EIDL Loan: A Doule-Edged Sword

Ben Levy

​Nearly a decade of experience analyzing composite scores across various school types and sizes.

The Economic Injury Disaster Loan (EIDL) program, implemented during the COVID-19 pandemic, was intended to provide financial relief to small businesses. However, the specific restrictions on how these funds could be used have had unintended consequences on proprietary schools, potentially harming their financial responsibility and composite score.

The EIDL Loan and Fixed Asset Purchases

One of the key restrictions of the EIDL program was the prohibition on using the funds to purchase fixed assets. Specifically, 13 CFR Part 123 Subpart D -- Economic Injury Disaster Loans explicitly states that loan proceeds can only be used for working capital and normal operating expenses, such as payroll, rent, utilities, and other similar costs. This limitation means that the loans were classified as post-implementation debt not for the purchase of fixed assets, rather than debt incurred for the acquisition of assets.

The Dilemma for Proprietary Schools

While the EIDL loans provided a lifeline for many struggling schools during the pandemic, the restrictions on their use have created a long-term challenge. Schools that relied on these funds may now face higher debt burdens and lower composite scores. Additionally, these loans were created with “generous” loan terms, which include up to 30 months of deferred payments (no payments due for 2.5 years).

A Quick Example

Let’s assume that you received an EIDL loan in June 2020. The loan had the following terms:

• Loan Amount: $150,000
• Interest Rate: 3.75%
• Term: 30 years
• Monthly Payment: $793
• Deferral Period: 30 months

With this loan, which was common for proprietary schools, the school does not even begin to pay down the principal balance until August 2026. This means that more than 6 years after you initially got the EIDL loan, you will still owe the original $150,000. On top of that, in that 6 years you will have paid approximately $34,000 in interest.

The Impact on Composite Score

​A school's composite score is a crucial metric used by the US Department of Education and accrediting agencies to assess the institution's financial responsibility and overall performance. Post-implementation debt not for the purchase of fixed assets negatively impacts this score, as the entire amount of debt is subtracted from the school’s equity for composite score purposes. This debt will be dragging down the composite score for years, making a passing composite score unnecessarily difficult to obtain.

Repaying or Accelerating Payments

To mitigate the negative impact of EIDL loans on composite scores, proprietary schools may consider the following strategies:

• Repayment: Prioritizing the repayment of the loan can reduce the overall debt burden and improve the school's financial position. Some options school’s have used to repay the loan include using available cash in the business and owner contributions.
• Accelerated Payments: Making larger or more frequent payments can expedite the loan repayment process and positively impact the school's financial responsibility in the long-term. Using the above example, if you paid an extra $100 per month, you would be able to pay the loan off approximately 5 years ahead of schedule. An extra $575 per month will cut your loan term in half!

Conclusion

​The EIDL loan program, while well-intentioned, has presented unique challenges for proprietary schools. By understanding the implications of the loan restrictions and taking proactive steps to manage debt, schools can work to minimize the negative impact on their financial responsibility and composite score.