As higher education institutions continue to navigate financial pressures, it’s more important than ever to assess financial health using clear, data-driven metrics. rpk GROUP’s recent report, The Financial Sustainability of Higher Education: Bright Spots & Challenges 2012 to 2022, offers valuable insights into how institutions have fared in recent years and where financial sustainability challenges are most pressing.
Persistent challenges stemming from declining enrollment and tuition revenue—driven by shifting demographics, increased competition, and questions about the value of higher education—combined with rising costs due to inflation have heightened concerns about financial stability. College closures increased during the pandemic, and financial uncertainty remains a significant issue, particularly for small colleges that rely heavily on tuition revenue.
At the end of the pandemic in 2022, key financial metrics show:
- Only 63% of nonprofit higher education institutions appeared financially healthy, as indicated by positive net income.
- Public institutions were in a healthier financial position than private institutions. Nearly three quarters (74%) of public institutions showed positive net income compared to 47% of private institutions in FY22.
- Public institutions saw their financial positions improving over time while private institutions did not. Public institutions were also financially healthier during the pandemic compared to earlier in the decade. In contrast, private institutions—particularly private master’s and bachelor’s colleges—experienced a gradual decline in financial stability over the prior decade.
How Do We Measure Financial Sustainability?
Higher education institutions rely on multiple revenue streams, from tuition and fees to government appropriations and private donations. But having revenue isn’t enough. Institutions must manage costs effectively and generate enough net income so they have the financial flexibility to adapt to changing conditions and invest in new campus priorities.
The study explores two key financial measures used to assess the financial stability of higher education, and that can also help institutions understand their own financial standing: net income and the composite financial index (CFI). Together, these indicators provide a clearer picture of institutional health beyond simple year-over-year budget comparisons and can guide strategic decisions for long-term viability.
Net Income: A Snapshot of Annual Activity
Net income—the difference between total revenue and expenses—is a standard financial metric found on financial statements across industries. In higher education, net income is a key indicator of financial sustainability, helping institutions evaluate their ability to cover costs, reinvest in their mission, and respond to financial pressures. Unlike for-profit industries, nonprofits are, by design, not focused on generating net income for investors. Even so, institutions with declining or negative net income are not as well equipped to respond to potential financial stressors.
While 63% of institutions reported positive net income in FY22, this figure drops to 55% when Higher Education Emergency Relief Fund (HEERF) stimulus funds are excluded, revealing that 8% of institutions relied on this temporary federal aid to balance their budgets. Many colleges and universities depended on HEERF support during the pandemic to compensate for revenue losses from tuition and fees, room and board, research, auxiliaries, and other sources. Private, non-research institutions were particularly vulnerable, and these funds did not fully offset these same losses at many private institutions.
It is common in other industries to also calculate net income using an approach known as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), which removes non-cash expenses like depreciation. Using EBITDA for higher education aligns more closely with the ‘balance the budget’ view of finances that is common at institutions. However, it can make institutions appear more financially stable than they actually are because it does not account for long-term capital investments needed for financial sustainability, such as maintaining facilities. From an EBITDA perspective, 89% of institutions had positive financial results in FY22, significantly higher than the 63% of institutions reporting positive net income.
The Composite Financial Index (CFI): A Broader View of Financial Strength
While net income provides a snapshot of annual financial performance, the composite financial index (CFI) offers a more holistic measure of long-term financial sustainability. The CFI is an aggregate score based on multiple financial ratios (including net income) that helps guide institutions in addressing financial health and risk.
In FY22, just over 60% of institutions had a CFI score considered in the financially stable range (i.e., a score of 3 or higher). Even so, financial stress increased for 42% of those institutions from FY20 to FY22. Private nonprofit institutions, particularly small and tuition-dependent colleges, saw CFI scores declining over time, reflecting growing financial pressures.
What These Metrics Tell Us
These metrics tell us that financial sustainability in higher education is complex and varies by institution type:
- Public institutions fared better financially during the pandemic, but HEERF funding masked underlying financial concerns. The end of federal relief funding could expose financial weaknesses in FY23 and beyond.
- Private institutions, particularly non-research colleges, face significant financial stress. Many have declining net income and lower CFI scores, signaling long-term sustainability risks.
What’s Next?
Understanding these financial metrics isn’t just about assessing the past. It’s about shaping a financially sustainable future. Institutions that take proactive steps to diversify revenue streams, control costs, and strategically invest in student success will be better positioned to navigate financial uncertainty.
Stay tuned as we continue unpacking this report’s insights in upcoming posts.
Want to dive deeper? Download the full rpk GROUP report here. And register for our upcoming webinar on Thursday, April 3rd at 1pm ET (register here).
During this webinar, rpk’s Rick Staisloff and Donna Desrochers will share key findings from the report. Later, they will engage in conversation with industry leaders, Terry Brown, Vice President for Academic Innovation and Transformation at American Association of State Colleges and Universities, and Ed Smith-Lewis, Senior Vice President, Strategic Partnerships and ICB at United Negro College Fund, on the financial sustainability of higher education and the impact on institutions.
