September 17th, 2020

Tuition Pressure from COVID Squeezes Private School Bonds

private school bond

Schools nationwide have been struggling to justify already inflated tuitions as COVID-related mandates have moved most instruction on-line. To start the school year, many schools invited students back to campus for in-person instruction, only to send them home a few weeks later, after having collected full tuition payments from students. Schools facing backlash from their perceived bait and switch are contemplating or have already dropped tuition rates to try to lure students back.

Further, schools opting to hold in-person classes face increasing costs to meet strict sanitation requirements and student class size restrictions. With tuition and operating costs under pressure for the first time in many years, we examine the potential impact to private school surety bonds, an already risky class of surety bonds designed to provide financial assurance should a school go out of business.

What is a Private School Bond?

Government-required private school bonds, sometimes called proprietary or postsecondary school bonds, provide financial compensation to students when schools shutter and do not provide refunds. Public schools and universities are not required to obtain school bonds, and not all private schools must purchase them either. These bonds are usually only required for institutions who offer for-profit postsecondary (aka after high school) education and collect prepaid tuition. Some common examples include driving schools, beauty/cosmetic schools, and other career or technical schools.

Private school bonds are inherently risky due to the financial obligations (prepaid tuitions) that the bond covers. Bond claims arise when a school goes out of business and is unable to refund unearned tuitions, typically leading to losses that meet or exceed the bond amount. As a result, surety carriers charge higher than normal premium rates of around 2%-8% of the bond amount. Given the squeeze on school tuition, we expect heightened claims potential and increased premium rates.

Why are Schools Struggling?

The government response to combat COVID-19 has led to increased costs and declining enrollment for many schools. Schools that choose to conduct in-person instruction are facing high costs from implementing sanitation measures and equipping their locations to accommodate social-distancing mandates. Schools that are operating virtually are finding it hard to justify conventional tuition rates based on in-person instruction.

Making matters worse, the economic recession resulting from COVID has made it difficult for students to pay their tuition, forcing many to choose between investing in their future and paying for necessities such as rent and food. Schools are also unable to generate ancillary revenue with sports and other extracurricular activities shut down or void of fans.

Frustrated Students May Not Return to School

Many students are not happy with how their schools have responded to COVID-19, expressing a lack of confidence in schools on multiple levels. Schools who are operating in-person are facing accusations that they are putting profits before the safety of their students. Some students argue that it is not safe for them to return to the classroom, and that schools are carelessly endangering students to justify charging customary tuition rates.

Schools that are operating online are facing backlash as well, with many students complaining that they are not getting the full learning experience but are still required to pay high tuition and fees. Administrators are beginning to show concern about student retention and the ability to charge traditional tuition rates going forward.

What Happens if a School Can’t Reimburse Tuition Payments?

Schools must refund any unearned tuition and fees if they can’t provide the services the payments were intended for. If a school does not have the financial capability to repay tuition costs, then a claim can be made against the school bond. The carrier of the bond will issue payment up to the bond limit, and the school must reimburse the surety for the cost of the claim in addition to any court costs and claim adjustment fees.

If the school can’t repay the carrier, the carrier can file suits against the school in court or bankruptcy proceedings. Even with the bond coverage in place, total claims often exceed the bond amount, so students are often still left unreimbursed for some portion of their prepaid tuition.

What This Means for the Future of Education Bonds

COVID has added additional risks to school bonds, and increases the likelihood that many schools will go bankrupt and be unable to refund tuition payments. This will likely result in stricter underwriting requirements and higher premium rates for private school bonds moving forward.

Applicants can expect a strict review of the owner’s personal credit and overall financial position, along with a review of business financial statements. Schools with unsatisfactory cash balances or profitability may experience a jump in premium rates or may need to seek alternative surety markets to secure the private school bond.

How Can an Agent Get a Private School Bond?

BondExchange makes obtaining a Private School Bond easy, even in challenging economic conditions. We have access to over 30 leading surety markets, ensuring we can secure your customer’s private school bond regardless of their financial situation.

Simply login to your account and use our keyword search to find the “school” bond in our database. Don’t have a login? Enroll now and let us help you satisfy your customers’ needs. Our friendly underwriting staff is available by phone, email or chat from 7:30 AM to 7:00 PM EST to assist you.

2020-09-17T16:51:33+00:00

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