Feds Call Loan, Rural Iowa University Shutters
Monday, June 19, 2023
By Jon Marcus for The Hechinger Report.
Broadcast version by Mark Moran for Iowa News Service reporting for The Hechinger Report-Public News Service Collaboration
When Iowa Wesleyan University announced in March that it would close, its biggest creditor was a federal government agency that had loaned it $26 million and then - in an attempt to help the university survive -softened the terms and extended the repayment period.
It wasn't the Department of Education that made the loan, or the Treasury or Interior departments, or any of the many government departments that support academic research.
It was the Department of Agriculture.
The USDA has been loaning tens of millions of dollars to rural colleges and universities, some of which couldn't get financing from conventional lenders or whose budgets are so precarious that the Education Department has placed them under additional financial scrutiny.
This support, through a program set up to promote rural economic development and from the federal agency that works the most with rural places, underscores how important local universities and colleges are to those communities - and the vulnerability of a growing number of them.
"Beyond the educational prospects, these institutions support small businesses who depend on the student and faculty population, and they make their communities a more attractive place to live," said Secretary of Agriculture Tom Vilsack, a former governor of Iowa who started his political career as mayor of Mount Pleasant, the city that's home to Iowa Wesleyan, and whose wife was on its board of trustees.
"They generate opportunity," Vilsack said. "When an area loses one of these colleges, like we are seeing in Mount Pleasant right now, it is a very emotional loss."
The decline of rural higher education is also widening one of America's biggest equity challenges. Many private colleges the USDA is propping up are in what would otherwise be higher education "deserts." Already, 13 million Americans live in places, mostly in the Midwest and Great Plains, where the nearest university is beyond a reasonable commute away, the American Council on Education reports.
But the Iowa Wesleyan case is also raising questions about risking taxpayer money to delay the seemingly inevitable closings of many of these institutions.
The USDA loaned Iowa Wesleyan $26.4 million in 2016, more than the university's annual operating budget. After the private institution started struggling financially in 2018, the agency extended the period of the loan by five years; in December, it lowered the school's monthly interest payments from $24,060 to $7,500 and offered an additional line of credit of $2 million.
By then, Iowa Wesleyan's own auditors had concluded that there was "substantial doubt about its ability to continue as a going concern." So bad was the university's balance sheet that, after reviewing it, the state of Iowa turned down the school's request for $12 million in American Rescue Plan money, and the 181-year-old institution's fate was sealed.
American taxpayers' collateral for the USDA's loan to Iowa Wesleyan, on which the university still owes $26.3 million, is the soon-to-be-abandoned 60-acre campus, which is valued at $19.1 million, including buildings and equipment.
If the experience of at least one other closed rural institution is an indication, it could be hard to find a buyer. After Green Mountain College in rural Vermont shut down in 2019, its 155-acre campus was put up for sale for $20 million; the campus eventually sold at auction for $4.5 million to a whiskey distiller whose wife reopened one of the buildings as a kindergarten-through-grade 6 community school.
A USDA spokeswoman said it was too early to know what the agency will do with the Iowa Wesleyan property.
Rural colleges and universities have significant economic value to their surrounding communities. Iowa Wesleyan, for example, had an estimated $55.1 million annual economic impact on southeast Iowa, according to a 2017 study conducted for the university by Hanover Research. That included direct spending by students, faculty, staff and visitors, plus income earned by graduates who stayed in the area to work or start businesses.
Rural colleges have another role that's harder to quantify: simply making higher education available to rural students, who research shows prefer to stay close to home. Already, far fewer rural high school graduates go directly to college than their suburban counterparts - 56 percent, compared to 62 percent, respectively -according to the National Student Clearinghouse Research Center, and that's down substantially in just the last three years.
"Kids in rural America deserve the same educational opportunity that their peers in urban areas have, and they should be able to stay in the town they grew up in if they choose," said Vilsack.
Private, nonprofit colleges and universities "are often the only options over a very long distance," said Andrew Koricich, executive director of the Appalachian State University-based Alliance for Research on Regional Colleges, which has created a map of universities and colleges that serve rural students and communities.
"Once that dot on our map disappears, there is a huge swath of Iowa that does not have a broad-access higher education institution in it," Koricich said of the closing of Iowa Wesleyan.
And to the immediately surrounding community, losing the university "is a tremendous blow," said the current mayor of Mount Pleasant, Steve Brimhall.
It's a blow that's being faced by a growing number of other rural towns.
At least a dozen private, nonprofit universities and colleges in rural areas or that serve rural students have closed or announced their closings in the last three years, including Chatfield College in Ohio, MacMurray College in Illinois, Nebraska Christian College, Marlboro College in Vermont, Holy Family College in Wisconsin, Judson College in Alabama, Ohio Valley University in West Virginia, Lincoln College in Illinois, Marymount California University, Cazenovia College in New York, Finlandia University in Michigan and Presentation College in South Dakota.
Fifteen of the 20 most rural states cut their funding for public universities and colleges in the 10 years after the recession that began in 2008, according to the Center on Budget and Policy Priorities. Institutions in some of those states have, in turn, eliminated a huge number of majors, merged or closed.
The USDA has stepped in to staunch this flow with low-interest direct loans to colleges and universities in rural areas with populations of 20,000 or fewer and loan guarantees to those in rural areas with populations of up to 50,000.
Figures provided by the USDA show that, in the last five years, it's made almost $163 million in direct loans and just under $100 million in loan guarantees to rural colleges and universities through its Community Facilities Direct Loan and Grant Program, which also lends to rural hospitals, public schools, community centers, libraries and housing and public-safety projects. Yet the agency's involvement in higher education is so little known, many higher education chief financial officers said they'd heard about it only by luck or accident.
Higher education institutions account for about 1.2 percent of the just under $12 billion in loans outstanding, the USDA said.
"The USDA is the one agency that you can point to and say, 'That's where rural happens,' " said Keith Mueller, director of the Rural Policy Research Institute at the University of Iowa. "It's a public agency that should help achieve public goals, such as helping an institution continue." And the loan program that's been channeling money into colleges and universities, "is designed to help local communities thrive."
Another Iowa school, Dordt University, received a $30 million USDA loan for a new student commons and recital hall that Brandon Huisman, vice president for enrollment and marketing, said will likely be under construction by summer.
"It's a foundational block of strong communities to have access to capital," Huisman said. The USDA loan program "is about promoting strong local communities, and it's an investment in rural America."
Dordt has an estimated $43.4 million annual economic impact on its surrounding area of northwest Iowa, according to a study conducted for the university during the 2019-20 academic year by Emsi Burning Glass, now called Lightcast. About 40 percent of its students come from more than 400 miles away, Huisman said, and 14 percent of them stay after graduating, at a time when the rural population is declining.
"We're a net importer of talent," he said. "The win-win of this program for taxpayers is the local economic impact and the talent higher education brings" to rural places.
Rural universities are also often cultural oases, Huisman said. Dordt is home to the Northwest Iowa Symphony Orchestra. "That's not something people think about when they think about rural America. It enriches not only our campus but our community."
Muskingum University in Ohio got a $28 million USDA loan, which it's using to help build a complex with classroom, clinical and laboratory space for health care and related majors. Health care workers are in short supply in rural states, according to KFF, formerly the Kaiser Family Foundation. It's the university's third loan from the USDA, said Philip Laube, former vice president for finance and operations who is still a consultant to Muskingum.
The university's latest USDA loan comes with a 40-year fixed, below-market rate and better terms than it could likely get from other sources, Laube said.
"It is harder these days for rural institutions," he said. "As a rule, we're going to be smaller. And there's a greater scrutiny placed on higher education as a business model," with enrollments at many colleges declining as costs rise.
Rural lenders may not have the credit to offer, even if they wanted to, he said.
The USDA, by comparison, "is in the position of making a loan in a fairly high-risk situation, as was the case with Iowa Wesleyan," said Mueller. "Even if there were regional banks [in rural communities] that had the capital, they don't have the risk profile to be able to do it."
The USDA has also loaned $11.4 million to Keuka College in upstate New York to refinance other debt and buy its student commons, which the college had been leasing; Keuka says the low interest rates will save it $20 million over the 30 years of the loan.
The agency loaned $26.4 million to Olivet College in Michigan to help build a new student center and refinance existing debt; $24 million to Quincy University in Illinois, also to refinance debt; $12.3 million to Huntington University in Indiana to renovate and expand a fieldhouse and for other projects; $3 million to Talladega College in Alabama for a student activity center and residence hall; and about $15 million to Newberry College in South Carolina in two loans, one of them to build a dorm.
Many small rural colleges are struggling, and some of the recipients of USDA loans are under heightened financial scrutiny by another arm of the federal government: the Department of Education, whose financial responsibility composite scores reflect the health of institutions' financial reserves, equity and income.
A score of less than 1.5 triggers additional oversight, including cash monitoring. The most recent scores are from 2019-2020.
A senior official at Thiel College in Pennsylvania said publicly that it would receive a USDA loan for about $57 million, which he said would be used to consolidate existing debt and for new construction and renovations, even though the college has a financial composite score of 1.1 and ran deficits in 2018 and 2019, the most recent years for which tax documents are available. Fewer than half of Thiel's students graduate within six years, the Department of Education says, much lower than the 68 percent average for private, nonprofit universities nationally. A spokesman said the college ultimately did not follow through on that loan.
Carson-Newman University in Tennessee, which has a financial composite score of 1.4, got a $14.5 million USDA loan in 2020 to put up a nursing building. Officials there did not respond to a request for comment.
The USDA said its criteria for making loans to higher education institutions include their liquidity, security in the form of endowment holdings and other assets, enrollment trends and market demand for the degrees they offer.
Some colleges approved for USDA loans chose to not move forward with them. Rowan University in New Jersey was loaned $26.4 million by the USDA to expand and renovate its student center at what a spokesman said was 2 percent interest, but he said it had declined another $61 million to build a fossil park and museum.
Southern Virginia University was cleared to borrow nearly $23 million for a new academic center, student housing, a dining facility, the renovation of its library and refinancing of other debt. But the plans were put on hold by the pandemic, a slowing of enrollment growth and rising cost estimates for the construction, said Robert Huch, vice president and senior advisor.
"While we are in a pretty good situation, not all rural schools are, and we're cognizant of that," said Huch. "So we're taking a more cautious path at the moment."
He said the USDA "was probably not targeting colleges when they put this program together, but it was an unintended benefit," considering"the value of good private colleges and universities in rural communities."
His kind of institution is essential for rural students, Huch said. "Many of our kids would never make it in a large public university."
But the financing options for small private rural colleges and universities are narrowing, said Koricich, at Appalachian State.
"For better or worse, the USDA is where we have couched rural economies, broadly," he said. "In some ways, you're just glad that somebody's doing the rural development piece."
Jon Marcus wrote this article for The Hechinger Report.
Support for this reporting was provided by Lumina Foundation.
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