FEDS Paper: Predicting College Closures and Financial Distress
Date: January 6, 2025
Source: FEDS (Federal Reserve Economic Data System)
Summary:
The Federal Reserve Board (FRB) has published a new working paper titled “Predicting College Closures and Financial Distress.” The paper develops a financial distress prediction model that can help identify colleges and universities at high risk of closure or financial distress.
Key Findings:
- The model is based on a combination of financial ratios and other metrics that capture colleges’ financial health.
- The model was tested on a sample of colleges and universities from 2005 to 2019.
- The model was able to correctly predict 85% of college closures and 90% of cases of financial distress.
- The model can be used to provide early warning signs of financial trouble, allowing colleges and universities to take steps to improve their financial stability.
Importance:
College closures and financial distress have a significant impact on students, faculty, and local communities. This model can help prevent such disruptions by identifying at-risk institutions early on.
How the Model Works:
The model uses a range of financial ratios, including:
- Student-to-faculty ratio
- Tuition revenue per student
- Endowment per student
- Debt-to-asset ratio
- Operating margin
These ratios are then combined with other metrics, such as:
- Enrollment trends
- State funding levels
- Competition from other institutions
The model uses a machine learning algorithm to identify patterns in these metrics that are associated with increased risk of closure or financial distress.
Applications:
The model can be used by:
- Colleges and universities to assess their own financial health
- State and federal policymakers to identify institutions that may need support
- Students and parents to make informed decisions about college choice
Conclusion:
The FRB’s college financial distress prediction model is a valuable tool that can help prevent college closures and financial distress. By identifying at-risk institutions early on, colleges, policymakers, and students can take steps to maintain access to affordable and high-quality higher education.
FEDS Paper: Predicting College Closures and Financial Distress
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