Navigating the institutional credit programs in post-secondary education can be fraught with risk, where a single misstep in managing payment plans or loan terms could unleash a deluge of compliance audits and legal issues. In this article, we will explore why it's wise for schools to move away from offering these programs and outline a strategy for doing so without sacrificing student enrollment.

Let’s start with the why…

Regulatory Demands

In the clear-cut language of oversight and compliance, the Consumer Financial Protection Bureau (CFPB) is ringing the alarm bells for tighter control over educational payment plans. They point to a thicket of concerns that, without mincing words, spell out the potential pitfalls for students and institutions alike. The CFPB's spotlight on these issues serves as a regulatory checklist—and a bit of a cautionary tale—for schools navigating the complexities of extending credit to students:

• Hidden fees: Like unwelcome guests at a party, hidden fees can pop up unexpectedly, leaving students bewildered and financially strained.

• Misleading terms: A retail installment contract can sometimes read like a novel with a twist ending; the terms seem straightforward until they're not.

• Inconsistent disclosures: In the quest for financial aid clarity, inconsistent disclosures are the equivalent of foggy glasses—students can't see what they're signing up for.

• Captive audience issues: When students have fewer options, they're a captive audience. Schools must ensure these students aren't 'volunteering' for terms they don’t fully understand.

On another front, the Department of Veterans Affairs (VA) peers over its spectacles with concern at "Institutional Aid," implementing new rules that could make schools think twice before stepping out of line. These regulations could put a serious dent in a school's funding if their installment contract doesn't align with VA guidelines, specifically citing the 85/15 rule, which affects how veteran students' tuition payments are calculated and supported. 

The CFPB and VA are just the tip of the regulatory iceberg, with others like the Department of Education's 90/10 rule under Title IV adding to the iceberg's mass. These regulatory bodies, with their valid mission to safeguard students, still impose a hefty and complex burden on educational institutions. Beyond the good intentions, the reality is a landscape bristling with compliance stakes and significant risks for schools.

This growing regulatory presence makes it clear: more oversight is on the horizon, and with it comes the need for schools to reassess their involvement in direct financial lending. The time for educational institutions to step back from the complexities of managing student financial products is not just coming—it’s already here. With the regulatory environment evolving rapidly, the decision to pivot away from these offerings is not just prudent, it's imperative.

Administrative and Legal Burdens

In the practical world of higher education finance, the origination and management of payment plans or loans is a complex undertaking that can come with a heavy cost – operationally, financially, and legally. Even when third-party servicers and software platforms offer user-friendly systems to streamline this process, they cannot shield institutions from the ultimate responsibility that comes with these financial offerings.

In fact, the convenience of these platforms may inadvertently lead schools to overextend their financial services, making it too easy for schools to create loan terms and payment plans without the necessary credit policy framework in place. This apparent ease of operation belies the gravity of the liability still held by the institution, as these assets—and the risks of default—remain on the school's books. In essence, third-party services may facilitate the process, but they also potentially lower the guardrails, making it all too easy for schools to enter a fraught financial landscape without adequate safeguards.

The core issue is that while the management of these financial products might become more straightforward with external help, the inherent risks do not dissipate. The responsibility for due diligence, compliance, and financial stability cannot be outsourced completely. Schools must recognize that even with the best-intentioned support, the liability and potential for financial strain remain squarely on their shoulders, requiring a level of expertise and resources that may be beyond their means.

Repayment Performance

Effective repayment performance is crucial for maintaining the financial health of educational institutions. When a school lacks the expertise to manage its credit portfolio, it risks a rise in default rates. These defaults can significantly reduce the institution's revenue and result in an increased number of delinquent accounts, compounding the financial burden. Such issues are not just minor setbacks; they represent serious financial challenges that can have lasting impacts on an institution's economic well-being.

Economic Pressure

The economic strain on educational institutions managing their own credit programs is often a downstream consequence of the factors discussed above: (1) the tightening grip of regulatory risks, (2) the weight of these assets on balance sheets, and (3) a general lack of expertise in managing financial portfolios. This confluence of issues typically results in a dwindling revenue stream and presents a substantial challenge with no straightforward resolution.

One theoretical exit strategy could involve selling the loan assets to investors to cleanse the balance sheet. However, the reality is that most schools are ill-equipped to engage with capital markets effectively. Even when there is a possibility of attracting investor interest, the loans themselves might not be packaged appropriately due to the very issues previously highlighted—such as poor disclosure practices and a lack of standardized terms. These factors combined make it all too likely that the assets are viewed as potentially uncollectible debts, deterring potential investment. Thus, schools find themselves at an impasse, holding onto financial products that they are not positioned to manage or divest profitably.

The Solution

But not all is doom and gloom. Herein lies the promised lifeline - Fortify. As a lending firm adept at shouldering the burdens of payment plans, we offer schools a turnkey solution that includes the following:

• Interest rates and payment plans that are manageable for students.

• No fees charged to the school.

• Full receipt of tuition disbursed to the school as students make each payment.

• A skilled team specializing in portfolio management to optimize repayment rates.

• The ability to tap into capital markets for asset liquidation if necessary.

Fortify Education offers schools a practical way out, providing a viable exit from the institutional credit game.

Conclusion

It's time for educational institutions to step back from the complex world of managing institutional credit programs. Partnering with a specialized firm such as Fortify Education allows schools to refocus on their core mission of education, while ensuring financial stability and integrity. Fortify Education provides the necessary support and expertise to handle the financial operations, giving institutions peace of mind and the ability to concentrate on what they do best—educating students.