Bridget Horgan, an incoming freshman at Mount Ida College, had already chosen her classes for the fall two years ago when she learned the school in Massachusetts was closing for financial reasons. She and several other students testified at the state legislative hearing that they had “absolutely no indication” over the closing and that they were “lost and heartbroken.” The fiasco led to the messy class action lawsuit that was dismissed, while Massachusetts established a series of state reforms and safeguards.
Unless the Federal Reserve acts now, we may witness a repeat of this on a national scale amidst the pandemic. An analysis by a New York University professor has classified more than 90 colleges as challenged. It includes schools like Brandeis University and Fordham University, due to the “high admit rates, high tuition, low endowments, dependence on international students, and weak brand equity.” These and several financial challenges make the schools vulnerable to the uncertainties of the coronavirus.
Colleges are stretching budgets to navigate the expenses and challenges of reopening during this health crisis, sometimes reducing their tuition in the hopes for attracting students. Moreover, many families have lost their jobs and income in the economic downturn, and are now less able to pay tuition and housing. International student enrollment is expected to drop precipitously amidst sudden immigration policy changes and visa issues, costing colleges and universities in the country more than $20 billion.
As with the effects of the coronavirus, there will be uneven impacts on the communities already subject to cumulative systemic racial discrimination. The schools at greatest risk do not have wealthy alumni networks and are more likely to serve those first generation students, low income students, and students of color. The racial economic gap means black families will lose the ability to support the college opportunity for their children.
This sets historically black colleges and universities, which provide paths to success for students of color, at greater financial risk and for some, on the verge of closing. Unlike those elite colleges and universities shielded by wealthy endowments that were partly built upon the profits of slavery, historically black colleges and universities are quite dependent on tuition revenue and revenue derived from campus services. Some might benefit from the George Floyd protests that shifted the attention of prospective students to systemic racism and could generate an important stream for tuition income, but it is far from guaranteed that will be sufficient.
Despite these key differences among institutions of higher education, the government could easily shore up vulnerable institutions serving students at this time of severe economic uncertainty. During the coronavirus crisis, the Federal Reserve and the Treasury Department have vigorously shored up the markets for businesses. The Federal Reserve for the first time even created its lending facility for buying junk bonds. Rescuing the bottom of the corporate barrel and increasing the value of these risky junk bonds is outrageous when the Federal Reserve is doing little to extend a safety net to previously healthy, but suddenly fragile, academic institutions.
Colleges have always served as a default structure to assist those hurt by recessions to obtain new skills to rejoin the labor force. In this pandemic, it is fair to ask if the Federal Reserve has been an agent of more inequality. The programs for those previously healthy, but suddenly fragile, academic institutions have been rather restrictive. Despite critical efforts to redesign the programs, the central bank has failed to create a viable mechanism for nonprofits, like hospitals, universities, and colleges. Neither borrowers nor lenders have wanted to participate in any of the programs offered.
Why? The answer is very clear. The terms are unattractive, the interest rate is high, the term to repay is short, and banks will take a bite out of the final amount of the loan with their fees. The favorable emergency treatment for junk bond funds shows us how much discretion the Federal Reserve has. It must now do as much for higher education as it did for junk bond holders. The central bank must offer a longer time for repayment such as 10 years, a lower interest rate such as 1 percent, and have banks waive the lucrative fees that reduce the loan amounts that nonprofits actually receive.
The Federal Reserve is not a robotic cash register. The emergency powers were created to lift the country from the Great Depression. The pandemic calls for the central bank to remember this and to provide attractive terms for nonprofit colleges and universities. The Federal Reserve now holds an incredible opportunity to wield its emergency authority to advance those prospects for thousands of vulnerable students across the country.
Emma Coleman Jordan is a professor of business law with Georgetown University Law Center and is the former president of the Association of American Law Schools and also the Society of American Law Teachers.