Confronting the current higher ed financial crisis

Now that colleges and universities across the country look to survive the heat of summer recess, a cold and bitter wind blows through the finances of many higher education institutions. Since December, articles in education-related, financial and governmental publications have all reported the rise of an existential crisis in the finances of a substantial number of colleges and universities. Higher education institutions in critical financial condition have announced plans to close or merge and others have introduced cost-cutting plans and program reductions in the hope of staying afloat.

While industry experts and observers have highlighted a number of factors that have led to the current predicament at many schools, most agree that declining enrollments and the related inability to retain matriculated students to graduation remain among the highest concerns. Declining birth rates starting in 2007 in the United States as well as the fall in "adult learners" suggest that this factor will reduce demand over the long run forcing a greater number of institutions, their creditors and other stakeholders to face critical decisions.

Although the choices may be difficult, financially challenged colleges and universities do have options available to them. In many cases, the most important factor in charting a course will be whether administrators and trustees have left themselves and their advisors enough time and resources to consider and implement solutions before the crises they face swallow their institutions and the communities that depend upon them.

The Scope of the Current Crisis

In December 2024, the national financial ratings agencies foreshadowed increasing difficulties for a significant portion of the U.S. higher education industry in 2025. The outlook is negative for "highly regional, less-selective institutions that lack financial flexibility," S&P Global Ratings said. According to S&P, ratings downgrades have outpaced upgrades by 2.2 to 1 and unfavorable outlooks have exceeded favorable outlooks by a margin of 3 to 1. The U.S. Department of Education had placed, in the aggregate, more than 450 public and private nonprofit and proprietary, for-profit institutions on its Heightened Cash Monitoring schedule. Of these institutions, thirty-five were placed on the more severe HCM2 Schedule which more closely scrutinizes their ability to participate in the Federal Student Aid programs, squeezing their lifeblood of liquidity, due to significant financial or reporting weaknesses.

Actual closures have averaged about a dozen per year, but started to rise in 2024. Indeed, last year, at least 16 nonprofit higher education institutions announced that they had closed or would be closing their doors, separate and apart from those that merged to survive. Closings continued into the spring semester, some abruptly. Modeling forecasts in a study by the Federal Reserve Bank of Philadelphia suggest that as many as another 80 institutions could close in the near term.

S&P has stated that, as a ratings agency, it intends to keep its eye on a number of factors in the next year including enrollment pressure; rising operating costs; financial flexibility and balance sheet strength; event-related risks such as cyber, physical and other risks; continuing transitions in college athletics and the related costs, burdens and benefits; potential changes in federal education policy; and merger and acquisition activity, closures and partnerships.While all of these play a role in the current uncertain climate, most agree that falling enrollment is the most critical factor for the schools facing the most immediate threats and that it is not merely the declining birth rate, but also the drop in "adult-learners" and in student retention.

The Available Options

Against this backdrop, financially troubled colleges and universities have several principal options to "restructure," a term used to cover a broad number of potential outcomes other than a total liquidation of a school or its assets. Unfortunately, federal law appears to limit the ability of colleges and universities to reorganize and restructure their debt under Chapter 11 of the U.S. Bankruptcy Code due to the financial aid eligibility requirements imposed on colleges and universities under title IV of the Higher Education Act.

Specifically, title IV, which governs the ability of colleges and universities to participate in federal student aid funding, immediately precludes any such institution from participating in student aid funding as soon as it files for bankruptcy. Thus, all that a financially troubled college or university can accomplish in a Chapter 11 case is to sell its assets free and clear of all liens, claims and interests to another institution in a bankruptcy auction commonly referred to as a "section 363 sale" (named for the provision of the Bankruptcy Code that governs such sales).

Over the years, financially troubled higher education institutions have attempted to override title IV of the HEA by relying on Section 525 of the Bankruptcy Code, which prohibits the federal government from denying, revoking or suspending a license, permit or other participation in a federal program solely because an entity filed for bankruptcy.

Although federal appellate courts have not issued any binding decisions on this point, the two bankruptcy courts that have considered the issue found that Section 525 of the Bankruptcy Code did not override the title IV eligibility requirements.

Accreditation could also be placed at risk. As a result, the odds of success for a college or university bankruptcy reorganization appear to be slim absent a long, drawn-out and expensive fight. Unfortunately, the cost of such a legal battle with the federal government, no matter how legitimate, effectively defeats the benefit of a restructuring for a cash-strapped institution. Commentators have called for amendments to title IV and the Bankruptcy Code to make clear that colleges and universities should have a path to reorganize under Chapter 11, but that seems far from likely in the current political environment and probably more than is necessary.

Certain public institutions may have a different avenue available to them under Chapter 9 of the Bankruptcy Code, but that may not provide any respite from title IV of the HEA.

It is important to remember that bankruptcy itself is just a "means to an end." Other restructurings have been attempted in the context of federal or state law receiverships, but these raise very similar risks to title IV funding and lack the principal benefits of bankruptcy, i.e., the right to discharge debts and to impose amortization and paydowns over time upon creditors. There is no guarantee or significantly greater likelihood of success in those forums.

All that said, a substantial number of restructurings in a wide variety of industries take place "out-of-court" rather than "in-court" albeit with the "threat" of a bankruptcy case if a consensual out-of-court restructuring is not accomplished.

Indeed, one of the most well-known restructuring cases involved the interpretation of a bond indenture of a for-profit higher education institution called Education Management Finance Corp.

The success of any restructuring will depend largely on the ability of an institution, its creditors and other stakeholders to identify the signs of trouble. Then it must determine correctly and early enough whether the restructuring in question requires substantial operational fixes (e.g., employees, labor contracts, leases, etc.) as well as a capital stack restructuring (institutional debt such as bank or bond debt). Many schools are implementing operational cost reductions in jobs and programs offered, but it is unclear whether that alone will be enough.

As part of a holistic review and strategy, colleges and universities should develop and provide accurate and complete financial reports and ensure that their administrations, trustees, creditors and other stakeholders understand that data. When reviewing the HCM lists, it is surprising how many institutions have failed to provide timely and accurate reporting to the government and presumably their other stakeholders. Regardless, revenue forecasts should be as accurate as possible and schools should take steps to reduce support and administrative costs as much as possible.

Next, institutions should look to create reserves for strategic initiatives and contingencies and secure resources for growth by examining and prioritizing existing programs. Similarly, they should free up capital in noncore assets by considering whether or not it makes sense to privatize parking, dining services and housing. On the purely financial side, troubled colleges and universities should also examine their credit agreements and bond indentures to consider whether more can be done within the confines of those governing documents.

Ultimately, these financially challenged schools must develop a clear strategy with accountability based upon a compelling and sustainable vision to overcome resistance to change and to engage donors and investors. That may mean considering strategic alliances or mergers with other schools and creating networks similar to those that have been established among hospitals and medical practices in the healthcare industry which experienced similar upheaval over the years.

It should also not be forgotten that these institutions do not exist in vacuum, but in college towns built around them in which the school serves as the economic engine of the community. Examples of such towns in which troubled institutions jeopardize the local economies abound.
In the end, confronting the current crisis head-on is the key.

Long-term demographic and other macro-economic conditions will not necessarily improve for the foreseeable future and higher education institutions should be guided, and guide themselves, accordingly. Greater time before a liquidity crisis usually means more options. Administrators and trustees must engage with one another, their outside advisors, their creditors as well as their other stakeholders early and often if they hope to achieve the best available result for their institution, their stakeholders and their broader communities.