Universities Eye Bankruptcy Alternatives as Funding Cuts Loom

President Donald Trump’s funding freezes will force many struggling universities to seek financial solutions—but the bankruptcy process that typically provides a reprieve for distressed entities is unlikely to help academic institutions.

While bankruptcy offers legal protection and a path to recovery, universities are disincentivized from filing, as doing so would jeopardize their Title IV eligibility under the Higher Education Act, which is critical for student aid, and trigger cuts that lead to further financial strain.

Trump has targeted universities nationwide, recently threatening to cut $9 billion in grants from Harvard and blocking research grants at institutions like Princeton.

Public universities face additional challenges because, even if they seek bankruptcy protection as a last resort, convincing state governments to allow them to file under Chapter 9—a bankruptcy tool for municipalities—would be complex. And unlike private institutions, they can’t easily liquidate or sell buildings because their assets are deemed essential for public services.

With limited options available, universities may consider tuition increases, department overhauls, layoffs, debt restructuring, or liquidation, according to bankruptcy law academics and practitioners. But those measures could exacerbate ongoing struggles for institutions, marked by closures, rising costs, and the “enrollment cliff” caused by declining birth rates.

A court-appointed receivership is also an option, although it wouldn’t provide the same protection against creditors as bankruptcy.

“Higher education faces significant barriers to filing for bankruptcy,” said Laura Coordes, law professor at Arizona State University. “There’s a lot of uncertainty, particularly with receiverships and potential bailouts. How can you be sure that the state will bail you out? And even if they can, does the state have the resources to do so?”

Higher Education Targets

The Trump administration has threatened universities amid allegations of antisemitism during pro-Palestine protests and those researching topics such as diversity and environment.

The government said it was canceling funds to Columbia in response to Gaza protests, prompting the university to concede to Trump’s demands, including an overhaul of protest policies and the Middle Eastern studies department. Johns Hopkins University announced the elimination of thousands of jobs following USAID cuts.

Harvard University and the University of California also announced temporary hiring freezes amid cut concerns. The administration terminated contracts and grants with Cleveland State University and the University of Minnesota, among others, according to DOGE’s website.

Matthew Bruckner, professor at Howard University School of Law, said public universities could demonstrate insolvency under Chapter 9 if they can show that current obligations exceed revenue. However, their eligibility could be contested.

“They could file and an entity could try to sort of kick them out of bankruptcy by saying, ‘You don’t meet the eligibility criteria,’” Bruckner said.

Distress Loop

For bankruptcy to be a real option for universities, Congress would need to enact legislation granting them such relief and allowing them to continue receiving funds.

“There is no university that can survive as a business without federal student loan funding,” said Adam J. Levitin, Carmack Waterhouse Professor of Law and Finance at Georgetown Law. “Bankruptcy is utterly useless to universities.”

Without their primary source of income, institutions can’t reorganize through bankruptcy, according to Robert Miller, a University of South Dakota law professor.

Miller said out-of-court workouts with secured lenders could be an alternative. However, those will likely be more limited without the tools available in a bankruptcy.

“You’re going to see more of these out-of-court exchanges if they can be done, but it depends on the debt document and the willingness of the college to be very aggressive and deal with its creditors,” he said.

Another option, he said, is the “distressed merger,” in which small colleges in attractive locations that are closer to urban areas are merged into “larger, more healthy institutions.”

Alvin Velázquez, a professor at Indiana University Maurer School of Law, noted that although private institutions might find it easier to file bankruptcy, questions persist regarding how federal grants are considered when constructing a plan of adjustment.

Creditors can’t claim federal funds for repayment because they’re excluded from the estate, he said.

“Does that mean vendors who provided services to a private university project funded by federal grants get left out in the cold? Normally, they could look to the university for repayment, including in bankruptcy,” Velázquez said. “However, the scale of this administration’s actions may lead to some universities making creative arguments to get out of paying those creditors.”

A potential default could risk universities’ accreditation, as all accreditation standards include at least one related to financial stability.

Nearly 12,000 campuses closed between 2004 and 2020, with loss of accreditation the primary cause, according to the Postsecondary Education Participants System. A State Higher Education Executive Officers Association 2022 report said the accreditation losses were often due to financial challenges.

Ongoing Crisis

Rachel Burns, a senior policy analyst at SHEEO, said Trump’s cuts would most affect research institutions.

“Historically, institutions that have been struggling are not very high research institutions and have been taking these steps of closing programs and trying to find ways not to close entirely,” Burns said. “Now, other types of institutions are starting to experience the same financial struggles because of these cuts in federal funding.”

Universities are just beginning to rebound from low enrollment figures following the Covid-19 pandemic.

Total enrollment across all institutions dropped by 2.4% in 2020 and 2.6% in 2021 and held steady in 2022, according to data from the National Student Clearinghouse Research Center.

Enrollment jumped by 4.5% last year compared to 2023. Private for-profit four-year schools grew more than double the rate of public four-year institutions.

“Even following the pandemic, enrollment didn’t recover as quickly as we may have anticipated,” Burns said.

Bankruptcy scholars said that without bankruptcy relief tools, colleges will continue to be susceptible to external factors, including elections and unmet enrollment projections.

“Congressional failure to act will leave universities at the mercy of the executive branch while simultaneously undermining Congressional grant making policy,” Velázquez said.