Dowling's Failure Puts Distressed Colleges in Spotlight

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The failure of Long Island's Dowling College placed distressed higher education institutions in the spotlight, prompting a call from one of the most powerful U.S. senators for a credit warning system for students.

Sen. Chuck Schumer, D-N.Y., is proposing that the U.S. Department of Education require colleges to notify students if they are classified as being in a financial “danger zone,” which Dowling found itself in after defaulting on debt service payments in July 2015. The senior New York senator, who is the third-ranking Democrat in the Senate, said schools that fail to disclose that they are in danger of shutting down due to financial shortcomings should be sanctioned, and the Department of Education should form details on the penalties.

"Students deserve crystal clear answers from the school themselves and a fair warning if fiscal trouble could lead to an abrupt closure," Schumer said in a statement. "The fact that college closures across the U.S. are on the rise demands the U.S. Department of Education implement this warning system requirement as soon as possible."

Dowling, in Oakdale, N.Y., announced plans on May 31 to close down after 48 years. It has about $57 million in total debt outstanding, according to Interactive Data. The college, which is rated Ca by Moody's, lost more than half its enrollment in the last five years and had about 2,400 total students at end of the spring semester. An alumni group came forward with a fundraising campaign in early June as the college began negotiating with Global University systems in the United Kingdom to form an academic partner that could save the school. The resurrection efforts have so far proved unsuccessful.

Schumer cited a September 2015 Moody's Investor Service report showing a rise in college closings across the country. The Moody's research showed that closures among four-year public and private non-profit colleges averaged five per year from 2004 to 2015. Six colleges shut down in 2014, and Moody's forecasts as many as 15 institutions per year could close by 2017.

Richard Larkin, director of municipal credit analysis at Stoever Glass & Co., said the college closing rate forecasted by Moody's isn't cause for alarm, given the thousands of degree-granting institutions in the nation. He doesn't see Schumer's proposal hurting enrollment at distressed schools. Larkin said when looking at colleges bonds to purchase, he focuses on a school's cash to debt ratio, days of cash operation, acceptance rates, tuition and years of existence. He also looks at school's endowment, since a high number means donors will be there to back the institution should finances dry up.

"If you have a decent endowment base, that means if the school starts to have struggles the donors won't be so quick to pull the plug on their support," Larkin said. "It's in their best interest to keep the college open."

Schumer said in a letter to U.S. Department of Education Secretary John B. King that the federal agency isn't effectively communicating to students the annual data it collects on college fincances. The senator said the roughly 1,500 Dowling students were notified of the college's closure just three days before the scheduled closing, even though the school had been in "serious financial trouble" for nearly two years.

The Department of Education has added new features to its College Scoreboard in response to Schumer's recommendation, and new measures are being considered, department press secretary Dorie Turner Nolt said. The scorecard was launched in 2013 by the Obama Administration as a planning tool to help students and their families make more informed higher education decisions. The Department also updated its College Affordability and Transparency Lists in 2013 to highlight institutions whose costs are rising at the fastest rates.

"We agree with Senator Schumer that students should be warned when their school might be in financial trouble," Nolt said. "That's why we've added such warnings to our College Scorecard and are considering additional regulatory options."

Moody's higher education analyst Karen Kedem said the current U.S. Department of Education college scorecards are mainly based on key indicators on costs and career goals, with little emphasis placed on credit quality. Even if further details on a college’s fiscal health were added, it probably wouldn’t play a major role in student enrollment, Kedem said.

"It would be a very sophisticated student who would make a decision based on a credit rating. There is not necessarily a direct correlation to a school's rating and the school's overall quality," Kedem said

"It's a new shift in higher education to think about it that way," said Fitch Ratings analyst Joanne Ferrigan on whether a college's credit quality may impact future enrollment figures. "This is a new wrinkle."

A July 2015 Moody's report estimated that 20% of U.S. colleges were experiencing weak or declining revenue growth. Moody's said stress will be highest at small regional public universities with less than $500 million of revenue and small private colleges with less than $200 million in revenue.

"A number of the struggling colleges are very tuition dependent," Kedem said. "They are very vulnerable to shifts in enrollment."

All of the 25 college closures Moody's identified from 2010 to 2015 were private schools. While some smaller public colleges are also struggling, they are less at risk because of the ability to receive state funding, Kedem said.

"There is less revenue diversity for private universities," she said. "They don't have that diversification of state funding."

According to Larkin, investors may want to consider investing in a college's bonds even if the institution is in major distress, provided certain protections are in place. In the case of Dowling, bonds were trading near par three weeks after the announced closing, which Larkin attributed to the securities being insured through ACA Financial Guarantee Corp. and having mortgage liens that provide funding to bondholders if the property is sold.

Larkin said colleges that enroll fewer than 2,000 students and don't have a long history or healthy endowment are the most risky.

"Those colleges are so vulnerable," he said. "A good wind could blow those colleges away."

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