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Are College and Universities Bankrupting Themselves?

An opinion piece in today’s New York Times from a professor at Columbia University raises some excellent points about the skyrocketing costs of higher education in the US.

He criticizes huge expansion efforts at Columbia and New York University at a time when endowments are down, debt levels are up, and ambitions may be bigger than these institutions’ ability to shoulder new debt obligations.

This question comes at a time when the US government has reported that 149 colleges have failed its “financial responsibility test” (see the article here from the Chronicle of Higher Education–registration required).  While the colleges on this list may or may not be able to bounce back from their clear financial difficulties, it seems reasonable to predict that more colleges will start to show up on this list in the coming years.  Like so many businesses and individuals who spent the last decade or two living beyond their means, colleges and universities gorged on debt.  And some, like Birmingham Southern College, have been in the news recently for making huge mistakes in managing their money.  Some colleges are actually closing or merging.  Does it really make sense for Columbia and NYU to continue feeding voraciously at the debt trough? Sure, Columbia and NYU are financially stronger than, say, Guilford and Ripon Colleges.  Are these big boys “too big to fail?”  Is Columbia like AIG, or like Lehman Brothers?

While I’m not ready to run around like Chicken Little quite yet, I do know that the rapidly rising prices in higher education are unsustainable.  And I do think that parents–and their kids–need to take a step back and ask themselves whether they want to go into debt to a place like NYU in order to finance NYU’s debt.  Like derivatives, higher education services are not anything tangible.  If the investment goes south (i.e., if a child’s debt burden ends up being larger than what her future salary can bear), parents and kids will have nothing to show for it than a pile of student loans that cannot be discharged even in bankruptcy.  At least if NYU’s or Columbia’s investments turn out not to be so great, they can sell off the buildings they are constructing and at least recoup something. What assets will you sell when your debts come due?

Food for thought.

Mark Montgomery
Educational Consultant

 

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