enrolling in college immediately after graduating, the researchers said.
Predicting college closures is difficult because of the complexity of their financial structures and limits on data availability. But the researchers said coming to an estimate is “more important than ever” because of the headwinds facing higher education, the sheer number of students who could be impacted and the potential for ripple effects on local economies.
Between 1996 and 2023, a total of over 1,660 institutions have closed, mostly among private for-profit colleges, while public four-year institutions hardly ever closed. Private nonprofit four-year colleges represented about 7% of closures during that period.
A rise in closures also risks harming the academic trajectory of students who attend schools that close, as well as the local economies where colleges are large employers. In total, American higher education produces about $700 billion in expenditures, enrolls nearly 25 million students, and employs about 3 million people, according to the paper.
“Even ignoring the potential negative effects due to reduced training capacity in a county that loses a college, the immediate employment effects as a share of the labor force might be large,” the researchers wrote.
