Small Colleges Face Mounting Credit Stress as Enrollment Further Deteriorates

More U.S. colleges and universities have closed in the past two years than in any comparable period in recent memory – and market participants warn that factors such as rising tuition and continuing declines in enrollment could carry this trend forward for years to come. Recent examples of higher education closures include the University of the Arts in Philadelphia in 2024 and Fontbonne University in St. Louis in 2025. This year, Hampshire College and Anna Maria College in Massachusetts and Siena Heights University in Michigan are winding down operations.

Financial performance is also an issue as California’s William Jessup University disclosed covenant breaches on both its debt service coverage ratio, or DSCR, and days cash on hand for fiscal year 2025. Massachusetts’ Hampshire College announced it will close in December after failing to refinance $21 million in bonds.

Pennsylvania-based Harrisburg University of Science and Technology missed a debt service payment on April 1, and its rating was cut to CCC- with a negative outlook by S&P Global Ratings. Metropolitan College of New York, or MCNY, has a restricted default rating from Fitch Ratings and is negotiating a forbearance extension with creditors.

MCNY is selling its Manhattan campus to CUNY for $40 million, with nearly all proceeds directed to bond redemptions, while fighting to retain accreditation after Middle States placed it on show-cause status in June 2025. Anderson University, an unrated Christian university in Anderson, Ind., held a bondholder call on May 5 as it works to recover from a DSCR covenant breach in fiscal year 2025.

Last month, Moody’s Ratings downgraded Northern Illinois University to Ba1. S&P revised Gettysburg College’s bond outlook to negative in February.

“We think it’s the beginning of a broader wave right now,” said Jennifer Johnston, senior vice president and director of municipal bond research at Franklin Templeton Fixed Income. “There have been more college closures in the past two years than in my entire career before that,” Johnston, who has been with Franklin Templeton for more than 30 years, told Octus.

The total number of high school graduates is expected to decline steadily through 2041 after a 2025 peak, according to the 2024 Western Interstate Commission for Higher Education report.

At the same time, private nonprofit four-year tuition and fees have risen to an average of $45,000 in the 2025-26 academic year, nearly double the inflation-adjusted price of 30 years ago, according to the College Board. This gap is pushing price-conscious families toward community colleges and public universities, where average in-state tuition runs $11,950 in the 2025-26 academic year, according to the College Board report.

Octus’ distressed higher education database shows stress signals in the Northeast and Midwest, where many smaller regional colleges draw their students.

The map below identifies 19 higher education institutions across the country that have recently shown signs of distress through disclosures, bond defaults and rating actions:
 

 

This broader trend of declining enrollment and financial stress affects smaller, regional universities and hits those in weaker demographic areas, according to Ryan Ciavarelli, senior analyst of credit research at Belle Haven Investments.

“The premier universities are still seeing very strong demand,” he said. “It’s these smaller, regional universities that don’t have a unique product offering or niche that are really struggling to attract students.”

Market participants say the economics are punishing even for schools that meet enrollment targets. Competing for a shrinking pool of students means spending more on financial aid and tuition discounts to get them in the door, compressing margins in the process.

“Even if you can achieve your enrollment goals, it can sometimes come at a cost and really impact your overall margins,” Johnston said.

Franklin Templeton has overhauled how it assesses higher ed credits. “You can no longer assume a school is going to be around in 30 years when the bonds mature,” Johnston said, adding that the firm now tracks enrollment trajectory, program diversity, leverage, endowment size and liquidity when evaluating smaller colleges.

Collateral matters, too. “Oftentimes it becomes a real estate play at the end of the day,” she said. “It’s a very different calculation if you’re in the middle of an urban environment versus in the middle of a rural area.”

Hampshire College is one such case. Founded in 1965 in Amherst, Mass., the liberal arts college was known for its unconventional curriculum – no grades, no majors, self-designed and student-driven.

Its board voted to close on April 14 after a planned land sale fell through and refinancing efforts failed. The endowment had been drawn at an annual rate of 9%, double its usual 4.5% policy rate. Investments at fair value stood at $21.9 million in 2025. The campus is now being sold to cover approximately $25 million in debt.

“This is an incredibly painful moment for the Hampshire community, and we are doing everything to support our students in completing their studies and assist our faculty and staff in navigating what comes next,” Hampshire College President Jennifer Chrisler said in a statement posted to social media on April 14. The New School in New York City announced it is offering Hampshire students a “smooth transfer path” to Eugene Lang College, citing “many comparable degree programs.”

International enrollment was a growth story for many smaller institutions until recently. Schools historically built out programs to attract overseas students and became dependent on those tuition revenues.

That pipeline has tightened sharply under the current federal visa policy, and Harrisburg University is among the most exposed. The school enrolled a large share of students in second master’s programs, many of them international, and federal restrictions on that pathway cut directly into its headcount. University management said on an April 14 bondholder call that a May start cohort came in roughly 25 students below budget, with federal proposals to disallow second master’s programs identified as the primary factor.

Johnston said the key caution for such schools is whether they can survive a multiyear enrollment gap if the policy is reversed.

“The question is, how long will this last. Does the school have the ability to get through perhaps a couple of years of challenges around international enrollment?”

The Consolidation Path

Mergers and acquisitions have been discussed as a potential path forward, but market participants are skeptical that a wave of consolidation will materialize.

“It’s not something philosophically that universities really kind of want to do,” Ciavarelli said. “It’s a messy process.”

Donor relationships, endowment restrictions and board culture make it difficult to convince university leadership that a merger is the right answer, he noted. Still, Johnston pointed to Washington University in St. Louis’ acquisition of the University of Health Sciences and Pharmacy, or UHSP, as one “creative solution” that worked.

UHSP started reporting operating losses in 2022, as net tuition and fees collapsed from $33 million in 2021 to $25 million in 2022. The school missed its DSCR covenant in FY 2024 and FY 2025.

In March 2025, Pennsylvania-based Villanova University signed a merger agreement with Rosemont College, with consummation expected between May 2027 and June 2029. Rosemont is another small Catholic liberal arts college in the state, less than two miles from Villanova’s campus.

In California, William Jessup University acquired Multnomah University in the fall of 2023. “For Multnomah University, remaining an independent institution was no longer financially viable,” the school said. But the acquisition “led to a significant increase in operating costs during the past two fiscal years, resulting in a reduction in net assets and operating cash flows,” William Jessup University management said last month.

The recent downgrades and closures are “not necessarily a systemic risk,” Ciavarelli added. “It’s an ongoing trend that everybody is managing through.”

Franklin Templeton now requires more due diligence before entering into higher education deals. “Firms that have strong research staff that can dedicate time to doing their work are going to be able to successfully distinguish the winners and the losers,” Johnston said.