Friday, August 24, 2012

College and Universities, Just Like the Students, Are Piling Up the Debt

Mis-Management Finally Catches Up with Higher Education

Of the many disasters in the U. S. economy in the last 20th/early 21st centuries, the rampant excesses of college education will surely rank among the worst.  For decades college and universities have been characterized by lazy faculties, bloated administrations and the general degradation of the educational process.  The result, tuition and fees (particularly fees) rising at much higher than the general inflation rate.

The institutions were able to pass on their higher costs to students because colleges and universities hold the keys to entry into the middle class for low income families, and entry into the upper middle class for middle income families.  No college education, no access to the good life. 

But economics has a way of catching up with everyone, and the idea that if something cannot continue it will not continue is a very strong force.  So now institutions of higher education are facing the consequences of their folly, namely lower enrollment, lower revenues and higher debt.

A crisis in higher education has been brewing for years. Universities have been spending like students in a bar who think a Rockefeller will pick up the tab. In the past two years the University of Chicago has built a spiffy new library (where the books are cleverly retrieved by robots), a new arts centre and a ten-storey hospital building. It has also opened a new campus in Beijing.

Of course, holding a monopoly on that ticket to the good life, the schools just raised and raised the cost of attending.

To pay for all this, universities have been enrolling more students and jacking up their fees. The average cost of college per student has risen by three times the rate of inflation since 1983. The cost of tuition alone has soared from 23% of median annual earnings in 2001 to 38% in 2010. Such increases plainly cannot continue.

Student debt has reportedly reached a record $1 trillion. Before the financial crisis, some private lenders stoked the frenzy by securitising risky student loans—rather like subprime mortgages. This practice has been stopped but at its peak in 2008, private lenders disbursed $20 billion. Last year they shelled out only $6 billion.

And now that the student golden goose has laid its last eggs the schools are resorting to borrowing money.

Long-term debt at not-for-profit universities in America has been growing at 12% a year, estimate Bain & Company, a consultancy, and Sterling Partners, a private-equity firm (see chart 1). A new report looked at the balance-sheets and cashflow statements of 1,692 universities and colleges between 2006 and 2010, and found that one-third were significantly weaker than they had been several years previously.

So what does the future look like.  Well with federal and state support for higher education falling victim to the ‘tax cuts for the rich’ mentality the access to colleges by the middle class will slowly close.  But that’s okay, after all if young men and women really wanted to be successful in America they should start by choosing wealthy parents.

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