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Another university is imploding. The federal government must do more

Closures don’t have to be as painful as they are

The challenges surrounding school closure are broader than the for-profit closures that tend to dominate headlines, Kelchen and Megan write. (iStock)
The challenges surrounding school closure are broader than the for-profit closures that tend to dominate headlines, Kelchen and Megan write. (iStock)

OPINION — As Congress ramps up discussions around reauthorizing the Higher Education Act, yet another large for-profit university chain is teetering on the verge of financial collapse. Last month, federal regulators revoked Argosy University’s ability to accept federal loans and grants, due to its shaky finances and failure to make financial aid payments to students.

This development follows the high-profile dissolutions of Corinthian College and ITT Technical Institute in 2015 and 2016, but the challenges surrounding school closure are broader than the for-profit closures that tend to dominate headlines.

Declining birth rates, lower levels of international enrollment, and concerns among students about high tuition prices and student debt have contributed to declining demand for college, translating to fewer seats filled and budgetary struggles.

For the second consecutive year, the ratings agency Moody’s gave the U.S. higher education system a negative financial outlook, predicting a nasty combination of revenue constraints and increasing labor costs.

The problem extends to private nonprofits with small endowments, many of which are in the Northeast — though admittedly, these closures tend to be more orderly than those at for-profits. In just the past few months, the College of New Rochelle, Green Mountain College, Newbury College, and the College of Southern Vermont have all announced they are closing.

In an effort to protect students, Massachusetts recently implemented requirements that private colleges report financial data to the state.

Between 2011 and 2016, 34 percent of Massachusetts’ institutions of higher education saw growth in expenses outpace revenue growth by at least 5 percentage points. Similarly, around a quarter of schools in the commonwealth saw enrollment declines of more than 10 percent.

Though Massachusetts is moving ahead on its own, federal policy should also improve its system of managing school closures, providing a consistent national framework. The need is apparent given the vulnerability of the students enrolled, whose tuition dollars are often wasted when schools close unexpectedly. Taxpayers are also affected, given that the federal government issues roughly $100 billion annually in federal student loans.

First, the federal government should reform how institutions are identified as being at risk of closure. The current system, which has not been updated since the 1990s, relies on measures of a school’s liquidity, its ability to borrow and its excess revenues.

Schools deemed financially risky are subject to “heightened cash monitoring,” which restricts their ability to accept federal student loans and grants. Such an approach may sound reasonable in theory, but unfortunately, not only have the metrics proven to be poor predictors of closure, but the system also suffers from reporting lags of up to two years, meaning regulators are often unable to identify a school at risk of closing until it’s too late. This has obvious negative effects for students, whose futures are thrown into disarray when their school closes without warning.

Taxpayers also face costs and should be further shielded from the effects of school closure. Currently, students enrolled at the time of closure are eligible to have their loans forgiven. To help offset these costs, financially risky schools are required to post a letter of credit equal to at least 10 percent of their exposure to the federal loan system. This collateral, however, is often insufficient to cover the costs of loan forgiveness, meaning taxpayers make up the difference. In the cases of Corinthian College and ITT Technical Institute, taxpayers were on the hook for hundreds of millions of dollars of discharged loans.

The federal government could undertake a few straightforward reforms to improve its management of school closures and protect both students and taxpayers alike. It could require the reporting of any steep declines in enrollment and tuition revenues (which can be an indicator of financial problems). These could be collected quarterly, improving timeliness and providing regulators with better information on institutions with deteriorating financial health.

Similarly, the federal government could reduce the taxpayer exposure associated with loan forgiveness by increasing the minimum letter of credit threshold that at-risk institutions are required to post. Regulators should also develop an objective and transparent letter of credit process to minimize costs to taxpayers. Together, these policies would ensure that institutions themselves foot the bill for more of the loan forgiveness costs stemming from closure.

The strains facing U.S. higher education are not insurmountable. America is home to some of the greatest institutions in the world, and a college degree today is worth, on average, more than ever before. But unfavorable demographics, rising tuition prices and declining international enrollment pose significant challenges — especially to smaller institutions that lack resources. No federal policy will or should eradicate school closures, but a thoughtful and predictable approach can make the situation as painless as possible, for students and taxpayers alike.

Robert Kelchen is an assistant professor of higher education policy at Seton Hall University and a fellow at the Bipartisan Policy Center.

Kenneth Megan is a senior policy analyst for higher education policy at the Bipartisan Policy Center.

The Bipartisan Policy Center is a Washington, D.C.-based think tank that actively promotes bipartisanship. BPC works to address the key challenges facing the nation through policy solutions that are the product of informed deliberations by former elected and appointed officials, business and labor leaders, and academics and advocates from both ends of the political spectrum. BPC is currently focused on health, energy, national security, the economy, financial regulatory reform, housing, immigration, infrastructure, and governance. Website | Twitter | Facebook

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