The “higher education bubble” has often been discussed in terms of soaring college costs and the resulting debt being borne by students. Clearly this is a problem. Since 1978 the price of tuition has increased more than 650 points above inflation, a number that makes the housing bubble seem small by comparison. But there is another bubble lurking that could pose a more immediate threat to our nation’s colleges and universities: their own debt.
A new report from Bain & Company finds that approximately one-third of colleges and universities are built on faulty business plans, i.e. they are spending more than they can afford. The report’s authors write:
Much of the liquidity crisis facing higher education comes from having succumbed to the “Law of More.” Many institutions have operated on the assumption that the more they build, spend, diversify and expand, the more they will persist and prosper. But instead, the opposite has happened: Institutions have become overleveraged. Their long-term debt is increasing at an average rate of approximately 12% per year, and their average annual interest expense is growing at almost twice the rate of their instruction-related expense (see Figure 5). In addition to growing debt, administrative and student services costs are growing faster than instructional costs. And fixed costs and overhead consume a growing share of the pie.
The “Law of More” is doing nobody any favors; it’s killing colleges’ balance sheets, which leads them to raise tuition prices, which pushes young adults further into debt, which hurts the economy, and ultimately incentivizes high school students to look for alternatives other than a college education, which in turn puts colleges’ into a further financial bind. Indeed, new Census Bureau figures show that there have been 930,000 fewer college enrollments in the last two years, a tough pill to swallow for many cash-strapped institutions.
Unfortunately, colleges seem utterly deaf to the market realities they face. A recent report from the Delta Cost Project found that new administrative positions drove a 28-percent expansion of employees between 2000 and 2012. During the same period the number of full-time faculty per administrator has fallen 40 percent. Slowly but surely colleges are becoming more like fashionable four year retreats where luxurious campuses complete with lavish arenas, gourmet cafeterias, state-of-the-art gyms and technologically unparalleled classrooms are coupled with a watered-down curriculum to woo potential students.
Some universities will never feel price pressure. Multi-billion dollar endowments or untarnishable name brands will allow them to march on with little concern for offering a competitive pricetag. But others will be forced to change. Their over-leveraged balance sheets will allow price-shopping parents or government reformers more leverage to exact positive change.
That’s why we were initially so receptive to President Obama’s idea, first announced in his 2012 State of the Union, to come up with a system that tied college value to federal financial aid. On Friday morning the Education Department issued a draft release that is mostly inoffensive in no small part because it is so unsubstantial. That said, there are some concerns. For instance, the inclusion of things like the percentage of a college’s students who receive Pell Grants or did not have a parent who attended college seem aimed at furthering an agenda separate and apart from improving cost and quality.
The other big problem is the Obama Administration’s desire to boil the information down into a grade. That goes beyond providing information for price-conscious shoppers to use in making their choices to giving unbridled authority to politically sensitive bureaucrats. As Stephanie Simon and Allie Grasgreen report for POLITICO:
“[P]osting such data, Republicans say, is very different from judging one institution better than another. The Food and Drug Administration requires nutrition labels but doesn’t rate Triscuits as superior to Wheat Thins. The Energy Department mandates fuel economy stickers but doesn’t pronounce the Honda Civic a better value than the Ford Focus.
So what, they ask, makes the Education Department think it should be in the ratings business?
“Students and their families know best what will meet their educational needs,” Goodlatte said.
He pointed out that some students put a premium on factors that will never be considered in federal ratings, such as a college’s religious affiliation, sports programs or reputation in a particular field of study. “It is not the place of the federal government, through a rating system, to attempt to measure the value of an individual’s education,” Goodlatte said.”
If the White House had been more willing to work with Congress then perhaps those problems could have been avoided.