“Sustained Stress” in Post-Secondary Education

By January 31, 2019 March 10th, 2019 Articles

By: Joseph R. D’Angelo, Partner, Carl Marks Advisors
Jan/Feb 2019

With enrollment down, many colleges and universities have increased the practice of discounting — providing scholarships to increase enrollment — which can create ongoing cash flow issues. Joseph R. D’Angelo examines the turnaround options available to post-secondary institutions under financial stress.

The post-secondary education sector continues to struggle with rising costs and increasing competition for a declining U.S. demographic of high school graduates. Many schools supplement their enrollments with international students, representing about 20% of the total student population at many ranked universities. However, the restructuring activity for not-for-profit colleges is mostly concentrated around small, liberal arts colleges with dwindling enrollments, increasing operating deficits and inadequate endowments and fundraising.

For-profit schools represent 5% to 8% of total enrollments (down from a peak of 10% in 2010) and cater to non-traditional students that pursue degrees and job training, especially when the economy is worsening. Therefore, many for-profit schools are dealing with lower enrollments due to the strong economy and declining cash flow from the high fixed costs of physical campuses.

Both not-for-profit and for-profit schools have been discounting heavily by offering scholarships to increase enrollments — the National Association of Colleges and University Business Officers (NACUBO) reported the average discount rate for private, not-for-profit institutions increased to 44.8% in 2017 from 43.2% in 2016.1 The data also showed 38 schools discounted above the 2017 average, but 23 of the 38 still had declining enrollments. We believe that discounting may have also reached its beneficial limits at for-profit schools.

Restructuring cases at not-for-profit and for-profit colleges are usually initiated as a result of a covenant default on debt. Carl Marks Advisors either represents the school or the lender and works quickly and inclusively to determine and implement the best viable options. Since a school that draws Title IV financial aid from the Department of Education becomes ineligible upon a bankruptcy filing, turnarounds and sale transactions are executed out-of-court — further discussed in the “Insolvency Strategies” section of this article.

As revenues and enrollments continue to decline and cash flow pressures mount, we expect additional schools to face challenging decisions. A recent Moody’s study predicts that sustained stress in post-secondary education will drive more private colleges to alter business models or close.2 Over the course of multiple engagements, we have seen schools struggle with decisions to make changes, especially around faculty reductions and canceling programs with low student demand and enrollments. Unfortunately, trustees and administrators at schools experiencing financial stress need to consider all options.

Operational transformation

Many schools, including smaller and less selective institutions, have proven resilient and even innovative in the face of financial stress by reformatting curricula and prioritizing the highest demand programs to remain competitive and materially improve cash flow. There are several operational areas common to virtually all situations that trustees and administrators must address to optimize the chances of enduring and thriving. These can include program review/optimization, increasing enrollment by retooling marketing strategies, using online technology and outsourcing services:

  • A private college invested in a CRM platform and provides cloud-based, licensed services to smaller colleges that cannot afford the same investment.
  • A successful nursing school plans to expand program offerings in high demand Allied Health studies, which also provides retention opportunities for nursing students that want to change programs.
  • A for-profit college reduced the cost of degree programs by putting its general education classes online.
  • Retention programs that provide increasing discounts for each persisted term through to graduation.
  • Corporate relationships that guarantee an interview for graduates.

Donors Support and Endowments

One bright spot for some not-for-profit schools has been healthier donor support, thanks to the overall positive economy and investment returns. However, schools under financial stress tend to have more modest endowments and restrictions preventing the general use of funds. Many of these schools are using the investment gains from their restricted endowments to fill operating deficits or contacting donors to release restrictions on gifts. Unfortunately, many at-risk schools also don’t have a significant donor base or don’t have an active fundraising or development office. Using the unrestricted endowment funds and relying on donors for bailouts is neither sustainable nor reliable and should only be used to bridge the implementation cost of an operational restructuring or conducting an orderly wind down and closing.

When reconstituting a board of trustees in a turnaround situation, college presidents should be bold to enlist individuals who are committed to writing big checks. Typically, it takes a strong plan to gain confidence and build excitement.


While merger activity continues to increase in the sector, closing these deals remains difficult and elusive. Sometimes, schools cannot agree on eliminating duplicate resources — such as two philosophy departments, two coaching staffs or two alumni relations departments. Other times, the combined institutions cannot financially support the combined debt. As in other sectors, the most successful mergers and acquisitions are predicated on clear advantages and well-defined strategies to win. Defensive combinations may save two independent schools, but trustees and administrators must be proactive, thorough and decisive before it is too late.

There is also activity between traditional colleges and for-profit colleges. When Indiana University — Purdue University (IUPU) acquired Kaplan University to create Purdue Global, it created a state school system with national and international branding reach and access, programming flexibility and a powerful network of faculty and students. Other states took notice and many are developing and implementing similar strategies.

In the for-profit sector, there are fewer healthy M&A deals, and most restructuring transactions are smaller, quick sales of good campuses from a failing operator. However, some transactions involve campus-based schools acquiring an online school to become more competitive.

Insolvency Strategies

When a school becomes insolvent, there are a number of venues available to wind down the business and liquidate assets for creditor recoveries — bankruptcy, receivership or assignment for the benefit of creditors. However, if the insolvency strategy includes selling assets of a going concern, bankruptcy is not an option because the school will lose access to Title IV funds and will not have the liquidity to operate.

Many restructurings of for-profit colleges involve selling the good campuses, teaching out the bad campuses and then dissolving the entities in a Chapter 7 proceeding. Recently, Vatterott College in St. Louis, MO and Education Corporation of America in Birmingham, AL filed for state and federal receivership in an attempt to sell assets free and clear of liability and use the court to channel and resolve claims from lenders, landlords, vendors and students. However, given the recent shutdown of both schools without a sale of campuses, it is not clear that the Department of Education will treat receivership differently than bankruptcy.

Secured creditors can also transfer assets out-of-court through a strict foreclosure or Article 9 sale before a school pursues a court action. However, for-profit schools usually do not have a lot of assets, so lenders look to liquidate student receivables and campus equipment for sources of recovery.

When a not-for-profit school fails and shuts down, creditors usually look to a sale of the real estate to provide a source of recovery.


With few lifelines available, closure remains a likely possibility for struggling post-secondary schools. Moody’s found the rate of closures among not-for-profit schools has more than doubled in the past four years — and the upward trend is expected to continue. The study forecasts the school closure rate of private, not-for-profit colleges to increase but stay below 1% in 2019 — predicting roughly 15 private, not-for-profit schools will close this year.

There are major issues in shutting down a school, beyond the negative impact to students, faculty, employees and the community. Because schools draw the majority of their revenue from loans and grants awarded by the Department of Education under a program participation agreement, post-secondary education is a regulated business. If a school closes and students are not provided an opportunity to finish their education, the students’ loan obligations can be discharged and the liability for the bad debt is carried by the directors or trustees and the officers of the institution.

Sometimes closure is the right thing to do, but hopefully there is enough cash flow and runway to transfer or teach out the students and achieve a soft landing for all constituents, which usually minimizes any trailing liability with the Department of Education.

Joseph D’Angelo is a Partner at Carl Marks Advisors and a highly experienced restructuring professional with expertise ranging from operational turnarounds to financial restructurings and mergers and acquisitions.

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