The most recent tutorial 12 months noticed the beginning of what business consultants anticipate to be an intensified wave of faculty closures or mergers as establishments cope with declining enrollment and monetary pressures. However a collection of coverage adjustments by the Biden administration might make these transactions—which are sometimes extraordinarily tough to result in from a cultural standpoint—even more durable in observe.

Over the previous 12 months, the U.S. Schooling Division has amended federal guidelines to present itself extra oversight over the “change in possession” course of, and it has subjected mergers to new necessities.

The division says the adjustments are aimed toward defending college students and taxpayers, given the dangers for each teams related to a change in possession. However larger schooling legal professionals say that the adjustments have injected extra uncertainty and value into an already tough course of and lengthened the timeline for offers to shut, which could lead on struggling schools and universities to close down fully moderately than transfer ahead with a merger.

“We’re at a cut-off date the place it’s in all probability probably the most tough it has been within the final 30 years to finish a transaction,” mentioned Aaron Lacey, a lawyer who leads Thompson Coburn’s larger schooling observe and makes a speciality of mergers and acquisitions. “It’s tough for the events to know, and it’s tough for most of the different members of the triad. There’s quite a lot of confusion and totally different insurance policies and new guidelines, and even on the division, they’re figuring these items out.” (The “triad” refers back to the three teams concerned with regulating larger schooling—states, accrediting companies and the Schooling Division.)

Division officers wrote within the closing laws that adjustments in possession and management pose vital threat, notably when the offers contain for-profit establishments changing to nonprofits or the acquisition of a bigger establishment or chain.

“College students, taxpayers, and the division will profit from elevated transparency round a proposed transaction, offering extra time for the division to conduct oversight and make sure the transaction is correctly performed and doesn’t end in an interruption of title IV, HEA funds,” company officers wrote.

In a press release to Inside Larger Ed, the Schooling Division mentioned mergers are complicated, fact-specific offers.

“Whether or not a closure or a merger is most popular will depend on the underlying circumstances, together with what the buying college is planning on doing with the varsity they’re buying,” the assertion mentioned. “Typically a merger is extra acceptable, however there are many occasions when a closure is extra sensible.”

Lacey and different legal professionals fear that in attempting to mitigate the chance, the division is making much less dangerous transactions, resembling these together with solely nonprofit schools, tougher.

Clare McCann, a better schooling fellow at Arnold Ventures, a philanthropic group, mentioned the division’s steering is closing a loophole and clarifying that establishments and firms can’t use a merger to keep away from following the change in possession guidelines. The brand new processes don’t incentivize closures, in McCann’s view, however moderately encourage establishments to plan forward and make accountable choices. “We’ve seen schools time and time once more get to the top of their rope and shut abruptly,” McCann mentioned. “The objective is to consider issues early on.”

Among the current adjustments took impact in July below the division’s new guidelines governing change in possession. Others have been outlined in steering launched in September 2022 and February 2023. The division is also trying to impose extra necessities on mergers and different change-in-ownership transactions associated to monetary duty. These guidelines are within the works and anticipated to be finalized by November.

Compounding the impact of the adjustments is an absence of staffing on the division, which implies that evaluations take longer to finish, leaving establishments looking for to merge twisting within the wind. Legal professionals who work on mergers and acquisitions say division evaluations of transactions used to take 45 to 60 days. Now, these evaluations take six to 18 months.

From a regulatory standpoint, it’s simpler to shut the varsity.

—Aaron Lacey, a lawyer at Thompson Coburn

Among the many most important adjustments the Schooling Division made was within the timing of its evaluations. Its officers used to do an preliminary assessment of a doable transaction earlier than it closed, which gave the events an early sense of any main points. The company stopped these preclosing evaluations partially due to staffing points.

Beforehand, mergers have been thought of single-step transactions “whereby an establishment modified possession and concurrently turned a further location of one other establishment,” in line with a division memo despatched to accreditors in February.

Now the division evaluations a deal solely after an accreditor has signed off, and till the division offers its closing approval, the school or college that’s trying to merge should stay an unbiased establishment. In any other case, it is going to be thought of closed. Throughout this time, any potential value financial savings from a merger can’t be realized.

Institutional accreditors are updating their insurance policies and procedures in response to that new steering, they usually famous in statements to Inside Larger Ed that the brand new course of for merging might take as much as two years. The Larger Studying Fee mentioned in an emailed assertion that it created a brand new accreditation standing for establishments in the midst of merging with the intention to adhere to the steering.

“Over all, the brand new steering from the Division provides a layer of complexity that would prolong the timeframe for establishments to obtain closing accreditor approval of a merger or consolidation,” HLC mentioned.

Nicole Biever, senior director for strategic partnerships and advocacy on the Center States Fee on Larger Schooling, mentioned the approval interval does current challenges for establishments and will confuse constituents.

“Establishments partaking in these transactions could face challenges to function independently, and people challenges could possibly be exacerbated throughout these approval processes which might be lengthened in time,” Biever mentioned. “This might result in closures for some establishments.”

‘The Monetary Burden Is Important’

For establishments in monetary misery, the prolonged time in limbo after accreditor approval might show to be untenable. “The monetary burden of the additional 12 months is important,” mentioned Liz Maw, president of Presidio Graduate College, which is in the midst of a merger with the College of Redlands.

Presidio introduced late final 12 months that it was merging with Redlands to grow to be a part of the college’s enterprise college. They anticipated to shut the deal and grow to be one establishment as of June 30.

Nevertheless, after the February memo, the 2 teams needed to rework the deal and work out preserve Presidio’s operations for one more 12 months. Maw mentioned it was unclear what precisely Presidio wanted to do to be thought of an unbiased establishment.

By that point, three-quarters of Presidio’s employees had been advised that their jobs have been going to be eradicated below the merger. The varsity used retention bonuses to deliver again employees.

“Like every college taking a look at a merger, we’ve very restricted financials,” Maw mentioned. “We then had to determine function on this further 12 months actually on a bare-bones price range as a result of once more, we had deliberate to be merged and never have any of those expenditures.”

Presidio’s accreditor, the Western Affiliation of Colleges and Faculties Senior Faculty and College Fee, signed off on the merger in June. Earlier than the Schooling Division can begin reviewing the deal, the brand new laws require audited monetary statements from the previous two fiscal years, which gained’t be prepared till October.

Beforehand, establishments might submit the 2 most not too long ago obtainable audits, as a number of individuals advised the division in public feedback. The company mentioned within the closing laws that getting up-to-date monetary info was extra vital than rushing up the change in possession course of.

“Besides in very uncommon instances the place an establishment is vulnerable to a precipitous closure, there isn’t any motive to hurry a change of possession transaction,” division officers wrote. “The CIO course of shall be higher served if transactions are effectively thought by way of and developed. If doing so means ready to make sure we’ve up-to-date monetary info, we see no vital draw back.”

If the division says no to its merger, Maw mentioned Presidio will seemingly have to shut, although that call would depend upon the particulars of the rejection. “The life like possibility would in all probability be to shut, as a result of discovering a brand new companion at that time is a bit bit difficult,” she mentioned.

Within the meantime, Presidio is leasing classroom area from Redlands, and Maw is planning to remain on as president for as lengthy she’s wanted. Enrollment is down for the approaching tutorial 12 months.

“Our new scholar cohort is a bit smaller for us, and it’s tough to pinpoint precisely why,” Maw mentioned. “It’s exhausting to inform if it’s the merger.”

What Precisely Is Altering?

Previous to the division’s February memo, a merger or acquisition between two establishments below separate possession was not handled as a change in possession.

“The division has revised its strategy to those sorts of transactions to guard college students, to make sure that establishments have enough monetary power following a CIO to satisfy the division’s monetary duty necessities and that they continue to be administratively succesful,” Herman Bounds, director of the division’s accreditation group, wrote within the memo.

The method for change in possession is printed in laws that have been amended final 12 months and went into impact July 1. The revisions require schools to inform the division and their college students a few deliberate change in possession 90 days upfront, and impose new necessities for for-profit establishments which might be changing to nonprofit standing. Moreover, the division could require a letter of credit score if the schooling secretary deems such safety mandatory.

“The ultimate laws tackle the elevated complexity of adjustments in possession and assist mitigate elevated threat to college students and taxpayers,” a division reality sheet says. “These adjustments present vital protections, notably the place for-profit schools are looking for to transform to public or non-public nonprofit standing, to make sure that schools meet the necessities below regulation.”

The laws cite a 2020 Authorities Accountability Workplace report on for-profit conversions that discovered the division’s assessment of such transactions missing.

Aaron Ament, president of the Nationwide Scholar Authorized Protection Community, mentioned that maintaining establishments separate till the merger is permitted might assist the division kind out which establishment to carry answerable for borrower protection to reimbursement claims and different liabilities. Underneath borrower protection, college students can search debt reduction if their school or college misled them or violated sure legal guidelines.

“I feel there’s one thing to be mentioned, in idea, that earlier than faculties are in a position to convert to nonprofit standing or a for-profit entity is merged right into a state college, that the federal authorities conduct a radical assessment, notably as to who shall be on the hook for liabilities which might be owed to the federal authorities and taxpayers,” Ament mentioned. “To the extent that these new regulatory protections or steering facilitates that, it may be a extremely good factor. The issue is the division has to truly be capable of implement its assessment course of and desires the sources to take action.”

Lacey mentioned the forms of transactions he’s coping with now usually contain a distressed establishment looking for a nonprofit companion or a for-profit school recapitalizing. “Most of them appear to be the forms of transactions that we’d need to facilitate,” he mentioned. “There’s no query that lots of them are constructive transactions.”

Nevertheless, because the system turns into extra complicated by way of the time and uncertainty concerned, it’s tougher to get the offers accomplished. Lacey has seen cases the place an establishment runs out of money and has to shut as a result of a merger didn’t get accomplished in time. “From a regulatory standpoint,” he mentioned, “it’s simpler to shut the varsity.”

Lacey can also be involved concerning the proposed adjustments to the Schooling Division’s monetary duty guidelines, which gauge whether or not an establishment has the monetary sources to function. The division is planning to judge a vendor’s funds, and if the establishment doesn’t cross muster, the customer must submit a ten % letter of credit score. The proposed revisions haven’t been finalized but.

“The division has simply added a disincentive into the combo, they usually’re saying, ‘Properly, the varsity is distressed that you simply’re fascinated about serving to out—you’re gonna should additionally submit a ten % letter of credit score or one thing else that the secretary decides,’” Lacey mentioned.

The extra requirement might dissuade a bigger establishment from serving to out a smaller or weaker one in want of a companion to stay open, he mentioned, leading to extra school closures.

“It means college students are much less more likely to re-enroll and end any program,” Lacey mentioned. “It additionally implies that all these staff lose their jobs, doubtlessly. It’s not a very good consequence.”