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Dec 14, 2012

What have we gotten from the debt-financed expansion in higher education?

The New York Times on December 14, 2012 featured an article by Andrew Martin on the debt burden universities have undertaken in the past decade.  Student debt has dominated most public discussion, but higher education has had its own arms race in order to compete for (the best?) students.  Martin reports that between 2000 and 2011 the 500 higher ed institutions rated by Moody’s doubled their debt after accounting for inflation!  To put this into context, tuition and fees have also risen.  The Almanac of Higher Education reports “Private four-year colleges still have higher sticker prices (the published costs), and higher net prices (what students pay after grants and tax benefits), than do public four-year colleges. But in recent years, the percentage increase in average sticker tuition and fees has been higher at public colleges than at private ones.”

If tuition and fees are rising at the same time that debt is rising, it prompts the question of whether the debt is being used to enhance the value of higher education faster than current revenue can support.  After all, debt is a mechanism to create present benefit that will be financed in the future by future beneficiaries.  So today’s students are receiving enhancements that today’s tuition levels, however high, could not pay for entirely.

Informal observation of university expansions over the past 15 years suggests to me that relatively few of these “enhancements” have gone into the classroom.  Rather, they have gone into enhancing the lifestyle of students in order to “compete” with other universities.  Student centers, exercise facilities, restaurant-like food courts, dorm suites with individual bathrooms, internet access that is steadily expanded.  Gone are the spartan dorm rooms with bunk beds, small closets, one electric outlet, and long hallways.  Gone is the cafeteria with one choice and peanut butter for those who don’t like the choice.

The Times article provides this insight from the CFO of Miami University, David Creamer: ” the importance of college rankings had pressured administrators to spend more and more. In some rankings, the effect of spending is direct because institutions with “the best dorms” or “the best athletic facilities” are singled out. The effect on other rankings is indirect: better facilities attract better students, and that ultimately raises rankings, Mr. Creamer said.

How many  new academic buildings have you seen constructed compared with non-academic buildings?  While not a perfect measure, looking at the percentage of expenditures devoted to instruction does give one some sense of the implications of this type of expansion and the merits of all this institutional borrowing.  Instructional spending was 33.3 percent of spending by private nonprofit universities, 25.3 percent of spending by public universities, and 21.3 percent of spending by for-profit private universities.  Running the campus and the business end takes up far more than running the classroom.

Universities have given students what they want.  And both the universities and the students have borrowed to have it their way.  Maybe the real threat of the current wave of free online courses (MOOCs) is a harbinger of a return to emphasizing the classroom over the lifestyle.  But the debt remains to be repaid.

This reminds me of the Five Lessons that university CFOs  want to teach their presidents and deans.  Read about them starting on page 61 of More Than Just Money.  It is not too late to relearn those lessons.