US College closures predicted to surge, Federal Reserve research warns

The number of colleges closing each year is expected to grow significantly as schools face a decline in prospective students. This trend, referred to as the "demographic cliff," is tied to a drop in birth rates during the Great Recession, leading to fewer students graduating high school and enrolling in college. Other factors, like low graduation rates and rising costs, have also made higher education less appealing for many.

A new report from the Federal Reserve Bank of Philadelphia highlights the risks ahead. Researchers used financial data, enrollment patterns, and revenue models to predict future closures. They ran simulations to estimate the potential impact of these closures. In a worst-case scenario, where a one-time 15% drop in student numbers occurs, 80 colleges could shut down, affecting over 100,000 students and nearly 21,000 staff members.

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Demographic and financial pressures

Colleges have faced increasing financial challenges in recent years. Tuition costs continue to rise, student debt has reached record levels, and borrowing costs are the highest they’ve been in 15 years. Meanwhile, fewer high school graduates are choosing to attend college right after graduation. Between 2010 and 2021, enrollment in degree-granting institutions fell by 15%.

The closure of colleges poses significant challenges, not only for students but also for local economies. Colleges often serve as major employers in their communities, and their closure can cause ripple effects. The report estimates that American higher education supports about $700 billion in spending annually, employs 3 million people, and enrolls nearly 25 million students.

Historically, private for-profit colleges have made up the majority of closures, with over 1,660 institutions shutting down between 1996 and 2023. Public colleges, especially four-year institutions, rarely close. However, the current demographic and financial challenges may lead to closures among smaller private nonprofit colleges.

The report emphasizes the importance of preparing for these changes. While predicting college closures is difficult, understanding the potential impact on students, workers, and local economies is crucial as the U.S. education system faces a period of major transformation.