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In brief
In 2022, the EY-Parthenon team released the Institutional Viability Metric (IVM) and applied the tool to evaluate risk within the four-year higher education sector. Using 2019 and 2020 Integrated Postsecondary Education Data System (IPEDS) data, our analysis showed that more four-year colleges and universities were at financial and operational risk than previously thought: roughly 20% of the four-year segment was “At risk” in both 2019 and 2020, and another 20% was flagged as “Monitor.”
However, an analysis of recently released 2021 IPEDS data shows a starkly different picture. Based on 2021 data, only about 10% of four-year institutions are “At risk.” Roughly 20% are in the “Monitor” category, with 70% of the market showing as “Stable” (Figure 1).
Note: The number of four-year institutions scored in each year changes due to data availability (an institution is only scored if all six indicators are available for a given year) as well as closures and consolidations
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Read moreDid the higher education landscape become fundamentally healthier in the COVID-19 pandemic, or is the pulse on risk temporarily distorted by financial abnormalities? An analysis of the IVM’s key metrics sheds light on this question.
The IVM uses six weighted metrics in three categories to assess and score an institution’s risk, quantifying real “virtuous” or “vicious” cycles of financial health experienced by four-year institutions. An examination of 2021 results across these metrics suggests an “ibuprofen effect” in the landscape today – in other words, major, short-term swings in position driven by billions in COVID-19 stimulus.
Among the key findings:
An institution’s profit margin carries a 25% weight in the IVM, and an institution with any surplus receives a “Stable” designation on the metric. In 2019 and 2020, average profit margins by risk category were comparable and only slightly lower in 2020 overall (-2%) than in 2019 overall (2%) – likely due to early COVID-19 impacts. However, in 2021, a stark increase in average profit margin occurred across risk buckets and overall (21%) as budgets were uplifted by nearly $80b from the Higher Education Emergency Relief Fund (HEERF). In general, institutions were required to spend half of allotments on student grants, with the remaining funds to be spent on permissible operating costs over the next 1 to 3 years.
A significant increase in the number of institutions achieving surpluses in FY21 supported higher overall IVM scores and reduced the “stickiness” of risk assessments seen between 2019 and 2020. As shown in Figure 3, nearly 60% of institutions that were “At risk” in 2020 moved into “Monitor” or “Stable” in 2021. Between 2019 and 2020, only 30% of “At risk” institutions did so. Similarly, over half of institutions that were “Monitor” in 2020 moved into “Stable” in 2021. Between 2019 and 2020, only 25% of “Monitor” institutions did so.
Note: Institutions primarily move into “No Ranking” due to data availability (an institution is only scored if all six indicators are available for a given year), though closures/consolidations can also play a role
Figure 4 illustrates that across 2019, 2020 and 2021, averages for these additional IVM metrics among four-year institutions with the data availability to be IVM-scored remained steady or slightly worsened. While short-term surpluses supported by federal stimulus may have pushed certain institutions into the green for FY21, deeper trends in market demand and student outcomes will continue to play longer-term roles in shaping institutional trajectories.
Though COVID-19 relief funding was a critical intervention amidst unprecedented challenges for students and institutions alike, these efforts may have set higher education back in terms of change and transformation. With billions in emergency stimulus, the sector was positioned to reactively buoy day-to-day operations, but may have delayed proactively taking on existential threats to mission and model posed by decades of declining enrollment, increasing competition and shifting student expectations.
As the sector recovers from the COVID-19 pandemic, these enduring challenges are not only brought back into focus but are also joined by emergent economic shocks in the form of economic downturns and inflation. As the EY-Parthenon team reassesses risk in the four-year institutional landscape with 2022 data and beyond (as it becomes available), we expect a contraction in market stability due to these factors – particularly as stimulus funds dwindle.
In the meantime, it is critical for higher education leaders to take an active role in shaping their own paths to financial sustainability. While the road ahead may differ depending on an institution’s current “At risk,” “Monitor,” or “Stable” status, the importance of developing strategic and operational plans that reverse “vicious” cycles and reinforce “virtuous” ones in response to acute market realities is commonly shared.
The views expressed by the authors are not necessarily those of Ernst & Young LLP or other members of the global EY organization. Numbers included are from EY-Parthenon analysis and based on IPEDS data unless noted otherwise.
The IVM incorporates measures of financial position, market demand and student outcomes to create a dynamic view of an institution’s health. An updated assessment of the four-year higher education landscape using 2021 financial data suggests temporary risk reduction due to an influx of COVID-19 stimulus funds. These effects will likely dissipate over the short- to medium-term.
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