When colleges shut down in orderly ways and with adequate advance public notice, the closures do not usually make the news or blow up on social media. Sudden closures, however, such as the ones we have seen at for-profit chains like The Art Institutes, Argosy, and Virginia College, or nonprofits like Mount Ida and Dowling College, are a reminder of how damaging an unexpected closure can be: in the worst cases, students were shut out of classes, veterans lost housing, and million-dollar funds were suddenly found missing.
State regulators are often the first ones on the scene when a college suddenly shuts its doors. This week, the U.S. Department of Education will be meeting privately with these first responders to discuss what can be done to address the problem more effectively. College accrediting agencies are also reportedly attending the meeting. This commentary provides analysis of various types of harm wrought by sudden school closures, and offers a framework for a soup-to-nuts transformation of how regulators approach the problem of college closures.
Who Gets Hurt by Sudden Closures?
Calamitous closures have three categories of victims. First, students who are promised an educational opportunity, a credential, and all the tangential benefits they entail are left in the cold, and typically after these students have already incurred significant financial and opportunity costs based on the expectation that the school will hold up its end of the bargain. In the leadup to closure, students may already begin to be shortchanged as top instructors are let go and management cuts corners on academic quality to reduce costs or maintain profitability. For example, former students who attended the nationwide giant ITT Tech, a for-profit college chain that suddenly closed in 2016, report teachers leaving half-way through classes, and potential employers rejecting ITT graduates because the software, programs, and equipment in ITT’s courses were too dated to be relevant on the job market.
During the moment of the closure, students face enormous shock and disruption, not only to their education but frequently also to their earning potential, housing, and other essentials of daily life. In the months and years that follow an abrupt closure, students continue to face challenges accessing their academic records and are less likely to complete credentials for professional advancement. Displaced students who are unable to complete their programs are more likely to default on educational loans.
The scale of both immediate and long-term student harm is the single most defining attribute of an abrupt college closure. Sudden closures like those in recent years can be prevented if regulators step up to the challenge.
Second, schools that abruptly close break promises they’ve made to the state and federal education agencies, and ultimately the taxpayers, who have underwritten financial aid programs like federal loans, Pell grants, GI Bill benefits, and state grant aid. When schools close with no notice, they often take millions from state and federal financial aid programs without delivering the promised educational services. Moreover, state regulators must divert resources to provide advising to the disrupted students, arrange for the preservation of and the facilitation of access to student records, and plan post-closure education options for students displaced by the closure. In short, each abrupt closure shifts onto regulators—and the public, as well—many of the costs associated with planning and implementing a responsible closure.
Third, when a school abruptly closes, the entire community of individuals doing business with the institution may experience disruption, as do employees who find themselves without work or health care coverage, and financial harm. For example, a closing school may fail to meet payroll for employees, pay rent to landlords, and cover expenses owed to contractors and vendors. In the lead-up to closure, these unpaid debts cause further harm to students as instructors leave, classrooms are padlocked, equipment becomes outdated, and records go missing. As unpaid debts accumulate, many institutions enter bankruptcy or similar legal proceedings that make it even more challenging for students, regulators, and other stakeholders to recoup their expenses in a timely way, or perhaps ever.
Key Policy Improvements for Regulators to Consider
Changes in state and federal policy and practices could reduce the incidence and severity of abrupt college closures. In particular, the officials meeting at the Department of Education this week should consider ways to improve monitoring, better align incentives, mitigate student harm, reduce taxpayer costs, and share critical information.
Improve monitoring and screening to better detect when schools are financially unstable.
A TCF report I co-authored last October, “How To Stop Sudden College Closures,” explained why the federal government’s current financial monitoring tool is ineffective and sometimes even counter-productive. Making better use of multiple indicators and the professional judgment of financial experts would alert regulators much sooner about schools that are beginning to teeter and might fall.
Some states have taken action. For example, Massachusetts underwent an extensive review of the financial stability of institutions within its private, nonprofit sector and subsequently developed an independent rubric for flagging institutions that lacked the financial reserves to cover 150 percent of annual expenses. Additionally, an association of states has put forth recommendations for metrics that state regulators should monitor and track over time, including measures on liquidity, revenue, expenditures, and enrollments. New York, for example, considers some of these recommended factors when it reviews audited financial statements, and may require, on a case-by-case basis, more frequent reporting, or keep schools on provisional status when financial weakness is identified.
Absent the ability to detect early warning signs, regulators will remain stuck in a catch-22 wherein any late-stage regulatory efforts to reduce the harms associated with sudden closures may be blamed for accelerating a closure, while the absence of such efforts all but ensures that when calamitous closures do happen, students, taxpayers, and other stakeholders will bear the costs. By developing tools to complement the U.S. Department of Education’s approach, states and accreditors can spot financially troubled institutions before the risk has become too heightened to allow meaningful regulatory intervention.
Align incentives so that closures are more likely to be planned and orderly.
While orderly closures have occurred across sectors, abrupt closures are disproportionately concentrated among for-profit institutions. A review of the unique incentive structures of these institutions reveals a potential cause: a for-profit corporate structure entitles owners with decision-making power to prioritize the financial gain of shareholders over obligations to students, taxpayers, or other stakeholders. While the school is profitable, shareholders want to stay open and students benefit. But when a school becomes unprofitable—or not sufficiently profitable—shareholder and student interests are not aligned: every day that an unprofitable school keeps its lights on, the school incurs expenses that ultimately reduce the payout that investors could pocket upon closure. One investor reportedly described a “mercenary attitude” driving investor decisions to abruptly close in order to preserve the largest possible payout. For-profit investors may be the only group to benefit when a closure is sudden and abrupt rather than orderly and planned.
Once a for-profit school reaches the brink of a system-wide abrupt closure, regulators have very little leverage to induce any additional investment of resources to smooth the transition.
Once a for-profit school reaches the brink of a system-wide abrupt closure, regulators have very little leverage to induce any additional investment of resources to smooth the transition. Unlike the case of a program- or campus-level closure, wherein an institution will continue to seek accreditation, state authorization, and access to taxpayer funding for a surviving entity, abrupt system-wide closures leave regulators with almost no negotiating power. Worse, failing schools threaten an accelerated closure if unexpectedly met with costly interventions. Recent closures suggest that when massive national chains go bankrupt, early and automatic triggers are particularly needed to avoid situations wherein regulators, facing down yet another massive and abrupt closure, use their discretion to soften financial responsibility standards in an effort to buy more time before that institution collapses.
Enrollment-based bond requirements and student tuition relief funds are used by many states as both an insurance policy that delivers relief to students and taxpayers in the event of a closure and as a way to leverage risk assessments from the private market for the level of growth that a school attempts. While some level of surety bonding could be required for all postsecondary institutions, financial monitoring can be paired with screening so that the requirement does not apply to schools with a minimum risk of closure, such as public colleges backed by the full faith and credit of a state, or private colleges with endowments that could support many years of operations.
When the risks to students or taxpayers are high, regulators should have the power to place one or more of their own representatives on the board of the school, just as investor groups frequently insist on board seats on companies they support financially. Given that several recently closed chains derived over 90 percent of operating revenue from government-sponsored financial aid programs, taxpayer interests are currently vastly underrepresented on the boards of the companies they finance. Schools that do not want that type of oversight could reduce reliance on taxpayer funding, or restore compliance with other financial responsibility measures to avoid hitting that trigger.
As risks increase, government funding programs could also renegotiate for increased collateral and rights, just as other creditors do. Perhaps the strongest way for government actors to ensure that taxpayers are not short-changed by financially risky schools is to depart from the traditional advance-pay model of financial aid and withhold payment until after adequate educational services are delivered. Just as a government agency might wait until after a building is erected to pay contractors, architects, and laborers for their work, education agencies can flip the current prepayment default, and switch schools at risk of closure to a payment system where the school gets paid only after it has provided the educational services that it promised to students and taxpayers. Again, the Department of Education provides an example of this approach in how it departs from the advanced pay model for schools that require the more severe of two “Heightened Monitoring” statuses. However, because this designation can accelerate closure for an illiquid school, the department is reluctant to use it; and because the department does not use the tool in a predictable way, institutions are less likely to build this potential consequence into their business models.
As risks increase, government funding programs could also renegotiate for increased collateral and rights, just as other creditors do.
While advanced planning and clear automatic triggers can help bring the incentives of financially risky schools in line with the goals of students, taxpayers, and other shareholders, each recommendation for aligning the incentives for institutions with desired outcomes for students and taxpayers requires improved screening and proper timing. Once schools are already teetering on the edge of collapse, aligning incentives is not so easy: early planning and automatic triggers can help regulators stay a course that will disincentivize risky growth from the start and lead to more orderly closures.
Reduce disruption, educational displacement, and financial harm to students.
In abrupt closures, students suffer immediate disruptions to their budgets, housing, and daily routines, followed by educational displacement that can permanently forestall academic and professional advancement and a long tail of financial harm. Better monitoring, screening, and incentive alignment is needed so that, at the very least, students receive enough notice prior to the closure that they need not worry about continuous coverage for life necessities like housing and food support.
Beyond immediate disruption, institutions that close can minimize education displacement by delivering one of three options that are often lumped together under the umbrella term “teachout.” In one version, a “teachout in place,” students receive the educational training for which they enrolled in the format and location that they selected while regulators monitor to ensure that quality standards are maintained. To a student, a teachout in place is ideally the same from an educational standpoint as would have been offered by the institution before its financial difficulties, with the exception that new enrollments cease and the school closes soon after the student completes a given program. A second option, a teachout at a receiving institution, entails students being moved en masse to a different school, campus, or learning format. This second type of teachout requires regulators to monitor for comparable quality. In one instance, Wisconsin regulators rejected a proposed teachout where students would have been moved from a brick-and-mortar learning environment to an online-only learning environment that was simply not comparable.
A third option, one that is sometimes also labeled as a “teachout,” entails students individually seeking to transfer credits into another institution. These nominal “teachouts” place the onus on students to individually research and pursue transfers; like the other options, transfer options for educationally displaced students require close quality review from regulators to ensure that students’ educational goals are advanced by the receiving institution. An example will serve to illustrate the need: in response to an inquiry from Senator Patty Murray regarding teachout planning for students, Education Corporation of America, which operated recently closed chains like Virginia College and Brightwood, provided a spreadsheet that listed “ground” and “online” competitors with no indication that these competitors would accept credits or provide comparable educational credentials for students who were displaced by ECA’s closure.
In disorderly closures, students are often deeply troubled by the unexpected interruption to their educational and professional goals, and regulators are rightly invested in wanting to help students obtain their credentials. However, regulators must be careful not to sacrifice quality control in their rush to place students who are displaced by sudden closures. Where a closed school has been lowering quality standards during the lead-up to closure, students may struggle to find high-quality transfer placements, and regulators similarly struggle to find high-quality teachout options. The institutions most willing to overlook the costs of necessary remediation are too often schools that are themselves engaging in risky enrollment practices because they are also experiencing financial instability. To prevent predatory teach-outs that shuffle students from one closing institution to another, regulators must implement thorough quality control and financial responsibility standards for institutions that seek to enroll students displaced by sudden closures.
Last but certainly not least, loan relief and state relief funds should be available through streamlined processes for all students. Not only do the student victims of sudden and disorderly closures often fail to receive the educational services for which they took on debt, paid out-of-pocket expenses, and invested time and effort, but they often also face additional costs associated with the disruption, like suddenly needing to change residences, or acquire new health insurance; the difficulty of obtaining records that may be critical to professional goals; and the challenge of advancing their careers while carrying the black mark of a disgraced school on their resumes. After a closure, loan discharge allows students to decide for themselves whether the program that they started is one that they wish to complete, or whether it would be more beneficial to change course. Affected students should at least have that choice.
A Chance to Reshape the Coming Wave of Closures
In coming years and decades, the twin trend lines of a shrinking college-going population and increasing pace of change in educational formats and institutional models will remake the college landscape. Already, closures, mergers, and structural changes, including the rise of online education and the emergence of nominally nonprofit shell companies, have, at times, left regulators spinning their wheels while students are taken for a ride. As the Department of Education, regulators, and accreditors adapt to changing times, they must seize this current opportunity to reshape the contours of future closures and set in place strategies that will reduce harm for all the stakeholders who are impacted when schools abruptly close.