The $2.2-Billion Bet

For its 175th birthday, Limestone University got itself a new library and student center designed to be the heart of the Gaffney, S.C., campus.

On a sunny day in January 2020, campus officials wearing hard hats and holding shovels officially broke ground on the $18-million student complex, which features dining options and an academic-success center. The next year, a media tour of the space showed off large expanses of windows that allowed for sweeping views of the campus and study areas for students, plus hangout spots. University officials hadn’t lost any enthusiasm for the project. One called it a “game changer” for the rural campus.

Three years later, the building is open and prominently featured in recruiting videos. But the university is in worse financial shape. Last year, the president and chief financial officer departed following news that the college faced a multimillion-dollar budget shortfall. A few months later, the interim president made the alarming announcement that the campus needed to raise $10 million in donations in a little over a month. The governing board pledged its support for the interim leader, Monica Baloga. She resigned before the year was out.

The Limestone student center was financed by a little-known loan program run by the U.S. Department of Agriculture that aims to encourage new capital investment in rural areas, including on campuses. The USDA has lent rural colleges and universities $2.2 billion across the last decade to build student centers, libraries, dorms, and academic centers — at lower interest rates than those offered by private lenders. In practice, the program has become a lender of last resort for some financially strapped colleges for whom new construction promises dubious benefits.

Despite the cheery words at groundbreakings, a Chronicle investigation — based on dozens of interviews and an analysis of data obtained through open-records requests — has found that the program, while often delivering a temporary positive bump to a campus and its balance sheet, can threaten the colleges’ long-term survival by loading them up with new debt and not delivering enrollment increases.

“This has a bit of the subprime-mortgage-crisis feel to it,” said Andrew Koricich, executive director of the Alliance for Research on Regional Colleges and an associate professor of higher education at Appalachian State University. “We are lending to institutions that other places won’t extend credit to,” said Koricich, whose research focuses on rural-serving colleges. “What is the purpose of this being a loan? Why not a grant? Congress has to decide rural places are worth being invested in and not just a place to make money.”

The bulk of the money — more than $1.2 billion — has been lent to private nonprofit colleges in the Great Lakes region and the Southeast, institutions largely dependent on enrollment and tuition revenue. Nearly half of those colleges had declining enrollment over the decade prior to getting the loans, The Chronicle’s analysis found. The money was needed, college officials told the federal government in their applications, to help modernize their campuses, either through renovation of aging buildings or state-of-the-art new construction. The goal of both was to make campuses more attractive to students.

But at many colleges, this hasn’t happened. Enrollments of full-time students have been declining or flat at over 70 percent of those Great Lakes and Southeast campuses since getting the loans.

“If the result of construction isn’t going to lead to new revenue, then they’re not going to be any better off” than they were before the loan, said Donald E. Heller, the retired provost and vice president for academic affairs at the University of San Francisco and a longtime higher-education researcher. “You borrow money and even if it is at a decent rate, it has to be paid back. Having a sparkling new student center generally isn’t going to turn around an institution that has been struggling.”

The decline in tuition revenue, coupled with increased debt — the average loan is for $25.4 million — has added stress to college officials’ abilities to keep their institutions operating.

“I don’t know if colleges with that debt problem will be able to survive,” said Damián Fernández, the new president of Warren Wilson College, which took out a $16-million USDA loan. Unlike many other institutions, that loan is the college’s only significant debt, Fernández said.

Warren Wilson, like other colleges, secured its loan with property and buildings as collateral. If a college closes, or defaults on the loan, the USDA assumes ownership of the campus. That occurred recently at Iowa Wesleyan University, which closed in large part because of crushing debt, including a $26-million USDA loan. Large portions of the campus were sold in January to a local school district for $1.25 million.

The USDA’s Community Facilities Programs started as part of the Consolidated Farm and Rural Development Act of 1972. Congress allowed loans for “essential community facilities,” which include rural colleges and universities. The loans can be used to purchase, build, or renovate buildings or to buy equipment. Loans are often taken for new town halls, fire stations, fire trucks, and other large purchases.

The USDA declined to make any officials available for an on-the-record interview and did not answer detailed questions sent to the agency, instead issuing a statement:

“The number of colleges facing significant enrollment declines is expected to continue growing. However, all applicants are rigorously vetted and must meet numerous requirements. While the Community Facilities program provides opportunities for institutions as a lender of last resort, it does not make loans to those without a plan to repay their debt.

“Loan and grant requirements are structured to ensure all applications from eligible entities in rural areas, including institutions of higher education, receive equal consideration for the limited resources made available through the program.”

The Chronicle’s analysis found that the USDA has approved loans for dozens of colleges with documented financial struggles and declining enrollment. More rural campuses that owe money to the USDA are all but certain to fold in the coming years, and the buildings they constructed with public money will stand as reminders of a program whose utility — to taxpayers as well as the colleges themselves — was ambiguous at best.

And in that scenario, the government will have a fresh problem on its hands, Koricich said. “What on earth is the USDA going to do with campuses?”

Alma College had a problem. The small college in rural Michigan had about $17.5 million in loans and was approaching a balloon payment. It needed to figure out a way to refinance and went looking for options. Among them: a loan from the USDA.

“It sounded almost too good to be true,” Dan Henris, Alma’s controller at the time, said of the low interest rate. (The loan is currently being repaid at 2.1 percent.) But there was a catch. Alma was quickly informed it couldn’t just refinance the outstanding debt. It had to pair it with some sort of new project with a cost equal to or greater than the amount to refinance. College officials decided they would renovate dorms, which was desperately needed but hard to raise money for, said Jeff Abernathy, Alma’s president.

Renovations are one thing the program was designed to finance. Each year, Congress appropriates the program’s total funds, somewhere between $2.5 billion and $3.5 billion. The USDA’s Rural Development State Offices review the loan applications and approve or deny them. The national office also signs off on larger and more complex projects.

For colleges, the process can be complex. Henris called it “fairly laborious” for Alma, and recalled gathering documents into a binder more than six inches thick. Alma had to submit an architectural report on the proposed renovations and have an independent firm do a feasibility study of the college’s finances. “You want to prove you’re worthy of getting money and also able to pay it off,” Henris said.

Alma was and remains in good shape. Enrollment over the decade prior to getting the loan was increasing, from 1,167 in 2006 to 1,385 in 2016, according to federal data. It has dipped since, to 1,275 this past fall. College leaders believe the new dorm rooms helped with recruitment efforts.

The loan-approval process can take several years, said Gail Harris, vice president for financial affairs at Tennessee Wesleyan University. Her university started looking at a USDA loan in 2014 after a board member heard about it. The USDA approved the funding in August 2016. The university borrowed $20.6 million to build a student-life center, renovate other buildings, and refinance some debt.

Fixing the interest rate for the next 40 years was a plus for Harris, even as officials had reservations about the size of the debt. “That made us nervous,” Harris said.

But the current Tennessee Wesleyan president, Tyler Forrest, said he would have “absolutely” made the same choice. “It was the right decision to make a transformative change to our campus,” he said. He added that the university is on solid financial footing and enrollment is up slightly, from 1,037 in the fall of 2016 to 1,070 this fall.

For some colleges, the loans don’t pay off.

Iowa Wesleyan was teetering on the edge of closure. With enrollment plummeting, the college had to cut $3 million from a $20-million budget. Administrators axed 16 academic programs, got rid of almost half of the college’s 52 faculty positions, and let more than 20 staff members go. Faculty members who remained were convinced the college was doomed.

That was 2014 — nearly a decade before Iowa Wesleyan finally closed, ending a long string of years where expenses outweighed revenues.

In the fiscal year ending June 30, 2016, the university lost $3.2 million. The previous year it lost $5 million. Despite the well-documented struggles, the USDA agreed in 2016 to give Iowa Wesleyan a $26-million loan, which helped in restructuring debt. (It’s unclear what buildings were built or renovated with the loan.) At the time of loan, former Gov. Tom Vilsack, who is from Mount Pleasant, where the university is located, was the U.S. secretary of agriculture. His wife, Christie, had previously worked as an instructor at the university and sat on its board. The agency has said neither was involved in any decision around the loan.

When the money came in, university officials were confident it had helped the university get back on stable ground.

That didn’t happen.

In November 2018, the university’s board held a special meeting to decide on whether it could even stay open. The next year, it lost $4.5 million, then $1.6 million in 2021 and $2.3 million in 2022. That same year, it worked out an agreement with the USDA to cut its monthly interest payments by nearly two-thirds. The university couldn’t borrow any more money to plug the gaps — it had already pledged all the property and the endowment as collateral on the loans.

Finally, the university asked the state for money to keep it afloat, but Iowa’s governor declined in February of last year, citing the fact that the USDA could call the loan for full payment in November 2023. That could leave the state’s residents on the hook for millions.

That was the death knell.

“All our indicators have been trending in a positive direction, but we needed funding to buy some additional time,” then-board chairman Robert Miller said in a March 2023 media release announcing the closure.

The end of the release was stark in describing what would happen to the brick and mortar: “The physical campus will become the responsibility of the U.S. Department of Agriculture.”

One educational institution’s demise was another’s windfall.

For $1.15 million, the Mount Pleasant Community School District bought the central campus area, including the Howe Student Activity Center and Ruble Arena, the student union, Old Main, Pioneer Hall, P.E.O Memorial Building, and the University Chapel.

The bargain was a godsend for the district, which desperately needed new facilities. It didn’t have an auditorium for its bands or drama department to put on performances. It was renting out space for its administrative offices. And it was using city-owned athletic fields to make sure it had enough space for its teams to practice and play. Building a new elementary school, which some in the district wanted, would cost the district tens of millions of dollars.

“To build a facility like we’d be looking at, it would cost us $15-17 million for the gym alone,” school Superintendent John Henriksen told local media. “Either way, the value that we found in the gym, the chapel, and the practice fields, we felt like that was something we needed to proceed with.

“Definitely a win at $1.25 million.”

Not for the USDA, which has bundled other properties into three other packages and sold them for a total of about $460,000, tax records show. Combined with the sale of the main campus, taxpayers got just under $2 million back of the $26 million that was lent.

But there’s a bigger issue than money lost, experts said. The campuses, and what happens on them, is often the center of community life in small rural towns. It’s the gathering spot for big basketball games, for concerts from the local school district’s bands, and lectures from guest speakers. And it’s the only college around: The nearest public university is the University of Iowa, 50 miles north, and the nearest private institution is William Penn University, about 80 miles northwest.

“To the USDA, [Iowa Wesleyan’s campus] is a worthless asset,” said Koricich, the rural-college expert. “To that community it was an invaluable asset. We took away the only four-year college in that area for a measly $26 million. That fundamentally changes the future of the region.”

As the Limestone campus community gathered for the groundbreaking of its new library and student center on that sunny day in January 2020, optimism was running high.

“This new building, even while under construction, and certainly when completed, will be one of the most important student-recruitment and -retention tools that Limestone has ever enjoyed,” the then-president, Darrell Parker, said during the ceremony. “That means Limestone is about to embark on a path to growth unlike anything we have ever experienced.”

Limestone badly needed that growth. In 2010, the university had about 2,300 students, federal data shows. It stayed around that level until 2015, when it dropped to 2,250 students. Then the real slide began. By the time of the groundbreaking, its enrollment was 1,496 students.

There were financial difficulties. In 2017, 30 positions were eliminated and there were employee furloughs, according to local media reports. But the college rallied and prepared for expansion. In addition to opening this new building, Limestone was also in the process of changing from a college to a university, thanks to new graduate programs.

The university had long been working on a new library, but the USDA loan of $34.5 million allowed it to increase the size of the project. It also allowed the university to buy a new residence hall that it had been leasing and refinance debt. Buying the dorm was seen as a way of increasing a revenue stream, because the college would be able to capture student payments for it instead of sending the money to a private company. The university also made plans to rent out space in the new building for local events and meetings, adding some more revenue.

But these plans haven’t turned things around. Limestone’s finances took a nose dive in 2022. According to the audited financial statement, the university finished the year with an $8.5-million loss, which it attributed to “a decline in enrollment coupled with uncontrolled spending during the year.”

The university lost about $2 million in tuition revenue from the previous year, and about $3 million in revenue from auxiliary sources. At the same time, spending was up, including an additional $1.5 million for instruction, $3.5 million for student services, $1.5 million for institutional support, and $800,000 for auxiliary services.

The board authorized a $6-million draw from the endowment — widely considered a measure of last resort — to help cover some of the shortfall.

Shortly after announcing the shortfall — and a six-hour board meeting — Parker resigned. Baloga, then the provost, was named interim president in February 2023 and served until she resigned in September. Jeremy Whitaker, the vice president for finance and administration, was named acting president and continues in that role.

He told The Chronicle he is optimistic about both the USDA-financed building and Limestone’s future.

“We certainly knew the building would be popular with our students, but the impact it has had on our campus has been remarkable,” Whitaker said, adding that students are using the space and that it has enabled the university to bring more community events to campus.

Limestone has put in place cost-cutting measures since Whitaker took over and is adjusting its programs, he said, even as it, like many other small colleges, struggled coming out of Covid. Enrollment has dropped more than 25 percent between when the loan was approved in 2018 and 2022. The university halted the capital campaign and is working on starting a “vigorous advancement office” and looking at a new master facilities plan.

“The USDA loan has been beneficial to Limestone in many ways, particularly regarding the new student center and library that continues to help us attract and retain students,” Whitaker said, of the decision to increase the college’s debt.

When it was founded in 1845, Limestone was one of the few women’s colleges in the country, eventually opening its classes to men in the early 1900s. Many of its buildings date from the 1920s.

Gaffney is about 55 miles southwest of Charlotte and 50 miles northeast of Greenville. It’s best known for its giant “Peachoid” water tower and as the home of the ruthless politician Frank Underwood from Netflix’s House of Cards. In the TV show, Underwood made several trips to Gaffney and is buried there. With about 12,000 residents, it qualifies as a rural area and Limestone as a rural-serving institution.

Much of higher ed looks something like this. A January 2022 report from the Alliance for Research on Regional Colleges found there are 1,087 rural-serving institutions in the U.S. That includes 33 percent of all private four-year institutions, 46 percent of all public four-year institutions, and more than half of all public two-year colleges.

“These rural colleges and universities are providing extremely important access to education to rural communities,” said Ty C. McNamee, an assistant professor of higher education at the University of Mississippi. “When you also know that students want to go to school close to home, that creates a perfect storm when one of these colleges closes down.”

Small, rural colleges face tough years ahead, due in large part to the phenomenon known as the enrollment cliff — the projected dip in high-school graduates starting in 2025 and continuing for five to 10 years. This past February, the U.S. Census Bureau updated its projections to say that the drop will continue through the 2030s and isn’t likely to have any drastic jumps in the following years.

Campuses like these are often highly dependent on tuition revenue to keep their doors open. But in areas where enrollment is waning, other opportunities to boost revenue are limited. Taking on debt can be one of the only options. And once it’s on the books, it can make enrollment even more important. One missed target — overestimating revenue, like what happened at Limestone — can mean a world of hurt.

“You miss one or two years on enrollment numbers and there’s not much you can do other than drastic actions,” Koricich said. “Rather than turning [the USDA program] into a grant program, we are saddling them with more debt. Does the USDA really want to help or just look like they are helping?”

Adding debt through the USDA places a nearly insurmountable burden on struggling colleges, Koricich said. “These institutions have to have a near-flawless performance after the loan.”

If they don’t, and end up closing, the surrounding community suffers. Without other options nearby, students who would have attended the local college may be without good options. “You have to think about how far everything is away in a rural community,” McNamee said. “That is true in higher education as well.”

In many rural communities, the private nonprofit colleges act as an anchor institution, driving the economy forward along with functioning as a public gathering spot. The colleges “blur the public/private narrative in these places,” Koricich said.

That’s true in Gaffney, said James A. Taylor, the city administrator. Limestone’s economic impact — visitors spending money at hotels and restaurants, faculty members spending their wages on groceries and light bills, and even students serving as the city’s part-time worker base — is a boon to Gaffney, Taylor said.

But the impact extends beyond that. It provides cultural events, spaces for local community organizations to hold banquets and art shows to visit. If it went away, it “would be a huge economic blow to Gaffney, but also a psychological blow,” Taylor said. “The pride of having a four-year institution is important. It is a very important institution to our community. It’s an old college. It survived the Civil War. It survived the Great Depression. It’s a key part of Gaffney.”