In 2008 there were 76 on the list and in 2009 there were 126 and this year there are 149, In the last two years, there has been an astonishingly 96% increase in private non-profit colleges and universities failing their Test of Financial Strength of the Department of Education. According to the Department of Education these institutions are in danger of going bankrupt. Over the years their prediction has turned out to be correct for most of them.
I am not a person who laments the closing of corporations due to fiscal woes. As an economist I recognize that one of the hallmarks of our economic system is our recognition that (with the exception of some banks and auto companies) organizations must be allowed to fail. To me it just means that, as is with our own mortality, we’ve come to pass, not to stay.
Every year, hundreds of private corporations for profit and non-profit, go out of business. The Test of Financial Strength is a complicated equation (I must confess I do not quite understand it), which produces scores ranging from -1.0 to +3.0. These scores (the Department of Education says) are derived from several factors, including debt, assets, operating deficits and surpluses.
Only the National Hispanic University (NHU) that was financially failing in 2008 was able to regain its solvency. An old friend Dr. Roberto Cruz, an intellectual who was interested in the success of the non-intellectuals, founded NHU. He was convinced (and convincing in publications we co-authored) that academic success of people of Hispanic descent was only possible through an empowering of their own cultural heritage. Four years after Dr. Cruz left his leadership position, NHU was in fiscal trouble.
The NHU is now a part of Laureate International Universities, a
for-profit corporation, which owns 20 universities around the world. These universities are unique entities serving defined populations. Unlike the for-profits that impose a single model for every campus, Laureate allows each university to select its own model, injects capital when needed, and improves the operations specific to each campus.
The remaining colleges and universities failing their Test of Financial Strength were not as fortunate as NHU. When the Department of Education puts you on that list, your life becomes very difficult.
The Department demands that the college demonstrates its ability to keep the door open. This usually means that the institution obtains a letter of credit from a bank. If you have not tried to do that lately, let me assure you that it is easier to get blood from a turnip. In its defense, the government is just trying to protect itself (and us the taxpayers) by denying loans to student from universities that might not survive to issue a degree.
What puzzles me is why doesn’t the Department of Education do the same with public universities? Public universities cannot survive without huge tuition increases and the states that provide the “faith and credit’ are broke. As some of our readers commented, (public institutions) “don’t know how to save themselves”.
I was thinking of suggesting to the government that they apply their own Test of Financial Strength to all universities in the 11 states that are insolvent. But that would result in closing most of those public institutions. I need to add another category to the “too big to fail” list: State Universities and Colleges.