Behind the scenes in colleges across the U.S., institutions are having trouble paying their bills.
Why it matters: There’s a reckoning coming in higher education — especially for smaller, private liberal arts schools — that’s been years in the making. In obvious ways, COVID-19 accelerated some of the trends, but college finances have been hurting for a while.
- Pandemic-era government stimulus funds helped a slew of schools gain another year or two of financial runway.
- Yes, but: Restructuring advisors that work with higher ed institutions as clients say there’s been an uptick in schools that are beginning to explore financial transactions to keep from going under.
Demographics is destiny: A declining birthrate means the pool of college-age Americans has been declining, and could it be as much as 15% lower by the mid-2020s compared with the early 2000s.
Catch up quick: Smaller, nonurban liberal arts schools take the brunt of the shrinking student body, more so than elite universities with huge endowments, or large state schools that receive public funding.
- These schools “find it hard to differentiate themselves from other small, private liberal arts institutions” — and amid intense competition wind up offering substantial tuition discounts to a large chunk of students, Matthew Roseman, head of the bankruptcy practice at Cullen Dykman, tells Axios.
- They’re also often entirely tuition dependent, with low to no endowments, he says.
Then COVID hit.
Schools lost much of their room-and-board revenue over the last year. And some of that may never come back as remote learning expands.
This fall’s enrollment numbers will be make-or-break for many.
Be smart: Colleges can’t file for Chapter 11 bankruptcy the way insolvent companies can because they would lose their accreditation and student access to federal loans.
- Banks and other lenders that provide loans to colleges are usually willing to provide more leeway than they would to corporate borrowers — with maturity extensions and other relief, says Mark Podgainy, managing director at consultant Getzler Henrich.
- No bank wants to see headlines about it tossing kids out of school, he says.
- In return, lenders usually require the universities to shore up their balance sheets, through mortgaging or selling real estate, or by inking an M&A or cost-sharing transaction with another school.
If a school still can’t survive, the insolvency process it uses is called a “teach-out” — where another school takes over its facilities and offers classes to students, while the legacy school liquidates its assets.
- Higher Ed Dive has cataloged recent transactions in higher ed, finding at least 18 schools closed or were consolidated into another institution during 2019 and 2020, after 25 such deals in the prior two years. Here’s a snapshot of some of those deals.
The intrigue: A new playbook might be emerging for struggling schools if a recent three-way tie-up centered around the University of Bridgeport in Connecticut goes as planned.
- Goodwin University acquired the University of Bridgeport’s real estate and academic programs. Meanwhile, Paier College of Art will relocate to Bridgeport’s campus and share resources. The three will remain independent institutions.
The bottom line: Students don’t usually evaluate a school’s wherewithal to pay its bills when choosing a college — but they’re the ones who stand to lose the most from closures. The earlier schools deal with their problems, the more likely they’ll be able to provide a smooth path for students to finish their degrees.
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The Article Was Written/Published By: Kate Marino