Loan Program for Black Colleges Struggles With Oversight, Repayment

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The federal government has lent out nearly $2 billion over the past two decades to help dozens of historically black colleges and universities upgrade their campuses or refinance debt.

But only a fraction of the money has been repaid, oversight is limited and the lifeline promised to the schools, which have played a key role in educating African-Americans since the Civil War, has become more of an albatross for some.

Officials at Stillman College in Tuscaloosa, Ala., are lobbying the Education Department to have their $40 million loan modified or forgiven, arguing that the funds it got through the Historically Black College and University Capital Financing Program in 2012 were secured with overly optimistic enrollment projections.

Barber-Scotia College in Concord, N.C., defaulted on its loan in 2005 after it lost its accreditation.
And four schools ravaged by Hurricanes Katrina and Rita, which in 2007 took out a combined $361 million in loans capped at 1% interest over 30 years, have paid back just roughly $12.4 million of it in the past decade and were granted a five-year forbearance period in 2013 when enrollment didn’t rebound quickly.

“We’ve got to have much stricter underwriting requirements” to ensure that schools can handle the new debt, said Johnny C. Taylor Jr., president and chief executive of the Thurgood Marshall College Fund, which represents publicly supported HBCUs, and a member of the loan program’s federal advisory board.

Created by Congress in 1992, the capital-financing program encouraged the colleges to participate “as a coalition, as a collective, being willing to help other institutions,” said Brian Johnson, who until last month was president of Tuskegee University. But as a pooled escrow system, the schools also were on the hook when institutions with questionable credit couldn’t pay back their debt.

The program got off to a slow start: By summer 2006, it had approved just $218 million in loans to 14 colleges. A Government Accountability Office report that year encouraged more aggressive marketing to potential borrower institutions. Over the next 10 years, the program approved $1.75 billion in loans, including 11 worth more than $50 million each.

Many of the schools have used the funds to build or refurbish student housing and dining facilities, and they generated enough revenue to pay off the loan if enrollments remained stable or rose.

LeMoyne-Owen College in Memphis, Tenn., took out a $13.5 million loan in 2012 to finance a 336-bed dorm, doubling its capacity for residential students. The new dorm opened in fall 2013 and had an 86% occupancy rate this past fiscal year, according to spokeswoman Daphne Thomas. She said LeMoyne-Owen is “current and in good standing” with its loan, though she declined to provide specifics about how much remains outstanding.

But enrollment hasn’t been growing at many of the schools in recent years, partly because the Education Department tightened borrowing requirements for a parent loan program popular at HBCUs. Historically black colleges enrolled 294,316 students in fall 2014, down from a peak of 326,614 in 2010.

The program has long faced high delinquency rates.

Students at Stillman College before graduation ceremonies, where 105 received degrees in May. The school is located just a few miles from the University of Alabama.

The Education Department’s fiscal 2017 budget request shows that the program had a target delinquency rate of 14%. Its actual delinquency rate—reflecting payments that were between 11 and 59 days late—was 19% in fiscal 2012, and 36% in fiscal 2013. The budget paper doesn’t include more recent figures for that performance metric.

Donald Watson, who has been director of the federal loan program for 10 years, said at a May 2015 advisory board meeting that there were schools on his “watch list” because of concerns about impending financial trouble, and others that he described as “habitual late payers.”

The board hasn’t met since then.

“A lot of this has been left without the oversight that we’ve needed,” said Rep. Alma Adams (D., N.C.), who co-sponsored a bill this year requiring more reporting by the advisory board and allowing the Education Department to provide financial counseling to schools that don’t currently meet the loan program’s requirements. “The schools that participate should be constantly assessed to determine whether they’re on track for repayment.”

Stillman hadn’t been making regular payments for at least a year and a half before President Cynthia Warrick took the helm on an interim basis in January. She said she learned of the default two weeks into her tenure, when she received a message from the bank.
Stillman used its loan funds in part to refinance a loan that was used to build a new football stadium; it gave up the sport in late 2015, eliminating ticket-sales revenue that could have helped cover debt payments.

A fundraising appeal this spring allowed Stillman to make its April loan payment, but Dr. Warrick said the school would need to increase enrollment to at least 800, from its current 570, to afford another installment.

Dr. Warrick said she has been in regular contact with Education Department officials and is hopeful that the repayment plan will be adjusted.

“It’s in the nation’s best interest to either give us a deferral or if they evaluate the entire program and all of these schools and what we do for the nation, that we should get a bailout just like the automobile industry and the banking industry,” she said.

Education Department spokeswoman Liz Hill said the department doesn’t go into details about specific schools’ finances, but noted that penalties are laid out in loan agreements and failure to repay can affect schools’ accreditation and ability to borrow in the future.

Ms. Hill said schools “must be creditworthy to access this program,” and not every school that applies is approved.

Morehouse College and Texas Southern University were rated as investment-grade by Moody’s Investors Service at the time they got their loans, but others were speculative bets.

“The federal government needs to be a little more particular in their lending,” said Marybeth Gasman, professor of higher education and director of the Penn Center for Minority Serving Institutions at the University of Pennsylvania. “You should not be able to borrow anything unless you have a plan to pay it back.”

The Education Department said there are eight HBCU loan applications now under review.

Source: Wall Street Journal