Universities: New Report Describes $2.7 Billion ‘Debt Bomb’
AAs I have written recently, higher education, and in particular the for-profit sector, has become increasingly financialized – meaning it is money-driven rather than results-driven and engaged in financial machinations that actually undermine the quality of the basic business proposition, which is supposed to produce well-prepared students.
But the problems are not limited to the for-profit sector alone. A new study released Tuesday by the Roosevelt Institute shows that public and private nonprofit colleges and universities are increasingly involved in risky deals with Wall Street that put them at huge financial risk. A detailed case study of 19 major institutions, ranging from Ivy League schools like Harvard and Columbia, to state universities like the University of Michigan, to a variety of local community colleges to small state schools, has revealed that these institutions were involved in risky swap deals that had already cost schools $2.7 billion in unnecessary fees — enough to pay tuition and fees for 108,000 students in the sample group. It’s money that, as the report notes, has siphoned “billions of dollars from these schools’ budgets, at a time when schools are increasingly passing their costs on to students, including the costs of borrowing, and for public schools, the costs associated with cuts in state and federal funding.Additionally, to get out of bad derivatives deals, schools would have to pay about $808 million in penalties to lenders.
Why do such schools make risky deals with the streets, the same kind of bad deals that have brought down public governments in places like Detroit? The fall in state funding for public universities over the past two decades is central to the story; these reductions are due not only to the financial crisis, but in the longer term to the tax revolt in various red states (thanks Grover Norquist and the Koch brothers). For an interesting look at this issue, watch the documentary film Starve the Beast.
But as Roosevelt’s study points out, borrowing is driven not just by the need to pay for a high-quality education for students, but also by “an arms race for amenities,” in which colleges compete for full fees. pay students by building more sophisticated facilities, student centers and luxurious housing. In a separate study, Charlie Eaton, a sociologist at the University of California at Berkeley, and his colleagues found that only about 25% of all debt interest payments made by schools were for investments in construction of classrooms or other education-related projects. The majority will build things like new stadiums, cafeterias and a recreation center. All of this has led to a huge borrowing boom among colleges and universities – between 2003 and 2012 spending per student on interest payments on debt rose 45% at public colleges, 23% at private colleges. and 76% in community colleges.
Unfortunately, many schools did not get great terms on all that debt. Sold a bill of goods by Wall Street, they made deals that have now gone wrong, costing them far more than expected. As Deane Yang, head of research at New York-based debt management consultancy Andrew Kalotay Associates, puts it in the Roosevelt report, schools are sitting on “an uneven playing field” when trying to negotiate such agreements. “Basically, you have a gullible counterpart and a far more sophisticated one.” Some of the stories of doom, including Harvard’s disastrous foray into swaps under former chairman Larry Summers, are well publicized. Others are less so. Seven of Michigan’s eight largest public universities, for example, have had or still have exchanges on their books, and the two largest, the University of Michigan and Michigan State, have spent about $215 million on exchange payments and termination penalties.
Obviously, this raises huge questions about how the balance sheets of these schools are managed. But it also has a real human cost – schools that are in debt and struggling to pay interest pass those costs on to students, which is one of the main reasons why the average debt per student has risen from 29 $400 to $35,000 in the past three years. As these students struggle to pay off their debts, consumption is depressed, as is economic growth. It’s a crisis that affects us all – and one that is likely to deepen as the bomb costs of educational exchange become more apparent.
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