There are multiple options on how to structure exit fees.
Posted on: June 13, 2024 at 20:11:30 CT
JeffB
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Insurance companies, for instance, have several ways that they refund money for people who cancel their policies before the expiration date. The premium for some policies are 'fully earned' at inception. If people pay 1 year's premium & cancel it 2 days into the policy will get no refund (other than for a few exceptions). Others charge a flat fee. Most are cancelled on either a pro-rata or a short rate scale. Pro-rata would fully refund any "unearned premium" for days between the cancellation date and the contractual expiration date. Short rate might pay back 90% of the unearned premium, keeping a 10% penalty.
They could do something similar in these agreements. Rather than paying the full $1 billion up front, they could spread it out over some time frame. They could also require schools to pay back some (or all) of the money given to them if they break the contract by leaving before some set date. Those penalties could go into a fund to be used as a carrot to bring in other schools, as well as to disincentivizing any from leaving.