Colleges Are Buying Stuff They Can’t Afford and Making Students Pay for It

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With tuition costs more than doubling over the past generation, and student debt now exceeding $1 trillion, everyone knows the cost of college is too damn high. About 40 million people nationwide are weighed down by education debts that often reach into the tens of thousands. But those numbers are just a sliver of the bleak shadow that Wall Street casts over higher education.

A new study on debt across the higher education system reveals that the massive debts borne by both students and their institutions has climbed to about $45 billion per year. So the debt-related payments to the financial sector—including Wall Street investors, institutional lenders and the mammoth federal student loan system—drive about one tenth of all spending on higher education nationwide. These debt-servicing costs are tied to tuition lending as well as financial debts accrued by schools themselves, which finance investments of all kinds, from professors’ salaries to libraries to indulgences like sports teams and administrators’ bonuses.

According to researchers with University of California–Berkeley’s Debt & Society Project, a project of the Center for Culture, Organizations, and Politics with research support from the American Federation of Teachers, the a key factor in the rising cost of college is driven by expenditures largely unrelated to either the quality of the education, teaching or maintaining campus facilities. Rather, college is getting unimaginably expensive for both institutions and students because it costs so much to finance the business of education, thanks to Wall Street lenders. While there are many controversial budget items in higher education—critics lament bloated administrations and the cost of sports teams and flashy amenities—the report focuses on debt itself, and the massive volume of borrowing, as a major overlooked burden on institutions.

Even among graduates of public colleges, the average debt burden has more than doubled between 2001 and 2009, from about $9,440 to $21,100, mirroring the debt trendlines for graduates of private non-profit institutions. That means that for a typical poor single parent, the projected cost of her student loans may well have doubled in the years it takes to earn her degree as she juggles a job and night classes. And she’s likely facing other crushing debts on top of that: a recent Pew study links high student debt burdens among households of adults younger than 40 with higher total debt, including mortgage and credit card costs, which in turn aggravates the lifelong wealth gaps that higher education was supposed to help alleviate.

But the more shocking findings of the study are on the institutional side, where “colleges and universities also have a debt problem,” the researchers say. Since 2002, both public and private nonprofit colleges and universities have seen their debts soar, in large part through municipal bonds, and interest payments on those debts nearly doubled to $11 billion in 2012.

So the rising total cost of higher education stems not only from massive borrowing by low and middle-income students, who are largely doing so out of economic necessity, but from the heavy borrowing of colleges, often for questionable purposes.

Should we care that our college experiences are being funded by borrowed money? Here’s why: in recent years, the machinations of financial markets have become increasingly entangled in budget decisions, and often those decisions have little to do with educating students. The spike in borrowing costs isn’t just reflecting trends in interest rates, enrollment or the cost of professors’ salaries—the study found neither the interest rate per se nor instructional costs alone to be the primary factor. In many cases, schools are just borrowing for huge capital investments that help the college market itself, such as gleaming new football stadiums and shiny dorm buildings.

Researchers found that “at both public and private four-year institutions, the largest share of their borrowing costs were for investments in amenities like recreations centers, dining halls, and athletics.” The focus on prettying and branding the campus reflects the commodification of the “college experience.” Over the past two decades, the report says, “colleges have expanded amenities…to attract more students willing to pay higher tuition and fees.”

In the long run, however, these amenities often don’t pay off in terms of revenue for the schools, which grow increasingly beholden to bond investors. Those financiers, in turn, often favor not the highest-quality schools but rather “the safest prospects for investment.” Because of market pressures, the researchers warn, “bond markets can reward behaviors that generate greater revenue but are at odds with the goals of public higher education.” In other words, do you want your university’s future budget projections dictated by a Moody’s rating?

Charlie Eaton, one of the co-authors of the report, explains via e-mail that at all levels, the financing of higher ed—both for student borrowers and schools themselves—is increasingly involved in private markets:

The increasing finance costs are because increased tuition, room, and board costs have left households with no alternative but increased borrowing, and colleges have used debt and equity capital in ways that drive up costs for students even as state funding has been cut.

In the long term, Eaton says, “further research is needed to assess whether current borrowing rates are sustainable.” But demand for enrollment and academic needs is rising, and while debt will continue to swell, eventually, “colleges may need to reduce borrowing for amenities like luxury dorms and recreation centers and prioritize borrowing for instructional investments.”

The Wall Street influence in higher education is most acute in the for-profit college industry. These schools, which tend to take the form of sketchy diploma mills and lavishly marketed distance-learning schemes, operate primarily as educational storefronts for private equity firms. According to the report, “this finance-driven model is very efficient at increasing enrollment and generating profits. It has a poor track record, however, when it comes to helping students successfully graduate and preparing them for a competitive labor market.”

Many for-profit institutions have come under fire from Congress recently for their notoriously shoddy graduation rates, and those who do obtain degrees often struggle with poor job prospects, while saddled with loads of debt.

Whether a school is operating as a nonprofit or for-profit, the debt cycle pushes students to rack up unaffordable federal loans and drags students, families and schools into long-term economic insecurity. And ultimately, when an educational structure premised on borrowed resources starts to implode, taxpayers are robbed of the social promise of government-subsidized schooling.

Congress is now debating policies to help alleviate college debt, including reforming bankruptcy rules. But the Berkeley report places the debt crisis in the context of the overarching financialization of higher education. As Wall Street and the federal student loan system lord over the country’s campuses and tie education, society’s supposed great leveler, to volatile financial markets, we ought to ask not just whether getting a college degree these days is “worth it,” but who gets to determine how much it costs.

Check out Dog Park Media’s video about the Debt & Society report!

Debt And Society from Dog Park on Vimeo.