How Loans Ruin Students and Universities

(Cross posted at perishyourpublisher.blogspot.com)

A correspondent studying Chinese in Taiwan sends me this article, which states, inter alia,

At the Juilliard School, which completed a major renovation a few years ago, debt climbed to $195 million last year, from $6 million in inflation-adjusted dollars in 2002. At Miami University, a public institution in Ohio that is overhauling its dormitories and student union, debt rose to $326 million in 2011, from $66 million in 2002, and at New York University, which has embarked on an ambitious expansion, debt was $2.8 billion in 2011, up from $1.2 billion in 2002, according to the Moody’s data.

Well, yes.  The theme is students must pay for this.  Indeed, where else does money for a college come from, except tuition.  Largely borrowed.  There are alumni donations, and government grants, but these debts are in the range of impossible to repay.  And if impossible, they will not be repaid.  At some point, the schools will default on the loans, and the balances written off, and although the bondholders should suffer, where we have state intervention we have chaos, so we cannot know who will bear this burden.

One group that will, no matter what, is the students themselves.  Their tuition contributes, so the cost of the education comes with the gilt-premium.  But it is unlikely they can ever earn enough to cover the cost of the education.

Almost no one is predicting colleges will experience default rates on par with those of indebted students and graduates, at least not anytime soon. While payments on debt principal and interest have increased over all, they remain a manageable piece of the expense pie for most institutions, partly because of historically low interest rates, financial analysts said.

The low interest rates caused the misallocation of resources and the malinvestment in the building boom.   The interest rates will not stay low forever.  Then comes another boom, as in the lowering thereof.  But my jaw dropped at the implication:  "hey, who cares about the students and graduates insolvency problems after getting "educated" as long as the institution does well."  How come the attitude?  Adminstrators pensions.  That is all that matters.

The article goes on:

“We borrowed a lot of money, but we had no choice,” said Thomas H. Powell, the university’s president, who maintains, despite the credit rating, that it has regained its footing and has no need for additional debt. “I wasn’t going to watch the buildings fall down.”

False dilemma and straw man argument, at once.  You always have a choice.  The problem is gilding the lily, misallocation and malinvestment, not "buildings falling down."  Maintenance of beautiful 100 year old buildings would have cost mere millions.  Trying to buy your way into the USNews top 25 costs hundreds of millions in smoothie machines and rock walls.

Still, higher debt payments and other expenses have contributed to the runaway inflation of college costs, and the impact on students is real and often substantial. New financial realities on campuses are imposing conflicting demands on college administrators: do they make their institution more affordable, or continue to spend money to make their campus more attractive?

Did you notice anything?  The word "education" is not in that paragraph.  College costs, demands on administrators (poor things), institution, expenses, even "institution more affordable" but not "education."  How come?

Despite a lull in construction after the financial crisis, borrowing has continued to grow, Moody’s data shows. “Schools are behaving like the Greeks, irresponsibly,” said Richard K. Vedder, an economics professor at Ohio University and director of the Center for College Affordability and Productivity.

And why not?  Those Greek leaders were often educated in USA, one prime minister was actually born in USA, educated at Amherst and Harvard, was the son of an econ prof, so naturally, he would be a socialist.

By comparison, the cost of instruction grew 5 percent in that time period. The Bain report estimates that a third of colleges and universities are financially weaker than they were a few years ago.

That is actually a reduction in actual costs.  I have two daughters at university, and from their comments it is clear that this money is not making it into the classroom or to the instructors.  The universities are pulling emeritus back into the classroom to keep from hiring young new stars, ones whose cost includes pension contributions.  Cutting corners today that will lead to deleterious effects tomorrow.

“How do you bring people to teaching facilities that are really subpar?” he said. “It’s not a matter of gilding the lily, in many cases.”

False dilemma again:  We have an excess of first rate instructors looking for work.  A university is a library with faculty associated.  If you have more than a library, some classrooms, faculty offices and maybe some dorms, you are over doing it.    

David K. Creamer, vice president for finance and business services at Miami University, said the importance of college rankings had pressured administrators to spend more and more. In some rankings, the effect of spending is direct because institutions with “the best dorms” or “the best athletic facilities” are singled out. The effect on other rankings is indirect: better facilities attract better students, and that ultimately raises rankings, Mr. Creamer said.

Ah yes.  We get better students.  And how do we know?  Why, the SAT scores of our applicants are higher.  Never mind that SAT scores are no predictor of success in college or life.  Never mind that SAT scores have been inflated and with the self-selecting teaching to the test prep classes a school would have had an "improvement" in SAT scores anyway.   Just blow smoke.  "I'm getting $285k a year in salary alone (back in 2008, who knows how high it is now) and an astonishing pension ahead.  This will blow up on someone else's watch."  

One rule if you have kids heading to college: no student loans.  This whole problem is based on "easy credit."  You expose your child to being chained to this looming disaster if you burden them and yourselves with student loans.  It may be harder to get an education without student loans, but not impossible.  I've got two kids through and one with a year to go.  No student loans.  It can be done, it is a discipline.  But teaching kids economic discipline is important, since they certainly will never learn it at a USA university.

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