If You Build It, Debt Will Come

When we read or hear stories in the news media these days about debt in higher education, we typically assume they are about the trillion dollars in student loans held by college graduates and their families.

But last week The New York Times put the spotlight on an often ignored angle to questions of debt in higher education: the amount of money owed by colleges and universities themselves.

“The pile of debt — $205 billion outstanding in 2011 at the colleges rated by Moody’s — comes at a time of increasing uncertainty in academia,” Andrew Martin of The Times wrote in a front-page story.

In some ways, the news is even worse. The Times only counted debt that is tracked by Moody’s, one of the big-three credit-rating agencies. Moody’s only rates the debt at a few hundred of the nation’s colleges, usually the ones that are in solid financial shape. Data from the Education Department paints a picture of more red ink for all of higher education: $277 billion, double what colleges held in debt in 2000.

As The Times pointed out, much of that debt went to pay for “vast expansions and amenities aimed at luring better students.” The attitude of many college presidents and trustees during the first decade of the new millennium was “build it and they will come.”

The colleges most heavily engaged in improvements over the last decade didn’t pay for them out of their endowments or through private donations. They borrowed money, often stretching themselves beyond their limits, hoping their plans would someday pay off and that the current financial model of higher education would continue forever.

While these extravagant facilities made college leaders as ecstatic as a toddler showing off a shiny new toy on Christmas and gave students a taste of the high life, few paid much attention to the real cost of borrowed dollars.

Today, one-third of all colleges and universities in the United States face financial statements significantly weaker than before the recession, and according to an analysis by Bain & Company and Sterling Partners, are on an unsustainable fiscal path. Another quarter of colleges find themselves at serious risk of joining them.

Like anyone else who takes on large amounts of debt, colleges need a steady stream of cash to pay off IOU’s. But cash is not in plentiful supply at many colleges these days. Net tuition revenue – that is the actual cash added to the college’s bottom line from a student’s tuition bill after grant aid is subtracted – has either been flat or falling at nearly 60 percent of colleges.

Yet judging from the college officials quoted in The Times story, it seems they still don’t get that the financial model in higher education is forever changing. They still seem to believe that the model that has carried them for decades will continue.

The history of the United States is littered with industries that had similar hubris in the years or decade before they underwent massive change. Higher education is following that well-worn path.

Photo Credit: John Freidah for The New York Times