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Soaring Debts at Public Universities

Sunday March 23rd, 2014   •   Posted by Craig Eyermann at 6:00pm PDT   •  

24723108_S Normally, whenever the subject of universities and debt comes up, the topic is student loans, which as we’ve previously discussed, have skyrocketed in recent years.

But that problem with debt might not be limited to just students. Forbes‘ Josh Freedman writes about a unique change in the rankings for the University of California (UC):

Last week, the University of California got downgraded. Not in the U.S. News or other college rankings, where six of its campuses rank in the top 15 public colleges in the United States; nor in College Prowler’s list of schools with the most attractive men on campus (where flagship UC-Berkeley clocks in at a measly number 1185). Rather, the UC system has been downgraded in the credit markets: ratings agency Moody’s lowered the UC system’s general revenue bonds from Aa1 to Aa2.

People like to talk about student debt—read, for example, my five part series on the topic. (Ok, I know you’re busy. How about at least one part of it? Do it for me.) But university debt, although rarely discussed, is arguably more important. Schools across the country are borrowing more money, and the increasing reliance on debt-financing at universities is adding logs covered in lighter fluid to an already flammable higher education system. The University of California system, for example, has $14.5 billion in outstanding debt, more than double its level in 2005. The total volume of debt across colleges of all kinds has increased so much that interest payments per student have increased 86% since a decade ago despite low interest rates.

The trend of taking on more debt puts schools’ educational and social mission at odds with their financial needs, making it less likely that colleges will be able to do what they’re supposed to do—which is to provide a high quality education for students of all backgrounds.

What makes the trend for universities particularly troubling is where the money they’ve borrowed is going: to fund things like new sports stadiums and luxurious student housing facilities, which are increasingly viewed as ways to bring in more revenue, say through ticket sales and rent. Many schools are even pledging money they collect for tuition as collateral for these projects, as a way to make them more affordable and save money they would otherwise have to pay in higher interest.

That can lead to some really negative consequences if the universities cannot generate the additional revenue they expect to fund their debt payments without cutting into their basic mission. Freedman shares a horror story from the University of California’s Berkeley campus:

That saved money is now in the form of shifted risk, however. Student tuition, as well as other university finances, are now pledged in case the projects aren’t enough to pay back their cost. In fact, this already happened once: UC Berkeley took out $445 million in bonds from 2009 to 2013 to rebuild its football stadium. (The stadium sits directly on top of the Hayward Fault line and had an earthquake rating of “poor.”) Unfortunately, due to overly optimistic assumptions about how many people like football and how good they are at football, the school has fallen $120 million short. As a result, the Wall Street Journal reported, university officials have admitted that the shortfall will have to be made up for by campus funds.

That decision by the state’s public university administrators is one of many that has contributed to the downgrading of the University’s credit rating. Now they, and everyone who attends a UC campus, will pay a higher price for the bad decisions of the people who are running the UC system. Whose next bad decision will likely involve passing along the cost of their mistakes onto students in the form of higher tuitions and fees.

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March 2014