Closing the Barn Doors After the Escape

University of the Arts peers: Only 2 out of 34 recent closures and program cuts came from schools monitored by ED

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A lot of the education news in the US this week has followed the sudden closure of the private nonprofit University of the Arts in Philadelphia. After admitting the Fall 2024 freshman class, the university notified its accreditor on May 29th (the same day as the start of summer term) and the public on May 30th that it was closing today, June 7th. Nine days’ notice with no teachout plans, no provisions to help students, nothing.

A helpful, inquisitive reader (and one who loves a good IPA) triggered me to look deeper.

Not Alone Part I

Thanks to enrollment declines, rising interest rates, and the FAFSA fiasco, the University of the Arts is not alone. On April 26th, the Hechinger Report described that college closures had increased to a rate of roughly once per week, while also describing several mergers where weak institutions are completely absorbed by another. Today, Inside Higher Ed described a rough month of program and faculty and staff cuts at a number of colleges and universities driven by financial crises. And the FAFSA fiasco will likely hit schools this summer and through the fall.

What’s the Point?

What might surprise people is just how blind the Department of Education’s Federal Student Aid office (FSA, the one that is causing the FAFSA fiasco) is on these sudden closures. FSA’s primary mechanism for providing additional oversight in these cases is placing schools on Heightened Cash Management (HCM) status.

I combined the University of the Arts case along with the schools mentioned in the Hechinger Report and IHE articles to see if FSA was aware of the problems. As of the most recent public data release (December 2023), the Department of Education’s FSA office had only two out of 34 institutions on HCM status. And no, the University of the Arts was not on that list.

Furthermore, only two out of the 34 are for-profit institutions, which is where the vast majority of regulatory actions are targeted in terms of financial oversight.

To me, this is surprising, as all indications are that the University of the Arts has had a brewing financial crisis for a while, per the statement from the board of trustees reviewed by the Philadelphia Inquirer.

“Like you, we are struggling to make sense of the present moment,” that statement said.

They said the school’s finances had been in trouble over years of declining enrollment; the Center City institution last year served 1,149 students, down 44% from a decade earlier.

“With a cash position that has steadily weakened, we could not cover significant, unanticipated expenses,” the Friday statement said, without specifying the nature of those expenses. “The situation came to light very suddenly. Despite swift action, we were unable to bridge the necessary gaps.”

A Look at Finances

Furthermore, according to Form 990 filings, the university has operated on the edge for a while, hovering around $100 million in revenue and roughly the same in expenses for over a decade.

Looking at the 2023 balance sheet, we can see that the University of the Arts had very little cash or cash equivalents available to meet expenses ($8.5 million). Most of its assets are tied up in real estate and investments ($167 million).

We don’t know what “significant, unanticipated expenses” mean in this case, but we do know that the University of the Arts has not had reserves to cover any surprises for a while, yet the school was never placed on HCM status.

Not Alone Part II

But FSA is not alone in its blind oversight. The Middle States Commission on Higher Education (MSCHE), the university’s accreditor, found out about the closure on May 29th and pulled its accreditation as of June 1st. Remember that MSCHE is the accreditor that enacted its own third-party servicer (TPS) expansion policy at the beginning of this year.

Fitch, for its part, decided that it took should take action, downgrading the bond ratings on June 4th.

Fitch Ratings has downgraded approximately $46 million outstanding par (FYE 2023) of Philadelphia Authority for Industrial Development, PA series 2017 bonds issued on behalf of The University of the Arts (UArts) to 'C' from 'B+' with a Negative Rating Outlook. [snip]

At the 'C' rating, Fitch considers default to be imminent or inevitable.

It’s just a guess, but I wonder if the “significant, unanticipated expenses” were tied to the $46 million of bonds, based on some debt covenant.

Too Little, Too Late

The point is that FSA, Middle States, and Fitch have all closed the barn door after the escape. None of their actions are helpful, and we have a failure of oversight here. Instead of the regulatory and policy activism we’ve seen from FSA and Middle States lately, perhaps the two groups should focus on doing their assigned job instead. Student loan forgiveness and TPS expansion and targeting of online education and for-profits and OPMs are not just misguided, they are coming at the expense of these groups providing meaningful oversight to help avoid closure crises leaving students without recourse.

These sudden college closures this decade represent the area where we need investigations and improvements in policy and process.

And I expect an acceleration of sudden closures as the FAFSA fiasco plays out. We will see additional surprises that should not be surprises in the coming months.

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