What happens when financial or other circumstances make it clear that a college cannot continue to operate? It’s not a rhetorical question. Closures among four-year, private, not-for-profit colleges averaged five per year from 2004-14, and an analyst recently predicted that the closure rate would likely triple by 2017.
Unlike businesses, higher-education institutions cannot seek protection to reorganize under bankruptcy laws and retain Title IV eligibility, which ensures continued federal support. Therefore, when a college’s projected expenses exceed projected revenues and no additional sources of funding exist, closure may become the only option. But the sudden closure of a Title IV-eligible college creates problems for multiple stakeholders, including students, employees, officers and directors, vendors, landlords, and lenders. Negative publicity, regulatory upheaval, and legal scrutiny soon follow.
So colleges, given the choice, try to avoid sudden closure at all costs. Early identification of financial or regulatory instability is the most important action administrators can take; ignoring financial or regulatory stressors leaves them few options for an orderly closure. That’s why planning for an orderly closing is crucial: How much cash is available and how long will that allow the college to operate?
Do the legwork in advance and have a custom solution for each student.
Even during troubled financial times, if a college is in compliance with accreditation standards and state and federal regulations, the U.S. Department of Education may require a letter of credit but still allow the institution to participate in Title IV. Ultimately, the college’s board of trustees must weigh the pros and cons and approve the initiation of a closure. Once that happens, the actions a college takes are crucial to a smooth wind-down process.
Legal counsel can guide the college through the governance, accreditation, regulatory, contractual, and creditor issues. Transfer options and other plans to equitably accommodate students’ academic needs must be put in place. Finally, because school closures are a communication-intensive process, a public-relations plan must be developed.
One of the greatest difficulties when managing a closure is planning in a vacuum, since much of the information must be held in the strictest confidence until a final decision is made. If the communication to students, faculty, employees, and external parties is incomplete or confusing, students’ immediate reactions are to panic and perhaps even withdraw from the institution, which will exacerbate its financial condition and potentially limit options for remaining students. Poor messaging may also result in excessive inquiries from regulatory bodies, which will additionally strain already limited resources.
Once the analysis of viability is completed and a decision to close is made, the real work begins. Several activities must be precisely coordinated:
- Determining the message. Consideration must be given to employees, students, parents, vendors, landlords, regulators, and community leaders. The first question they will ask is “When is the college going to close?” Establish from the outset that the college will honor its commitment to the students, even if it is still in the process of working out the details.
One person should be in charge of managing communications, including outlining with whom the institution must communicate, when, and how it will take place (e.g., in person, phone call, email). This point person will craft the media statement and develop custom messages targeted to each audience, as well as talking points for employees who will have to make presentations.
- Deciding how students will complete their education. Selecting options for completing the education of students is a tedious task that will be scrutinized by constituents and regulators, so it must be done with care. There are a number of possible paths, including continuing to teach current students until they graduate (called an internal teach-out plan), arranging with another college to teach these students the closing college’s curriculum (an external teach-out plan), and assisting students with transfer options.
- Completing individual student transition plans. Finding similarly accredited institutions with like programs in the same geographic area that have the capacity to effectively teach the students of the closing college is a tall order. However, doing the legwork in advance and having a custom solution for each student reduces the likelihood that students will withdraw immediately after the closure announcement is made.
- Making human-resources decisions. A number of employees, in particular those in admissions and marketing, will lose their jobs when the closure is announced. The administration should also identify employees essential to the closure plan and offer them an incentive agreement to remain until a specified time.
Several days before the announcement date, the college should begin internal notifications. Key leaders and, in particular, those administrators who need to announce the decision to students and employees need to be briefed. They should work from FAQ lists that answer the most common questions expected from employees, students, parents, and the larger community.
Next, regulators must be notified. The day before the announcement, the college should speak to its federal Department of Education team, accrediting body, and state regulator, providing them with student and employee communications. The college should expect to be asked to submit a teach-out plan.
The announcement date becomes the result of logistical exercise as the college orchestrates various notifications, first to the employees whose jobs are ending immediately, followed by students, and then the public. Administrators should expect an intense few days of media attention and be prepared to respond quickly to questions from the media.
Finding options for students to complete their education is a legal obligation and a moral responsibility. Next week we will recommend strategies for colleges to honor their commitments to students, regulators, employees, and other constituents while closing down with dignity.
Jamie Morley is chief executive of Education Consulting Solutions, and Bill Ojile is a lawyer in the office of Armstrong Teasdale LLP.
