Behind the scenes in colleges across the U.S., institutions are having trouble paying their bills, writes Axios' Kate Marino.
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 advisers 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 it could 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.
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.
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.