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Lending in Higher Ed: Opportunities and Risks Abound

Dear Miss Indie,

Thank you for this beautiful place that was once our playground among the cows… where young girls became wonderful women.

With gratitude and sadness in our hearts,

— Sweet Briar Alumni

This is the letter three Sweet Briar alumni addressed to “Miss Indie,” the founder of Sweet Briar College, after the board of directors announced its imminent closure in March 2015. Sweet Briar College — a former plantation that once served the equestrian-minded daughters of Southern gentlemen — fell upon hard times after declining enrollment, 60% tuition discount rates, and an 8:1 faculty-to-student ratio stretched its resources. Combine that with the fact that very few young women have much interest in attending an all-girls college anymore (horses or no horses), and Sweet Briar’s total assets shrank by 16% from 2008 to 2014. Most of its assets were entangled in the college’s restricted endowment and the abundance of wild rose bushes perfuming its 3,250 acres. What was available — $19 million — would have to go towards the $25 million bond debt it threatened to default on. Sweet Briar’s roses should have seen their last season. But they lived to see at least five more. Distraught alumni remembered their playground among the cows and, under threat of sleeping in the haunted cemetery, raised over $44 million in a frenzied Facebook fundraising campaign. They hired a law firm to halt the closure, ousted the sitting president, and started raising bees amongst the briar bushes. What gives?

Schools with Challenged Business Models Continue to Operate

Sweet Briar isn’t the only school that should have closed its doors. We spoke to Haven Ladd, Managing Director at EY-Parthenon, a global education consultancy, about how many small liberal arts schools are in peril following the COVID-19 crisis. He’s been assessing risk within higher education through a number of ways, including whether a school has the assets to teach its current students through graduation and what percentage of capacity it’s operating at.

“It’s difficult to predict whether a specific school will close or not,” said Ladd. “Schools close for all sorts of reasons. But they also stay open for all sorts of reasons, despite many operational inefficiencies. Random donors appear out of nowhere. You can’t predict when somebody will cough up $35 million.”

White knight donors aside, it’s easier to assess the general financial health of the industry. “We’ve found that 20% of schools do not have enough assets nationwide to see their students through to graduation. Furthermore, these places have a financial model premised on growth.”

An Unsustainable Growth Model

Northeastern states — the nation’s original nesting spot for higher education — are most at risk. There, relying on a larger freshman class size to cover rising expenses is wishful, if not delusional, thinking. How can you expect a larger incoming class when your region is predicted to shed 50,000 more high school graduates by 2030? Some states, like Vermont, are so desperate for younger residents that they’ll bribe you 10k to pick up your laptop, marry a lumberjack, and set up a home office there. (They have no jobs: you’ll have to bring your own). Rather than consolidate or reduce expenditures to reflect demand rates, many schools have responded by spending more. The thought process is that a luxury arms race is the only way to capture the roaming senior’s eye anymore. It’s no coincidence that Sweet Briar decided to embark on a $14 million state-of-the-art campus renovation project the same year that tuition revenues fell by 30%.

“Enrollments have been down, but faculties have been up,” said Ladd. “In order to attract more students, schools start more programs, add more faculty, and shift a higher and higher cost burden onto fewer students. If you shut down low capacity schools to make the whole system run better, close to 18% of all schools would close.”

Fresh Skillsets and More Cash Needed

Why won’t schools adjust their capital plans? Because they’ve never had to before. For forty years, higher education was a more predictable choice than Wonder bread. “Higher ed has historically been a cash flow positive business,” said Ladd. “You get all the payments up front, from the government, students, grants, etc. Most college CFO’s do not have the skills to manage cash flow. They’ve never had liquidity shortages before. Higher ed’s pricing model started to buckle after the Great Recession when the government stopped spending and Americans stopped reproducing. Add in the fact that most people haven’t gotten a raise in 40 years, and higher ed was already headed towards a grand reckoning. COVID-19 only serves to add more drama and speed to the fallout. While the government has thrown some free money at the problem (many of the smaller colleges most at risk qualify for the Paycheck Protection Program), Parthenon estimates that the CARES Act dollars will only cover 67–70% of the school’s fee refunds. That’s not even counting foregone revenue. Schools will have to explore new avenues for survival, whether it’s accessing more debt, mooching off a larger peer, or finding a friendly rival willing to consider a merger.

Why It’s Difficult to Lend to Colleges

There is clearly an increased opportunity to lend to higher education, but not many private players have much interest in the area. Why? Below, we walk through some of the reasons why lenders might think twice before getting involved.

1) We tried that once with for-profits, and it wasn’t very much fun.

Private capital’s first dalliance with higher education was through for-profits. When the University of Phoenix was founded in 1976, it blew other schools out of the water with its scale, its inclusivity, and its naked profit motives. For the first time, education wasn’t just for the lost eighteen-year-old hoping to find themselves: it was for the single working mom with three kids and no viable career prospects.

Then private equity got into the scene, and, admittedly, many unpleasant things happened. There was that issue with the fake student identities. Then there was that time salespeople used mentally ill people to snatch more government dollars. Not all for-profit schools operated this way, but enough did to attract the wrath of Obama.

Things came to a spectacular head with the Gainful-Employment Act in 2014, and many large players made a disgraced exit. Since then, for-profits have cleaned up their act and found new ways to adapt, but many private lenders are too scarred by the memory to go near education again.

2) Most schools are more culturally conservative than your Irish Catholic grandmother.

It takes a lot to convince an institution that dates back to Medieval Christianity to adopt new practices. Until ten years ago, most schools looked at debt as one step above a mortal sin. It was like convincing someone who only pays with cash that, yes, credit cards do serve a purpose sometimes.

Because education is regarded as a public good, institutions of higher ed have been unusually adamant about distancing themselves from the world of business. For years, many universities ran themselves as if they were a small mom and pop shop that may or may not keep a ledger. Higher ed isn’t a career, it’s a calling. We’re not searching for profits; we’re searching for the truth. While many universities are slowly inviting more professionals with a financial background onto their boards, there is still significant cultural dissonance between the image of public servants and business-minded strategists.

3) Bernie Sanders will haunt you in your dreams.

If you want to escape the political arena, this kind of lending isn’t for you. In its earliest form, higher education was only available to elite dandies living off cucumber sandwiches and bonbons. For centuries, it was the preferred alternative for wealthy men who were too lazy to become a priest and too rich to learn a trade. That all changed in the 20th century, when a taxpayer funded movement led to the explosive growth of the industry. Education was no longer part of a luxury lifestyle. It was reframed as a universal right that was more sacred to the American middle class than homeownership and God. As a result, the industry never fails to invite political meddling. Every time the White House changes colors, you should expect dramatic regulatory changes that can directly impact a school’s viability. We saw this happen with for-profit colleges, when party turnover prompted a mass conversion of for-profit colleges to non-profits. Unfortunately, as the industry becomes ever more politicized, tax status may be the least of your headaches come next election cycle.

4) Rules, rules, rules!

Any industry where Uncle Sam funds up to 90% of your paycheck will be incredibly regulated. Higher education has not one, but three main regulatory bodies: the U.S. Department of Education, six regional accrediting bodies, and state regulators. The DOE, as the lender with the most at stake, issues Composite Scores (essentially financial report cards) for schools each year. If a school takes on too much debt, they’ll flunk the report card and lose out on all Title IV funding. Regional accreditors offer the prestige factor. Every school board is desperate to win their approval and will do almost anything to keep it. Losing accreditation is seen as worse than joining a lepers’ colony, so schools generally avoid any risky behavior that might jeopardize it. Finally, state regulators focus on consumer protection laws. So long as you aren’t defrauding students, you shouldn’t have much to worry about. Together, these regulations make it more challenging for schools to refinance, consolidate, or transfer credits between each other.

Ultimately, unless more private lenders are willing to jump through these hoops, only herculean efforts like those of Sweet Briar’s alumni will save many schools.

This is the first in a series of four articles covering higher education. Colbeck has a particular interest in this area because 1) there’s tons to do and 2) there’s no one to do it. Next up, we’ll be discussing what it looks like when two schools decide to merge.

About Colbeck: Colbeck is a strategic lender that partners with companies during periods of transition, providing creative capital solutions to meet their evolving needs. You can reach the team at


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