(MONEY Magazine) – This is the decade of reckoning for America's 2,127 four-year colleges and universities. The pool of high school graduates is shrinking, from 2.7 million in 1989 to an estimated 2.5 million in 1994. Government funding is drying up. And parents have begun to resist the steep annual tuition increases of the past 10 years. Across the country, schools large and small, public and private, are in the grip of a financial squeeze that has led to increasingly crowded classrooms, shabbier campuses and reduced counseling and extracurricular activities. ''We've had years of more money, more programs and more buildings,'' says Frank Newman, president of the Education Commission of the States, a research group in Denver. ''And now we're facing years of retrenchment that will affect every institution.'' As a result, college-bound students and their parents must now carefully check out a school's financial health as well as its academic and social character. With many institutions facing potential money troubles, ''you don't know if the school you enter as a freshman will be the same place when you're a senior,'' says Michael McPherson, an economics professor at Williams College. This guide can help you and your son or daughter avoid colleges with serious problems and find schools that will continue to offer top-quality education at reasonable cost for years to come. In addition, the articles on the following pages describe today's perils of campus life, like alcohol abuse and crime, and explain how to determine whether a school is right for your child. We also tell you what you need to make the most of the financial aid system -- and how to pay the bills if you can't get help. Finally, our exclusive value rankings (page 56) highlight the schools that deliver the best education for the money. Financial problems are most dire at public colleges and universities, which educate 80% of the nation's 12.2 million undergraduates. Halfway through the past school year, 30 states forced their university systems to slash their budgets by an average of 3.9%. The University of Massachusetts schools, for example, have had to cancel classes and reduce library hours and student services such as counseling. ''It's like being thrown into a cold shower,'' says Richard Novack, director of the Center for Higher Education Policy and Finance, a research group in Washington, D.C. Private universities -- even the richest in the nation -- have also been forced to economize. Yale, for example, with a $2.6 billion endowment, the nation's third largest, has cut temporary faculty positions by 5%. Stanford has laid off 100 staff members and imposed, in effect, its first-ever faculty hiring freeze. Schools that are more hard-pressed are eliminating entire departments. To cope with a roughly 40% decline in undergraduate enrollment since 1980, Fairleigh Dickinson University in New Jersey, which charges $14,400 for tuition, room and board, has shut its departments of physics, industrial engineering and mechanical engineering. Many other schools have set up task forces to look for ways to trim their offerings. Cutbacks are also affecting student counseling, sports programs and campus upkeep. Some of these losses amount to only minor annoyances. But educators worry that cuts in crucial support services, such as tutoring, will make college harder for some students and ultimately lead to higher dropout rates. ''Undergraduates -- particularly entering freshmen -- can expect a lot less personal attention,'' says John Gardner, director of the National Resource Center for the Freshman Year Experience at the University of South Carolina. ''Many students will not get the assistance they need, so they're going to have more trouble academically.'' For college-bound students, the 1990s will bring some benefits. The decline in the number of high school graduates is forcing many private colleges -- but not those in the top tier -- to dig deeper into their pool of applicants to fill their classes. That means high school students may have a better chance of getting into their first-choice schools. According to the National Association of College Admission Counselors, 77% of the 600 four-year schools responding to its survey reported that they had openings in their freshman classes for the 1991-92 school year as of May 1, up from 74% in a similar survey conducted a year earlier. And there's another bit of good news for students heading for private colleges: tuitions are rising at the slowest pace since the 1970s. Overall, private schools, where tuition, room and board averaged $13,318 in 1990-91, will probably raise their prices 6% to 8% annually for the next few years, says Arthur Hauptman, author of The College Tuition Spiral (Macmillan, $12.95). That's well down from the 9.4% average of the 1980s, although still sharply above the expected inflation rate of about 5%. But the forecast may not be so promising if your child is bound for Public U. As more parents shun pricey privates and turn to public schools -- where tuition, room and board now average $5,248 a year -- competition for admission is stiffening. With budget cuts squelching expansion plans, more than a dozen states, including California, Florida, Maine, Michigan, New Jersey and New York, have put ceilings on the number of students they accept. You should expect other budget-pinched state institutions to continue boosting tuitions by 10% to 15% a year for the next two to three years. And if you send your child to a top-quality public school in another state, the tuition may be no bargain at all. At UC Berkeley, for instance, tuition, fees and on-campus housing for nonresidents of California will increase by 16% to $16,289 for 1991-92. When you are considering a public college, you should try to learn all you can about the state's fiscal condition. Of course, if you're a resident, you will read of budget cuts in your local newspaper. If you live elsewhere, you can call the state's office of higher education, which is usually located in the state capital. (For profiles of the six largest public systems, see ''The State of the States'' on page 20.) When assessing a private school's finances, one factor to consider is what percentage of its endowment goes to pay current expenses (ask at the office of the treasurer). A figure above 6% may be a sign of trouble. Also ask if the college has recently closed any departments, trimmed services, or plans to do so. And you might ask the staff of the school newspaper whether the school has had difficulties holding on to key administrators and faculty members, which can be a sign of financial ills. Some thoughtful members of the academic establishment believe that a dose of austerity will actually end up benefiting higher education. With fewer dollars floating around, ''schools will begin to focus on doing several things well instead of trying to be all things to all people,'' says Robert Zemsky, director of the University of Pennsylvania's Institute for Research on Higher Education, in Philadelphia. ''And to attract good students, they will rededicate themselves to undergraduate instruction instead of focusing on research.'' If Zemsky turns out to be right, students who choose a school carefully will find that higher education's budget crisis has an unexpected payoff: a far richer college experience.