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November 1 2013

Binge Borrowing by American Universities

Vicki E. Alger

Ohio University economist Richard Vedder says the Obama administration’s student loan policies are making college more—not less—affordable. He’s right. But Vedder explains that as student debt continues to pile up, so too does college debt thanks to century bonding. These low-interest bonds are in effect another type of government subsidy, according to Vedder:

Students are left to pile up more debt while colleges indulge in their Edifice Complex -- building luxury dorms and gyms and stadiums (all “sustainable,” of course) at the expense of poorer students. There is another, related government subsidy that also has perverse effects and needs reform: the tax-exempt debt binge by universities.

Schools are exuberantly borrowing, in some cases issuing 100-year (century) bonds. Some bond offerings are justified, even wise, as schools are taking advantage of low interest rates to reduce future debt-service obligations. But a lot of this activity is financing construction of high-end student housing, faddish “centers” and stadiums.

Should Colorado State University be able to secure bond financing for a proposed $246 million stadium that has no direct academic purpose beyond the school’s claims that it will attract 5,000 out-of-state students who will pay higher tuition? At the University of Kansas, an $18 million structure is being built to house the first “rules of basketball” that James Naismith wrote more than a century ago (for which an alumnus recently paid $4 million).

The public institution where I teach, Ohio University, plans to spend almost $1 billion on buildings from 2013 to 2019, financed largely by borrowing $568 million -- far more than the total endowment. With the money in the pipeline, the school has decided to tear down a perfectly serviceable lab facility (against the wishes of several prominent researchers using the building) that is less than 50 years old and previously was merely going to be remodeled.

The number of universities and colleges bonding themselves up to the eyeballs for dubious construction projects is bad enough. But Vedder notes elite, wealthy private institutions such as Harvard with 22,000 students is in the hole to the tune of $6 billion (about $300,000 per student). In contrast, the University of California system, with more than ten times as many students, has a debt around half that amount.

Moody’s notes that significant numbers of once highly-rated universities and colleges are being downgraded, and that the trend of borrowing at levels far beyond projected revenue is not sustainable.

This pattern of keeping up with the Jones’ on the backs of students and taxpayers will continue until we start demanding some common-sense reforms, starting with requiring higher education institutions to  prioritize funding education first, not frills.

 

 

 

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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