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Back in the Classroom, but Not Back to ‘Normal’

April 07, 2021

The education industry, like many others, saw a fundamental shift in 2020 as remote learning challenged some of the long-held traditions of institutions, educators, and related companies. From federal support of reopening in-person classes to changes in college athletics to overall financial challenges, here are some of the trends we could see defining the industry for the rest of 2021.

Biden-Harris Administration

The Biden-Harris administration made several campaign promises for the education sector, with the president’s primary focus centering on helping schools reopen. On March 1, the Senate confirmed Miguel Cardona as education secretary. Cardona will spearhead the president’s promise to reopen the majority of K-8 public schools in the first 100 days of the new administration. $81 billion of American Rescue Plan Act funds have been released to the states to support their efforts to have students return to the classroom safely for in-person learning, keep schools open once students are back, and address students’ academic, social, emotional, and mental health needs. Although the Biden-Harris administration announced a new federal program to give teachers access to at least a first dose of the COVID-19 vaccine, it is not clear how quickly educators will be vaccinated. School reopenings face challenges from teachers unions opposed to certain return-to-classroom protocols, the lack of vaccine approval for children, and apprehensive parents, particularly those from communities hardest hit by COVID-19.

The American Rescue Plan Act provides funding resources for educational institutions through both Title I and Title II, and earmarks certain funds for specific purposes and institutions including Howard University and institutions serving the deaf. Universities entitled to receive support under Title I include 1890 Land Grant Universities, 1994 Tribal Land-Grant Institutions, and Insular Area Institutions as well as certain institutions that are Alaska Native, Native Hawaiian, and Hispanic serving. Title II of the American Rescue Plan Act provides funding of about $125 billion for K-12 public schools and nearly $40 billion for institutions of higher education.

The majority of funds to support elementary and secondary schools are targeted for distribution to local educational agencies with requirements for such schools to reserve certain funds and implement programming to support homeless children and youth, to address learning loss, to plan for a safe return to in-person instruction, and to provide equitable services to students in nonpublic schools with significant percentages of low-income student enrollment. Similarly, a portion of state funds are required to be used to implement programming to address learning loss or to support specified programs, activities, groups, training, supplies, and services.

In contrast, funds allocated for higher education are not directed to programming; rather, like the CARES Act funding, a significant portion of funds received must be used to provide emergency financial aid to students. To the extent institutions of higher education are not required to apply 100% of funds received to financial aid, a portion of the remaining funds must be applied to implementing practices intended to suppress the spread of COVID-19, and a portion must be directed at targeted outreach to financial aid recipients. A number of conditions, primarily intended to preserve funding and resources for high poverty and economically disadvantaged local education agencies, are attached to the funds.

Under an executive order issued March 8 by the president, Education Secretary Miguel Cardona has 100 days to review all of the US Department of Education’s (DOE’s) regulations and policies to make sure they do not discriminate on the basis of sex. Cardona is expected to pay specific attention to Title IX of the Education Amendments of 1972 and “consider suspending, revising or rescinding” any policies that don’t actively protect students from discrimination on the basis of sex. As covered in our previous LawFlash, the DOE issued legally binding amended regulations governing how institutions that receive federal funding under Title IX must respond to allegations of sexual misconduct, including sexual harassment. While the final regulations focus primarily on institutions of higher education, their detailed processes largely apply to elementary and secondary schools as well. Reactions have been mixed, with many supporting the changes that they say protect the due process rights of alleged perpetrators, and many others condemning the final regulations and expressing concern that they will undermine the purpose of Title IX and deter students from reporting sexual harassment and assault, so it is not unexpected for the new administration to spend time closely reviewing these.

The new administration’s focus on immigration could also have a major impact on higher education institutions as they seek to attract and retain foreign students to US campuses. As one example, the executive order “Preserving and Fortifying Deferred Action for Childhood Arrivals (DACA)” directs the US attorney general and secretary of the US Department of Homeland Security to defer the removal of undocumented immigrants brought to the United States as children and who meet certain other qualifications. This order reinstitutes a program first established by President Barack Obama, which President Donald Trump then unsuccessfully sought to terminate. It directs the two cabinet heads to “preserve and fortify” the program. The continuation of DACA will provide additional security to those “Dreamers” who are seeking higher education and predictability for educational institutions that are admitting them. In addition, the “Proclamation on Ending Discriminatory Bans on Entry to the United States” terminates former President Trump’s executive order prohibiting entry by individuals from primarily Muslim and African countries. This proclamation ends any vestige of then-President Trump’s prohibitions on entry, which were opposed by the education, medical, and technology industries, among others, because the prohibitions reduced their access to knowledge and expertise based on religion rather than competence. The end of that particular entry ban assures that eligible applicants of all nationalities and religious background may apply for and be granted visas to pursue educational opportunities in the United States.

There is also bipartisan support for a bill that seeks to amend the SECURE Act and extend the availability of pooled employer plans (PEPs) to 403(b) plans (for nonprofit entities). This could create a new market for small colleges and K-12s to band together to participate in plans administered by well-known asset managers that would allow greater economies of scale, lower fees, and access to broader investment platforms. 

College Athletics

With the US Supreme Court currently hearing a case that could allow for compensation of student athletes, many colleges and universities are closely watching what could have groundbreaking implications for the NCAA, for student athletes, and for their member institutions. Depending on what is decided, the case has the possibility to change forever the landscape of student athletes at universities and colleges by allowing students to be paid for playing. Right now, schools can’t fully prepare for potential outcomes because of how different and how impactful the decision is going to be. The Supreme Court already made waves in college athletics when it lifted the ban on sports betting in 2018. While the decision pushed the actual rules around sports betting to the states themselves, it has opened up an avenue for schools, like the University of Colorado, to make the very first sponsorship agreement with a sports-betting operator and share in the revenue generated. This has created the potential for an enormous new revenue stream for schools, with many universities examining their own partnerships with gaming operators.

Education-Related Investments

With the rise of distance learning defining much of the past year for educators, there has been an explosion of ed tech investments in the education sector, with more than $1.1 billion invested in 2020. This demand for a new technology platform and virtual classrooms has prompted a host of new legal issues, including licensing and intellectual property concerns for this technology that is delivered to learners remotely, the use of blockchain technology to store and encrypt personal data, and the growth of artificial intelligence to aid with grading and tailoring basic activities.

Private equity and venture funds also have invested record sums into the global education sector—$30 billion in the last five years across K-12 and workplace learning.

Financial Challenges

The global COVID-19 pandemic has raised significant financial challenges for institutions of higher learning. National Association of College and University Business Officers (NACUBO) and financial services firm TIAA released a study showing that almost half of endowments increased their spending support for their institution’s operating budget in fiscal year 2020. Over 40% of endowments reported that their institution’s cash flow declined in fiscal year 2020, resulting from decreases in tuition revenue due to lower enrollment, lost revenue from on-campus services such as student housing, dining, and parking, and declines in new gifting. Academic institutions spent $23.3 billion from their endowments during fiscal year 2020, up 4% from the prior fiscal year, with seven in 10 institutions increasing spending from their endowments. Endowments’ average effective annual spending rate (i.e., the dollars spent from endowments divided by the endowment market value on July 1) rose as well.

An increasing need to rely on their endowments, a roller coaster stock market, low interest rates, and generally muted investment returns have prompted many institutions to re-evaluate their endowments’ portfolio construction. It is anticipated that many endowments will consider adopting more risk and explore other changes in portfolio construction in 2021.

Budget shortfalls and other financial challenges stemming from the global pandemic have accelerated the closures of certain academic institutions, particularly small private colleges such as Becker College and Mills College, and closures of additional institutions may follow. The challenging financial climate has also contributed to the merger or consolidation of certain public higher education systems such as those in New Hampshire and Pennsylvania, mergers in the private sector such as St. Joseph’s University and the University of the Sciences in Philadelphia, and discussions of other mergers and consolidations such as the public systems in Wisconsin and Oregon. This financial climate is expected to result in the assessment of merger and consolidation opportunities by other higher education institutions and systems.

ESG Development

The global pandemic and social unrest have sparked a focus on the practice of responsible investing by academic institutions, which is shaped by key environmental, social, and governance (ESG) issues. The NACUBO/TIAA study revealed that, while 80% of endowments reported that ESG factors are reflected in their investment policy, endowments generally have yet to integrate responsible investing criteria into portfolio construction in a meaningful way across asset classes. Many endowments have cited performance concerns and potential conflicts with fiduciary duties as the primary reasons for not actively pursuing responsible investing, but this may change as market evidence increasingly indicates that a responsible investing approach can indeed deliver competitive returns, creating an opportunity to align an institution’s mission with its investments while also meeting return targets.

The movement towards divestment in fossil fuels by university endowments has accelerated, as institutions such as the University of Michigan, Tufts University, and Rutgers University announced divestment plans in the past couple of months and others are facing increasing pressure to approve divestment. Many endowments are reallocating these divested investments into renewable and sustainable energy investments and ESG funds.

Academic institutions are also facing pressure to improve the diversity of the managers of their endowments. In the NACUBO/TIAA study, only 6% of responding institutions reported having a formal policy addressing diversity and inclusion related to manager selection, with institutions with the largest endowments significantly more likely to have diverse managers in their portfolios, and just three of the responding institutions provided specific targets or projections for their future allocations to diverse managers. Congressional inquiries on manager diversity and growing calls to address structural racism through investment allocations to diverse managers have prompted many endowments to pay increasing attention to manager diversity at their asset managers. How endowments will measure and monitor diversity remains an open question.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Chicago
Deborah S. Davidson
Ami N. Wynne

New York
Christopher J. Dlutowski
Martha B. Stolley

Philadelphia
Ali M. Kliment

San Francisco
Baird D. Fogel

Washington, DC
Gregory L. Needles
Eleanor Pelta