Uncertainty Swirls Around Trump's Impact on Post-Secondary Education

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Supported by government funding of some $135 billion in student loans and grants each year, for-profit and not-for-profit colleges are big business. More than 13 million students receive loans and grants to help cover the costs of tuition, room and board, books, and living expenses. It is still the early rounds when it comes to assessing what impact the Trump administration’s policies will have on post-secondary education, a vital source of training for the nation’s workforce. 

The stakes, of course, are high. If the U.S. Department of Education, the White House, and the Republican-led Congress move forward with sweeping changes to post-secondary education regulations or funding, the ramifications could impact a wide spectrum of stakeholders. While a cloud of uncertainty hangs over the sector, the new administration’s activities have been minimal in the first 100 days since Trump took office.

Most of the president’s regulatory decisions were only made in March and involved extending a deadline on the new gainful employment regulation (basically, debt-to-earnings ratios for graduates with student loans). Many other regulations implemented since 2010 could still be repealed, postponed, revised, or replaced—leaving stakeholders uncertain and hopeful for the best.

Figure 1

The Trump administration and the Department of Education say they are evaluating the effectiveness of existing programs and regulations to achieve their objectives. Investors in for-profit schools, though, certainly haven’t let the statements pass unnoticed; the stocks of 11 publicly traded for-profit colleges soared by 35 percent following Trump’s election through March 27, 2017 (Figure 1). The bounce is mainly predicated on a bet that the recent gainful employment regulation would be repealed or modified. 

Conversely, Trump’s budget proposal calls for a 14 percent reduction at the Department of Education and includes cuts in work study programs and Pell grants that send contradictory messages because these programs help more students afford a college education. Another conflicting message is the White House’s support for continuing to fund historically black colleges and universities (HBCUs), with the signing of an executive order that transferred control of an initiative backing HBCUs from the Education Department to the White House. At the same time, Trump’s budget doesn’t commit new funding for HBCUs.

Although several changes have been proposed or already implemented, stakeholders are unsure whether they will ultimately receive more or less in funding and regulation when the smoke clears. This article tackles some of the Trump administration’s changes and the issues being considered at for-profit colleges and not-for-profit institutions and assesses how diverse constituents, such as students, employees, lenders, investors, and taxpayers, may be impacted. 

For-Profit Colleges

For-profit colleges were a big story under the Obama administration due to the increase in regulation and the shutdowns of well-known post-secondary schools ITT Technical Institutes and Corinthian Colleges Inc. The industry was left reeling from the impact of gainful employment regulation, which deemed degree and non-degree-granting programs ineligible to receive federal aid if students do not graduate and secure a job in their studied field that paid wages high enough to achieve a debt-to-total earnings ratio of less than 12 percent. 

In early March, Trump’s Department of Education extended the deadline for schools that failed the gainful employment test to notify existing students that the school is at risk of losing access to federal financial aid. The deadline has since been extended to July 1 amid concerns about the accuracy of the data measured and whether the rules conformed to federal privacy laws. The 800 colleges that failed based on the metrics may get another 90 days to argue the data under appeal or prepare for changes. 

It’s worth noting that because most for-profit colleges are owned by private equity firms (only about a dozen schools are publicly held), these firms are faced with the decision to keep funding troubled schools, betting that gainful employment will be rolled back and new equity value can be created. Apart from changing regulations, the for-profit industry would also benefit if the new administration facilitated consolidation by swiftly approving mergers and acquisitions of post-secondary schools and granting permission for student transfers to aid in closing failing campuses and reducing capacity in the sector.

It is probably safe to say that the Trump administration will not shut down for-profit schools using the approach taken with ITT and Corinthian. More than 100,000 students and 30,000 employees were impacted by those closures, which also cost the federal government more than $800 million in student loan discharges.

From an operating perspective, it is important to point out that repealing the gainful employment rule would not make for-profit colleges more successful. These schools still need to attract students and provide a cost/benefit for graduates. For-profit schools should refocus on the market need for education programs that develop skills and experience for high school graduates to enter the work force and flexible training for older students to advance in a career path. 

Not-For-Profit Institutions

The decline in student enrollments and the challenge for students and parents to afford the rising costs of college also directly affect not-for-profit institutions. More than 300 not-for-profit colleges and universities, whose current student enrollments are half the size they were five years ago, face the threat of extinction. This top-line problem is driving unsustainable operating deficits at schools that do not have the endowment funds to cover the losses, let alone funds to invest in revitalizing programs. 

Small liberal arts colleges, HBCUs, and community colleges are starving for funding to provide relevant programs and education opportunities for rural and low-income students. These schools require millions of dollars in funding to operate and provide financial assistance to their students, while the students attending these schools have few choices for employment other than taking low-paying, unskilled jobs or possibly attending a for-profit school. The Trump administration and Department of Education announced budget changes that will affect all post-secondary students but will impact the students served by these schools in particular.

HBCUs

Students who attend HBCUs, which comprise more than 100 schools and collectively educate about 250,000 students nationwide annually, have historically relied on government grants and programs to help them cover the cost of college. These schools are under relentless pressure to develop programs that are relevant in today’s job market to attract students and sustain their mission to provide opportunities for underserved groups.

Trump signed a new executive order in late February that essentially moved an initiative supporting HBCUs from the Education Department into the White House in an event widely covered by the news media. While $492 million has been earmarked in the budget for these schools and other institutions serving disadvantaged students, new funding for HBCUs is noticeably absent. College officials responded by requesting more funding to improve their facilities and programs. Thurgood Marshall College Fund President Johnny Taylor reportedly said $25 billion in funding would help “get our schools back to the point where they can reasonably be expected to compete with other institutions.”

Many of the HBCUs without large endowments will likely need to restructure their operations. There are significant opportunities to eliminate duplicate infrastructure for information systems and back office operations; consolidate buying power under common contracts for food service, insurance, telecommunications, subscriptions, etc.; and outsource noncore operations, including housing, maintenance, and information technology (IT). Unfortunately, it is a struggle for schools to get comfortable with yielding control in some of these areas. 

Pell Grants

Trump outlined a budget for the Department of Education that showed the spending priorities for his administration. The net result is a $9 billion cut, or a more than 13 percent spending reduction. A number of the cuts are focused on grants, which is important because students from low-income families, which are disproportionately reliant on grants, may have less ability to pay for college. Unlike loans, students do not have to repay grants. Therefore, this may deprive some college-eligible students of the opportunity to gain a post-secondary education if funds associated with the canceled programs (TRIO, GEAR UP, SEOG and Work-Study) are not redistributed through other programs that benefit low-income students.

Born from the budget cancellation of $3.9 billion in carryover Pell funding, one of the biggest fears expressed by some is that the Pell Grant program would be greatly reduced ($28.2 billion for the 2015-2016 academic year). However, the Pell Grant program currently has a surplus of more than $10 billion due to eligibility changes implemented by the prior administration. The fear that Trump would greatly reduce funding is unfounded because by law the surplus would be returned to the Treasury after 10 years anyway, and Congress sets the Pell grant budget, not the president.

Politics and Government

There are several ways the Trump administration and the Education Department could change the current regulations and address the existing deadlines. For example, at the beginning of March the Department of Education delayed the deadlines for schools to file appeals on the gainful employment debt-to-earnings calculations for their programs at risk, as well as the deadline for schools to disclose to students that their programs may be at risk of losing financial aid. Both deadlines were extended for three months to July 1 “to allow the department to further review the Gainful Employment regulations and their implementation.”

Of course, the Education Department also has some latitude in deciding not to enforce or make decisions based on regulations that were enacted during the Obama administration, such as the gainful employment mandate. Taking a cue from how the Trump administration handled attempts to repeal and replace Obamacare, stakeholders may expect to hear strong messages for repealing the gainful employment regulation but also find a lack of ideas for better regulations. 

The cold reality is that politics and governmental processes are involved in adding or changing existing rules and laws. To do so, the Department of Education must either go through a protracted, negotiated rule-making process, or Congress can pass them in a reauthorization of the Higher Education Act. 

However, to prevent doing more harm than good, rolling back regulation means that the Trump administration and Congress must be ready to propose alternative legislation. In the world of politics and government, these processes take time. Further complicating the scenario, Trump has yet to fill most of the politically powerful positions at the Department of Education—deputy secretary, general counsel, and the various assistant secretaries—in addition to lower level positions. 

These positions are key to legislative activities and are directly involved in the department’s actions and decision making. Thus, it makes sense to extend deadlines to give the department’s new leadership time to evaluate the feasibility and efficacy of the gainful employment rule and other regulations. 

Considering the need to balance the issues around protecting the education prospects and rights for students and consumers with the need to provide workforce training in their districts, congressional leaders may choose to use their political power by addressing changes through the reauthorization of the Higher Education Act. Congress could also target regulations by not approving funding for them in the annual budget, which doesn’t extinguish a regulation but neuters its impact by denying funding for its implementation. 

Time Will Tell

As noted earlier, it is still too early in the game to prognosticate winners and losers in post-secondary education under the Trump administration. Significant impacts could still be ahead, depending on how much Title IV funding for loans and grants is approved—with more than $130 billion at stake—and whether the president makes additional cuts in Pell grant programs.

While the outcome of Trump’s policies on post-secondary education resides in the tea leaves for now, one thing is clear: American employers rely on the availability of trained and skilled workers to grow their businesses and maintain productivity. Recognizing that post-secondary for-profit and not-for-profit colleges are an important source of this talent pool, plans to increase business growth and productivity in the U.S. should include strengthening schools that offer vocational and workforce training.

Restructuring professionals are likely to see opportunities to help post-secondary schools work through these issues and to provide support in cash forecasting, budgeting, cost reductions, strategic initiatives, monetization of assets, refinancing debt, contract negotiations, and basic analytical resources. 

Troubled schools must resolve their issues out-of-court because they would lose eligibility to receive federal loans and grants for their students if they were to file bankruptcy. Administrators and trustees must work out debt default issues with their lenders and bondholders to avoid risking the loss of their accreditation and access to federal loans and grants. 

Sometimes a school’s demise is unavoidable. For example, Dowling College on Long Island could not attract enough students, and the school shut down its two campuses in 2016. The real estate owned by the school is being sold to repay the bondholders. Luckily, most of the students were able to transfer to other colleges to continue their education.


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    Joe D'Angelo

    Joseph R. D'Angelo

    Carl Marks Advisors

    Joe D’Angelo is a partner at Carl Marks Advisors and has more than 20 years of experience improving underperforming businesses and advising companies and lenders in complex restructuring matters. He has served in various roles, including CRO, CEO, COO, CFO, and advisor. His engagements have encompassed turnarounds, operational and financial restructurings and assessments, M&A, due diligence and assessments, and Chapter 11 reorganizations and Section 363 sales. D’Angelo holds a bachelor’s degree from Columbia University and an MBA from The Wharton School of the University of Pennsylvania.

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