Debt-Ridden Colleges Struggle to Raise Funds

Finance
Posted By Abby Perkins on April 2, 2015 at 3:57 pm
Debt-Ridden Colleges Struggle to Raise Funds

It’s common knowledge that for-profit colleges and universities have been suffering since the U.S. economy fell into a recession in 2008. A significant number of these institutions have endured closures, mergers, the cutting of faculty and staff, and the discontinuation of departmental majors in their efforts to stay afloat.

Now, those problems aren’t just reserved for for-profit institutions. Many nonprofit colleges and universities are experiencing financial issues, too, struggling with debt that requires restructuring, intense financial scrutiny, and difficult conversations with creditors. Unable to fulfill their loan obligations, typically obtained in the form of bonds and borrowed for campus expansion and construction projects such as new dorms, some schools are falling behind in repayment, or, in some cases, lacking the requisite amount needed in reserves to guarantee their loans.

Extreme measures

While some view the pressure applied by debt holders to be a cut-and-dried matter of wanting a return on their investment, others are quick to point out that investors have little to no desire to be responsible for running a college. Their vested interests lie in working things out so that the college can remain operational. In proactive efforts to help struggling schools before their problems become unsolvable, bondholder’s often call in independent consultants to oversee the implementation of sometimes extreme remedial measures.

In 2014, Iowa Wesleyan College promised Wells Fargo, the trustee for the college’s bondholders, that they would increase enrollment, contractually guaranteeing 446 full-time students by October 2017 – approximately 25% more than the 361 students that were on campus in 2014. But the college also reduced staff and faculty by a third, raising the question: How will the school offer adequate attention to the increased student load with reduced administrative resources?

Also last year, the public Florida Keys Community College fell under scrutiny from investors after a dorm expansion project strained the school’s finances. As an answer, the college increased the dorm fees to students by 12%. Some schools, such as the private Iowa Wesleyan and Upper Iowa University, have begun to require students to live on campus (thereby increasing their income from room and board). Wesleyan now requires residency for all four years as opposed to two, and Upper Iowa now demands a three-year on-campus commitment. Student-faculty ratio increases are common solutions in turnaround efforts, as well as online class size increases and scholarships cuts.

Autonomy vs. accountability

While the measures employed by struggling schools are necessary and not unusual, some wonder if the open-book nature of the disclosures – and the constant scrutiny and intervention of investors – is healthy. Does it verge on meddling that could affect a school’s accreditation status? Can a school’s governing board still make sound, independent decisions, even in the face of financial stress or outside pressure?

Iowa Wesleyan receives accreditation from the Higher Learning Commission, which requires schools to be “sufficiently autonomous to make decisions in the best interest of the institution and to assure its integrity.” However, its not clear what distinguishes oversight from interfering.

Keeping it local

Because colleges know that seeking financing from the public bond market requires full disclosure of their fiscal operations, those that lack financial security may turn to local lending institutions in their immediate community. Because of this, wider public knowledge about institutional debt often goes undisclosed.

Helping schools remain functional is often vital to an area’s economy; local financial institutions have large incentives to help. Unbeknownst to students and faculty, and out of the glare of local media, many institutions can be struggling to stay afloat, while the behind-the-scenes efforts go undetected until the problem has progressed too far for effective solutions.

 

Image: Upper Iowa University

Abby Perkins
Email | Twitter | LinkedIn Abby Perkins attended Davidson College, where she graduated with a B.A. and Honors in English and wrote for The Davidsonian newspaper. Abby's work has been featured on Yahoo! Finance and Entrepreneur. As Managing Editor, Abby is a regular contributor to the GoodCall newsroom, covering education and financial aid.

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