The College-Cost Calamity

August 13, 2012

A crisis in higher education has been brewing for years. American universities have been spending like there is no tomorrow. Universities hope that vast investments will help them attract the best staff and students, draw in research grants and donations, and ultimately boost their ranking in league tables, drawing in yet more talent and money. They have also increased the proportion of outlays gobbled up by administrators, says The Economist.

  • 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.
  • Long-term debt at not-for-profit universities in America has been growing at 12 percent a year, estimate Bain & Company, a consultancy, and Sterling Partners, a private-equity firm.

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 percent of median annual earnings in 2001 to 38 percent in 2010.

Such increases plainly cannot continue. Federal support for higher education remains at historically high levels, but states have cut back. To make matters worse, endowments (and their returns) have shrunk, money from philanthropy has dried up and those universities that provide need-based aid have suddenly found their students are needier.

All this suggests that colleges have good cause to worry about their debts. Even Harvard, Yale, Cornell and Georgetown have been on an unsustainable path in recent years, says Bain, though all have big endowments to cushion themselves.

For-profit universities have proved to be the exception to the rule: most are in good financial health. However, they face pressure from lawmakers who think they fail to deliver value for the $32 billion in subsidies they receive.

Source: "The College-Cost Calamity," The Economist, August 4, 2012.

 

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