This post is the first in a series analyzing COVID-19’s impact on institutional finances.
The spread of the novel coronavirus has rapidly transformed the higher education system. Classes have moved online, schools are processing refunds for room and board, and institutions face tough decisions to furlough or lay off staff. A number of schools have also announced they will suspend admissions or close entirely, a trend likely to continue due to state budget cuts and enrollment uncertainty. Unfortunately, even in normal times the federal government is ill-equipped to manage school closure or even identify institutions at risk of closing. As the crisis unfolds, policymakers must implement a streamlined, transparent, and student-centered approach to better manage school closure.
Most high-profile closures in recent years have occurred among large for-profit chains—Corinthian Colleges and ITT Technical Institute, for example. But many small, private nonprofit schools are also under pressure. Even before COVID-19, the closure rate was projected to climb, driven by lower enrollments due to changing demographics and a decrease in international students.
In 2018, a total of 218 institutions and campuses closed in the United States, affecting roughly 100,000 enrolled students. Low-income students, students of color, and military veterans, who disproportionately enroll at for-profit colleges, are especially vulnerable to school closure.
Closures often happen suddenly, leaving students in the lurch. Student borrowers have the option of federal loan forgiveness on their remaining balance, but they must give up any credits earned, sacrificing all of the time, effort, and money already invested. Taxpayers pay a price as well, given that federal student loans are lent directly by the federal government. In the case of the 2015 closure of Corinthian Colleges, roughly $80 million in student loans were discharged.
Affected students may be able to participate in a teach-out plan, which financially risky institutions are required to file with their accreditor. A teach-out plan is meant to preserve pathways for students to complete their degrees—either by allowing currently enrolled students to finish their degrees at the affected institution, or through an agreement that another institution will take those students. Unfortunately, teach-out plans are often hastily designed by administrators after initiating closure and can lack necessary funding. This poses a serious risk to many students’ ability to complete their degrees, especially graduate and professional students, who struggle to find a school that will honor all of their credits.
The federal government relies on a complex process to identify schools that may be at risk of closure and to implement measures to mitigate the impact on students. For private and nonprofit institutions, the Department of Education calculates a “financial responsibility score” to reflect their financial health. Institutions with low financial responsibility scores are required to post a letter of credit with the Department of Education, which is intended to offset the cost to taxpayers that can result from loan discharges and ensure funding for a teach-out plan. The Department of Education maintains broad discretion to increase the letter of credit requirement for institutions with low financial responsibility scores, but this process lacks a transparent methodology, potentially exposing taxpayers to the costs of closure.
Furthermore, financial responsibility scores use backwards-looking metrics, relying on data that can be several years old. As a result, the scores have proven largely ineffective at predicting closure, anticipating only half of school closures since the 2010-11 academic year.
Policymakers could implement an objective and forward-looking process to guide school closure that prioritizes students. BPC’s Task Force on Higher Education Financing and Student Outcomes has developed a framework to accomplish these goals.
First, financial responsibility scores should utilize real-time data measures, such as quarterly declines in enrollment and net tuition revenue, which would allow regulators to better identify institutions at risk of closure. Letters of credit should then be set through an objective process linked to the burden that a potential closure would have on students and taxpayers.
Furthermore, every institution should be required to have a detailed teach-out plan on file with adequate funding set aside to implement the plan. To support this process, the Department of Education could provide templates to guide administrators as they develop these plans, which should be focused on delivering clear and transparent options for affected students.
If implemented correctly, these straightforward reforms would allow policymakers to better predict institutions at risk of closure, as well as lead to a more manageable and predictable process when closure occurs. With the spread of COVID-19 causing unprecedented financial strain on the higher education system, now is the time to develop strong policies to guide the school closure process with the goal of keeping students on the path to graduation.
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