Debt, Leverage and the Higher Ed Bubble

Planned classroom and office tower at Virginia Commonwealth University, part of an $83 million project announced April.
Planned classroom and office tower at Virginia Commonwealth University, part of an $83 million project announced April.

How serious is the predicament of higher ed today? Wade Gilley, a former Virginia secretary for education, laid out the particulars in an op-ed this morning in the Times-Dispatch.

In January bond-rating agency Moody’s shifted its outlook for U.S. higher education from “stable” to “negative.” (That outlook, said Moody’s in “U.S. Higher Education Outlook Negative in 2013,” applied even to “the sector’s market leading diversified colleges and universities.” Universities face diminished prospects for revenue growth and “have only recently begun examining the cost structure of their traditional business model.”)

Meanwhile, the higher-ed sector is coming off a binge of borrowing. Gilley quoted the New York Times as reporting that institutional debt levels doubled from 2000 to 2011 at the 5000 institutions rated by Moody’s at the behest of the newspaper. Over the same period, the amount of cash, pledged gifts and investments maintained by colleges increased only 60% as much.

As has been widely publicized on this blog and elsewhere, students have been racking up record levels of debt as well. More than 35 million Americans owe an average of $28,000 in college loans — and half have not earned, and are not likely to earn, a four-year degree.

Indeed, there are growing grounds to question the value of sending so many Americans to college when it is evident that millions are gaining little from the experience. As Gilley notes, only 31% of college graduates were classified as proficient in reading in 2004, down from 40% in 1992.

Social and political pressure to increase enrollments, all funded by easy credit from Uncle Sam, has allowed colleges to grow without seriously watching costs. Much of the increase in spending has gone to non-academic facilities and exploding administrative expenses, Gilley writes, even as state legislatures have pruned their financial support for higher ed.

Now serious competition is emerging. Florida, Texas and California are talking about creating $10,000 four-year degrees. The New York Bar Association is discussing the potential for a two-year law degree.

Bacon’s bottom line: Elite universities with huge endowments, like the University of Virginia, no doubt will be able to ride out the coming storm, catering to the brightest kids and/or students with the wealthiest families. But what of the lesser institutions? How long can they continue jacking up tuition and fees? How long until Massively Open Online Courses (MOOCs) or inexpensive, hybrid online-in person courses rip their guts out?

Gilley doesn’t address that last question but he does conclude with this dispiriting observation: “Unfortunately, not enough academics, trustees or political leaders are realistically assessing today’s challenges and options.”

What’s happening in Virginia? I know of no one who has examined indebtedness at state institutions. The Joint Legislative Audit and Review Commission (JLARC) or some other appropriate state agency should dig through the balance sheets to determine the extent to which Virginia’s public universities have strengthened or undermined their balance sheets over the past decade. How vulnerable are they to competition from new business models? How much of their debt is back-stopped by the state? And what is the commonwealth’s exposure if things turn ugly?


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25 responses to “Debt, Leverage and the Higher Ed Bubble”

  1. DJRippert Avatar

    The writing is on the wall. The last decade was an orgy of fiscal mis-management at many US colleges and universities. That mis-management was fueled by the large number of baby boomer babies (i.e. echo boomers) applying for admission. Guess what? That demographic bulge is decreasing.

    Meanwhile, median real wages remain stagnant. The ability of families to fund college for their children is dwindling.

    Interest rates will go up. Therefore, the cost of borrowing for college education will jump.

    Finally, the value of a college degree is being called into question. More students are finding alternatives to the typical college path.

    All of which heralds a potential fiasco at American colleges and universities.

    There are potential solutions. The enrollment of foreign students at American colleges and universities could make up for the loss of echo boomers.

    Work-study programs could alleviate some of the financial hardship of going to college while also giving the students a chance to get a toehold in the work-world while getting their degrees.

    Computer assisted courses could help lower the costs of an undergraduate education.

    But all of these approaches require moribund colleges and universities to change.

    Our state legislature has 37 members on various education committees. However, the recent flap at UVA demonstrated that few or none of the General Assembly members are actually engaged in the operations of our higher education. If the rising debt is guaranteed by the state this will simply be another example of the incompetence of our General Assembly.

  2. Neil Haner Avatar
    Neil Haner

    “How long can they continue jacking up tuition and fees? How long until Massively Open Online Courses (MOOCs) or inexpensive, hybrid online-in person courses rip their guts out?”

    How long until a Bachelor’s degree (from a real brick and mortar college) stops being the price of admission into most career fields in America?

    Also, how long until the Federal Government stops inflating tuitions by blindly pumping money into student loads?

    The problem is there really is a ceiling on where you can go in life in this country without a college degree, unless you’re a very rare breed of entrepreneur. Granted, I’ve long maintained that there’s just as much prestige in a good trade education as their is in a Bachelor’s, as the world is always going to need builders, nurses, and mechanics (and the world will always been willing to pay fair wages to good tradesmen).

    But if you want to be white collar in America? As it stands, you need a bachelors degree, and for any reputable company that degree needs to come from a reputable college. Employers simply do not take online colleges seriously, as their reputations are that of degree factories. Even the for-profit brick-and-mortars operate on a lower rung than traditional private and public colleges.

    I really hope this isn’t just my Wahoo arrogance speaking here (dad loves to call me out when he thinks it is), but for the foreseeable future, my resume is going to look a lot better with a UVA (or VT, or W&M, or ODU, etc.) degree on it than something from a DeVry or a MOOC. And that better resume is the reason our addiction to traditional public and private universities isn’t going to end.

    Now, with that said, while I don’t think the solution is going to come from outside competition (for-profits and MOOC’s), I think some internal competition becomes the answer. If some states, or even some institutions within state systems, can successfully develop *and then successfully market* a stripped down, budget Bachelors program, using it to attract the best cash-strapped students away from more backwards thinking institutions, you might start to see some real paradigm changes.

    So which of our in-state universities wants to be the one to pioneer the Budget Bachelors? (And hopefully, in the process, find a better name to market it under.)

    1. The degree certification issue is important. Please reference the article I wrote recently about Richard Bland College’s hybrid approach to education. It’s evolving into the type of institution you describe — marketing a stripped-down budget degree.

      1. Neil Haner Avatar
        Neil Haner

        I like what they’re doing. I’d just like to see that kind of thinking coming from the 4-year institutions now. Don’t get me wrong, I do think that Virginia’s CC system is woefully undervalued as a tool to making 4-year degrees more affordable. In my area, TCC has run a marketing campaign touting itself as the affordable alternative for at least the first two years of a four year program (a transfer to one of the VA Public U’s being years three and four).

        I don’t expect UVA or Tech or W&M (those with the most inertia) to lead this charge, but I could very well see Mary Washington or VCU or ODU being that innovator on the four-year college level. Imagine a few National Merit Scholar kids from more modest backgrounds choosing VCU over UVA because VCU’s “Budget Bachelors” (which may very well be part of a partnership with the VCC system) will let them be the only one of their HS friends graduating debt free.

    2. Ghost of Ted Dalton Avatar
      Ghost of Ted Dalton

      Completely agree. That is why I think all the “education debt bubble” talk is just babble. I know of in-house counsel at a Fortune 500 company who now says a Master’s is the price of admission to entry-level white collar jobs in most F500s. Maybe an undergrad business degree from a school like U.Va. or U of R will land you such a job, but an undergrad business degree from an ODU? No way.

      Employers simply view the sheepskin as a gatekeeper. You go to an Ivy or Public Ivy and have a bachelor’s? Chances are you’re bright, at least somewhat responsible, and have been around elites enough to know how to act in a sociable manner. Otherwise, no job for you unless you get a master’s.

      And I find it amusing that some blame the colleges and universities. This is really employer driven. As long as employers view higher ed as their screening device, the “bubble” (and it’s not a bubble) is not going to “pop.” And no, a “bachelor’s from Richard Bland” is not going to get you past the gate at almost any major white collar employer.

      1. Interesting observation about the role of employers. But you’re talking about maybe 10% of the workforce. The elite universities will always dominate that market. How about the other 90%?

        1. Ghost of Ted Dalton Avatar
          Ghost of Ted Dalton

          Good question. But it’s been my experience that ultimately middle sized and small sized businesses usually end up adopting F500 human resources “ideas” and “practices.”

          Don’t get me wrong. I agree that higher ed is vastly overpriced. But I can’t blame the schools for exploiting what employers are demanding…can you?

          Ultimately, I have two suggestions: 1. Employers view the University of Phoenix and its progeny as jokes. The only employers who really view these degrees as worth anything are governments which simply require “degrees” to move on to the next step. That’s it. People just need to get over it and have the gov’t shut these places down. If you disagree, then ask yourself this: Would you hire someone whose only credential was from the U of P? I think the answer of 95% of employers of all sizes would be “No.” So why do we allow things like U of P to keep inflating the “bubble”? 2. Shut down most state run universities. Leave elite schools in place and shut down the others. If Virginia only had U.Va. and William and Mary and other states followed suit by keeping onlyt their top 2 or 3 schools open…..I imagine you might see some sense return to the system. If we weren’t handing out college degrees like toilet paper, then employers at the mid and lower levels may not require such degrees as a gateway to employment. Who cares if the entire Cal State system shut down and you only had the University of California system left? It would probably be better for everyone except those employed by the Cal State system. Who cares if VT and ODU and VCU were shut down?

          I’ve always thought it was a joke that the state operated anything but U.Va. and William and Mary.

          1. Hokie Avatar

            Who cares? I care. Not everyone associated with this blog is C’ville Homer. Why keep two liberal arts schools that essentially serve the same function: 50% trust fund babies and 50% people that deserve to be there.

            Need I remind you that not everyone can up and move to a new location for school. I will soon be attending ODU to receive my Master’s not because of its reputation as being a great institution, but because it makes sense given where I live and my situation in life. Considering W&M doesn’t offer a Master’s in any branch of engineering, my only option under your plan would be commuting up 64.

            If you want to make the point that the Commonwealth shouldn’t have its hand in higher education, that’s fine. Eliminate funding in the budget. I see no sense in dictating that all other institutions be closed. To have the public sector pick and choose winners? Surely Mr. Bacon has something to say on that matter.

          2. larryg Avatar

            people make choices but the Universities, like any business, know what it is that they are selling is worth- and it’s basically worth what you are willing to pay – and it will continue to be priced that way until or unless people make different decisions.

            You’re going for a MS – but the vast majority of choosing their first school for their first degree.

  3. Peter Galuszka Avatar
    Peter Galuszka

    But what of the lesser institutions? How long can they continue jacking up tuition and fees? How long until Massively Open Online Courses (MOOCs) or inexpensive, hybrid online-in person courses rip their guts out?

    Yep, depends upon how credible such online courses are and how seriously they are taken. My view is that MOOCs will always play a secondary role — a major shift to them will stress them beyond their intrinsic value.

  4. reed fawell III Avatar
    reed fawell III

    G0od article and good comments.

    Did not Virginia Commonwealth University recently set the record in Virginia for an annul tuition increase? If so, its April decision to spent another $83 million on more bricks and mortar per above photo helps explain that institutions every increasing appetite for spending money.

    Perhaps this insatiable appetite is the core threat to higher education today. The system that runs most universities is built around spending ever more money. It lacks the ethics, tools, and will, to change its profligate habits. Indeed its addicted to and thrives on waste and extravagance.

    But now, if it continues on this course, and all evidence suggest that it will, then mounting evidence suggests the only remedy is total financial failure. Jim’s concluding comments asks. Will the states then bail them out?

    In times of financial stress (despite today’s WSJ article), folks might turn to more traditional remedies. Every forest must be burnt over every so often to stay healthy. This natural law applies to us and our institutions. For those unwilling to save themselves the fire always come sooner or later. Events suggest here the Fire Next Time might come sooner than we think.

    1. reed fawell III Avatar
      reed fawell III

      PS – I do not think the elites will wholly avoid this coming change. They will have to adapt in material degree as well. Think Mercedes versus Lexus. Time now and its capacity to force change are accelerating fast.

  5. larryg Avatar

    I think people misunderstand Moody’s ratings. It’s not about indebtedness alone. It’s about the prospects for revenue. Our county gets rated by Moody’s and as important to debt – is the assurance of the revenue stream – i.e. taxes.

    In other words, if you cut taxes – Moody will downgrade you because they believe you will have more trouble paying off debt if you have less revenues.

    should not be such a surprise – credit ratings agencies do the same thing to you and me. It’s not how much we owe – it’s how much we make relative to what we owe.

    but with respect to higher Ed – there are LOTS of Universities that charge a LOT LESS than the “name brand” colleges but the name brand colleges are not dumb. They know there is a greater demand for them that the no-names, especially the no-names that do not have significant sports programs that get media exposure.

    don’t blame this on Universities. Blame this on the kids and their parents who won’t get the kid a used Toyota Yarus from Carmax and insist on the higher priced spread.

    The colleges are selling a product just like Tide – and they know what it is worth – and until people refuse to pay for it – they’re going to keep charging what the market will bear.

    it’s as simple as that folks.

  6. I’m no municipal finance expert, but I believe that Moody’s is concerned with both revenue *and* indebtedness, specifically, is the revenue sufficient to cover the indebtedness. The more indebtedness you have, the more revenue you need. And that’s why all that college borrowing is a problem — indebtedness is up while revenues are flattening out.

  7. larryg Avatar

    what exactly do Colleges go into debt over? Not operational expenses which is the lions share of their spending. they get downrated because they built one too many academic buildings or dorms but what is the real impact of that?

    it’s self limiting, right?

    that’s not going to change what they charge for tuition if the demand for their school brand remains strong.

    this whole line of reasoning seems separated from the real issues and actual realities.

    Colleges are selling a product. they do not care if the parent or kid goes into hock to pay for it – as long as they can find the money and pay …


    what would have to change?

    Parents and Kids would have to start saying ” it’s not worth it to go to VaTech or UVA or VCU and instead we’re going to NoWhere U and get a good academic degree for a lot less money.

    Realistically, how many people, right now, are willing to do this?

    this is not going to change until people vote with their wallets.

  8. larryg Avatar

    You know – this is like trying to tell you kid that some other toy that is “like” the one they want is the same thing.


    If your kid wants UVA or VCU or similar who are you to be telling them that Nowhere U is just as good and a lot cheaper especially when you yourself believe it also?

    We have today – a whole lot of blame going on – whether it’s govt, or college or public schools and teachers, etc…

    but in the end – especially when it comes to colleges we are what Pogo famously said – ” We have met the enemy and he is us.”

    the only trouble is – we stubbornly refuse to accept it and much prefer to blame others.

  9. Breckinridge Avatar

    Long string – did anybody mention that JLARC is indeed engaged in a two year look at Virginia’s system of higher education? There should be a preliminary report this fall, than the full report in late 2014.

    This is the largest long-term problem facing the United States in general, and Virginia in particular. The price inflation is unsustainable. The debt levels are unfair — the rich and the poor do fine but the middle class is buried. The ivory tower dwellers simply do not care. The need for a highly educated workforce is accelerating. With demand exceeding supply and allowing for higher prices, the solution is to create more supply – more seats. But the universities get that and will resist.

    Step one, in my opinion, is to blow up US News and World report and get rid of that stupid ranking they do. Because really it is meaningless. I have met extremely impressive JMU grads or Longwood grads and I’ve met plenty of total idiots from UVA. Each person gets out of the educational opportunity in exact proportion to what they put into it.

    Governor Allen just passed a bill saying no tuition increases. He held the line for four years. They are state institutions and the General Assembly is 105 percent responsible for what they are charging. Isn’t there an election going on this year? If so, this needs to be a one of the main issues.

    1. reed fawell III Avatar
      reed fawell III

      To pick up on Breckinridge comment –

      I too ran into many extremely competent and successful graduates of second and third tier colleges. Indeed many such people had no college education at all. Surely these colleges are still graduating such people. But I suspect current graduating classes have lower percentages of such people.

      I suspect this be true for two reasons.

      First, rampant grade inflation and off the wall marshmallow courses and majors combine to deprive many students of an education. Its bad marketing today for a colleges to require that their college students learn. In face its no longer as a condition to their students staying in college.

      Given their extravagant habits, many colleges no longer consider students to be students there to learn but people to fill up colleges seats that fill up college coffers. This attitude and ethic perverts the entire system.

      Students must fear failure to learn if they are to learn. With far less is far chance of a bad grade, much less the change of a failing grade or even an average grade, there is far less chance that a student will learn. Or that a professor with feel himself obligated to teach. And this in turn wastes the value of all students’ degrees, including those students who have earned a degree that should have great market value to them by reason of their hard work and achievement. So the system on this level is rotten at the core.

      And I agree with Larry that easy borrowing greatly acerbate the corruption of this system. Easy money feeds colleges bad spending habits. This in turn turbo charges the quest of Colleges for more and more tuition paying students which in turn feeds on their need for lower and lower standards to teaching and admittance.

      The system has built itself into a receipt for failure all the way round.

      And, while the elite graduates have more opportunity to escape the pain, given their talents, those not so endowed often have far less chance. This system to operate profitable much cheat students out of an education.

      1. reed fawell III Avatar
        reed fawell III

        correction – “… With far less is far chance of a bad grade, much less the change of a failing grade or even an average grade, there is far less chance that a student will learn.”

        is corrected to: “… With far chance of receiving a bad grade, much less the chance of a getting a failing grade or even an average grade, there is far less chance that that student or any other student will learn.”

        1. Reed, There should be an “edit” function on your comments. You can go back and change the original comment without the need to make corrections in a trailing comment.

          1. reed fawell III Avatar
            reed fawell III

            Thanks, Jim. Meanwhile, I post this over again below. Perhaps you can erase what’s above.

      2. reed fawell III Avatar
        reed fawell III

        Correction of “This system to operate profitable much cheat students out of an education” to “This system that must be geared to operate colleges in a way that keeps them profitable after wasting so much money must be designed by necessity to cheat most all of its students out of an education.”

      3. larryg Avatar

        re: ” Students must fear failure to learn if they are to learn.”


        I think parents partially cause this back when the kids are in k-12 and they urge their kids to stay away from the harder courses so they can build a better QCA to get into a better college.

        The number one failure of our K12 schools in the US compared to the other country’s that best us is – critical thinking – the ability to use in concert the basic taught skills – to solve practical problems.

        this is what college is supposed to be a continuation of – the acquisition of problem-solving skills that are in demand in the workplace.

        we do education on the LAZY these days. Glide through K-12, stay away from hard courses, get into a good name-brand college and again stay away from difficult stuff – get a degree and go market yourself by proving you can write a good-sounding resume.

        we still produce doctors and engineers and other skilled and significant occupations but we have a ton of “generic” graduates who have no particular identifiable skill other than they did graduate with a degree from a name brand college.

        this is not govt’s fault and it’s not the college fault. This is our fault.

        Right now, teachers in K-12 catch hell if they assign difficult work to do.

        those teachers are singled out by parents as ones to stay away from.

        if we really want to assign blame – put at least some of it on ourselves as we have clearly lost our work ethic … culturally – and just like a lazy kid, he has a thousand excuses why he did not accomplish his work – we now blame our institutions for failing us. we are failing and that’s why institutions are failing.

        Europe and Asia have national curricula that emphasize critical thinking and problem solving – and there is no choice. all kids have to do it and there is no demonizing of teachers and schools as there is here. The focus is on the kids to do the work per the curricula.

        we have become fat and lazy – not only physically but culturally.

  10. larryg Avatar

    I think the problem is student loans myself but that game is changing to 6%+ and I wonder how many are going to look at 40K in debt at 6% interest as worth a degree from a “brand name” college?

    I don’t think the prices are unsustainable until or unless people make up their minds that they’re not going to pay the prices.

    and I think you WANT the ratings… but you need to ADD the prices to come up with BEST BUYs and help people decide VALUE.

    you’re never going to get govt to really do something because higher ed has
    superior lobbyists – graduates sitting in the GA!

    I don’t have much confidence that any govt entity is going to really bring higher ed prices under control.

    What I actually fear is that as prices go up and people seek other options, the Universities are going to fill in from less qualified applicants who have the money or are willing to pay.

  11. reed fawell III Avatar
    reed fawell III

    To pick up on Breckinridge comment, and start again edit free –

    I also ran into many extremely competent and successful graduates of second and third tier colleges. Indeed many such people I encountered had no college education at all. Surely these sorts of colleges are still graduating such people. But I suspect there are fewer of them percentage wise in current graduating classes. I suspect this is true for two reasons.

    First, rampant grade inflation and ‘off the wall marshmallow courses and majors’ often combine to deprive many students of the education they deserve. Thus many colleges today don’t require that their student’s learn. It’s bad for student retention and cash flow. So learning is no longer a condition to their students staying in college. Given extravagant spending, many colleges must keep classroom seats to keep their coffers filled.

    This overbearing attitude and ethic perverts the entire system. Students must fear their own failure to learn if they are to be motivated to learn. Now, with far less chance that a student will receive a failing grade, much less an average one, there is less chance that a student will learn.

    Similarly many professors no longer feel obligated to teach. Teaching is hard work. Without standards of achievement, teacher accomplishment also cannot be measured. This in turn wastes the value of all students’ degrees, including those who earned them by hard work. So the system on this level is rotten at the core.

    Easy borrowing acerbates the corruption, and it feeds the colleges bad spending habits. This increases the need for ever more tuition paying students so colleges keep lowering their admittance and grading standards.

    The system has built itself into a receipt for failure all the way round. And, while the elite graduates have more opportunity to escape the pain, given their talents, those not so endowed often have far less chance. To operate profitably, the system must cheat students out of an education.

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