The challenges facing U.S. private colleges are starting to become their bondholders’ problem, too.

An unusual bankruptcy by New York’s College of New Rochelle this year will likely leave investors recovering only a fraction of what they are owed. A Christian college is asking bondholders to sell back their securities for as little as 10 cents on the dollar to help it emerge from a two-decade fight for survival. Others are defaulting on debt limits contained in bond contracts, a potential harbinger of deeper strife to come.

The troubles have been building at some small, private colleges for years as students grow apprehensive about taking on debt for costly tuition. Moody’s Investors Service has estimated that one in five such schools is under “fundamental” stress, and a demographic shift is threatening to make it worse: by one estimate, the number of high school graduates is projected to stagnate over the next several years and then start falling after 2026, threatening to increase competition for a smaller pool of students.

“The size of their market is shrinking,” said Joseph D’Angelo, a partner at Carl Marks Advisors, a firm specializing in debt restructurings. “If we were talking about a business or industry, we’d be going, ‘Oh wow, this is terrible.’”

The pressure is creating a divide in the higher-education system between the prestigious, wealthy schools that draw a large number of applicants and those struggling to attract them. Jessica Wood, a senior director at S&P Global Ratings, said she expects more colleges on the losing end to merge or shut down as a result. “I don’t think there’s an end in sight,” she said.

Ohio Valley University, in Vienna, West Virginia, is trying to avoid that. The approximately 500-student Christian school told investors that “tremendous market pressures” have left it facing an “uphill financial battle” for about 20 years. In June, it offered to buy back its debt for prices ranging from 10 cents to 40 cents on the dollar, depending on the particular security. In September, the school defaulted on debt payments.

Mike O’Neal, financial adviser for the college, said the school is still working on the restructuring and declined to comment further.


Still, out-of-court restructurings can be more advantageous to investors and the schools than bankruptcy, which is a last resort because it cuts off crucial federal student aid.

The College of New Rochelle in New York filed for Chapter 11 bankruptcy this year. It will end up selling its campus for $32 million, which will cover a little more than a third of its outstanding liabilities. Investors who owned debt issued by Dowling College on Long Island, which went bankrupt in 2016, fared even worse: they recovered an average of 17.8% of what they were owed, according to Moody’s.

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