Non-Profit Universities Continue to Pile Up Debt

Although the cost of higher education for students has been in the news lately, not nearly as much has been heard about the precarious financial situations that colleges and universities — including some of the most prestigious institutions in the world — find themselves in. American non-profit institutions of higher learning have been piling on debt at the rate of 12% per year, proving that even drastic tuition increases aren’t going far enough to make up the funding gap left by  reduced government funding and increasing capital outlays.

The University of Chicago could serve as a stark reminder of what happens if a school increases its spending without heeding the economic reality in the outside world. Over the past two years, the school expanded its campus by rebuilding its library, adding a new arts center and a hospital building. In addition, it invested capital in opening up a satellite campus in Beijing, China. To fund this expansion, which school officials believed would allow the school to attract the highest caliber of students and faculty, it increased enrollment and hiked fees and tuition. What wasn’t covered by those methods was paid for by increasing its debt load.

It is these kinds of massive capital projects that could be the driving force behind the skyrocketing cost of college attendance.

 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.

Although the amount the federal government contributes to higher education has remained level over the past few years, state contributions have in some cases been drastically reduced since the recession began in 2008. College endowments have also taken a hit, as those depend heavily on the continued good financial health of the economy as a whole and that of school alumni. In addition to donations being down at most schools in the country, the returns on invested endowment funds have also shrunk.

Glenn Reynolds, the author of “The Higher Education Bubble”, predicts that the bubble will burst “messily”. People have long believed that “whatever the cost, a college education is a necessary ticket to future prosperity.” Easy credit has allowed them to pay ever more, and colleges have raised fees to absorb the extra cash. However, this cannot go on forever, says Mr Reynolds, especially when people start asking whether a degree in religious and women’s studies is worth the $100,000 debt incurred to pay for it.

08 7, 2012
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