THE HILL: Allow universities to restructure themselves through bankruptcy
Career College Central Summary:
Despite, or perhaps, because of, the higher education boom in the years immediately following the Great Recession, colleges and universities are now facing increased financial pressures. Enrollments are down by nearly one million students from 2012 levels. These decreases in enrollment have not only hurt everyone’s bottom line, but institutions are now subsidizing students that do enroll at exceedingly high levels. Add in the disruptions caused by innovations in the delivery of education and the financial constraints accompanying capital projects undertaken when times were good, it is unsurprising that analysts such as Bain & Company report that, over 60 percent of institutions are on an “unsustainable financial path” or at financial risk.
Unfortunately, institutions of higher education have a significant limitation on their ability to restructure debt. Practically speaking, they can’t declare bankruptcy. Despite the general nondiscrimination provision in the bankruptcy code, changes to the Higher Education Act in 1992 require that a college filing for bankruptcy immediately and irrevocably loses access to the federal loans and grants authorized under Title IV of the HEA. Considering that approximately 85 percent of students utilize Title IV programs to pay for tuition, this restriction makes filing for bankruptcy a nonstarter.
This has the effect of making debt restructuring in higher education exceedingly difficult. Schools know lenders won’t force them into bankruptcy because doing so will greatly reduce the value of the institutions and make collecting on their debts nearly impossible. Debt holders are thus forced into the position of equity – owning schools – which isn’t a risk most debt holders assumed. Conversely, equity (and management in the non-profit context) is also hampered by having far fewer options to settle debts than in bankruptcy. As the economics become worse, regulators, rightfully concerned with the financial health of the institution, pile on data requests and various restrictions (including delays on receipt of the very Title IV funds the school is counting on). As each regulator adds inquiries and data requests, the regulatory “death spiral” only makes it harder to keep the institution a viable going concern.
The result of this is schools must either declare bankruptcy and implode (like the non-profit Lon Morris College in 2013 or the for-profit Anthem College in 2014) or, in many cases, go through a protracted consensual foreclosure process to accomplish, in essence, a debt-for-equity swap (as was done with the for-profit ATI Enterprises in 2013). Not only is this bad for institutions and their lenders, but this situation also places students and the taxpayers at great risk. When institutions close unexpectedly, the students will have wasted time, money and effort in moving toward an education credential that will never come to fruition. Taxpayers also suffer losses because students are able to extinguish their federal student loan debt associated with attendance at the now closed school. Thus, the taxpayer is out not only the grant funds already provided for an incomplete education, but also on the expected student loan repayments as well.
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