TIME: "Colleges Getting Hit by the Credit Crunch"

Parents Forum
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<p>“American universities have long been the envy of the world, with seemingly bottomless purses to bankroll cutting-edge research, top-notch faculty and construction projects galore. And fiscally speaking, these schools have it better than most businesses in the U.S.: multiple sources of revenue, including parents willing to pay tuition through the nose amid all kinds of money trouble, have often kept these institutions insulated from economic downturns. But in a financial crisis of this magnitude, even the ivory towers are getting hit — and in more ways than one. Not only have Bank of America, Citigroup and some two dozen other lenders cut back on or stopped issuing student loans, but the market meltdown has left many colleges scrambling to come up enough cash to cover payroll and other near-term necessities.” </p>

<p>[Colleges</a> Getting Hit by the Credit Crunch - TIME](<a href=“http://www.time.com/time/nation/article/0,8599,1847478,00.html]Colleges”>http://www.time.com/time/nation/article/0,8599,1847478,00.html)</p>

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<p>It is a tragedy all away around, and it may not ease for a year as it will take time for the effects of the bailout to be felt throughout the economy.</p>

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<p>I think this article touches the tip of the very large iceberg that will be felt throughout the higher education community. </p>

<p>More families will be reluctant with doling out money for private institutions. Many families will not be able to get loans, home equity especially with home values in decline. Many may be more cautious with the liquid funds they may have available. Some may feel they need to cut back and save in the event of future financial disruptions (loss of income, health care crisis etc). College aged kids may decide to stay closer to home to help mom and dad out (plane tickets home can cost big $$ these days), more kids may attend local state or community colleges thus putting a strain on state education budgets. I think this whole financial debacle has a lot more of unfolding to do.</p>

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<p>Some peoples “liquid assets” may be in well diversified mutual funds which have decreased by 33% or more :(</p>

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<p>I received a bunch of telemarketing calls last night all around the same time. One from the Obama campaign (sounded like the lady was cooking dinner), one from Boston College looking for donations, one from a credit card company looking to sell me some kind of insurance and others.</p>

<p>I just replied that I have two kids in college right now to the BC caller. He also asked for funds for building projects. I didn’t say anything but I think that this isn’t the best of times to be asking for building funds. Boston College wants to spend an absolute ton of money on building projects. I think that they have a superb campus right now and I’m a bit surprised at the ambitious building plans.</p>

<p>I used to just let the answering machine take the phone calls but things have been quieter since the “do not call” lists came out. Those have worked out fairly well. But peace is getting harder to come by again.</p>

<p>I would hope that colleges and universities would consider scaling back ambitious growth plans. Perhaps this is characteristic of a bubble. A glance at the housing market should point to caution when everything seems to be going your way.</p>

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<p>The financial situation for colleges is extraordinarily complex, mostly because it is hard to generalize across such a diverse spectrum of institutions. So let’s look at them by groups:</p>

<ul>
<li><p>State Universities. Most state universities will be further squeezed by cuts in state funding. Fortunately, most of them these days have a financial buffer of sorts in flexibility on instructional costs. So what you will see is (1) rising class sizes (2) poorly enrolled or expensive to teach courses “delayed”, (3) fewer sections (4) rising fees. This puts a real squeeze on students and their families of course, with longer times to graduate, some that drop out because of finances etc., but this will be offset by increasing numbers of enrollees that would in more normal times have gone to middling private colleges. BTW, this happened before, especially in the early 1980s.</p></li>
<li><p>elite private institutions (top 50 or so?). They will be hurt the least in this environment, because enough parents will still be willing to do anything to get their kid into, and pay for, an elite education. Yes, they will have budget squeezes, and the more poorly endowed of the elites will no doubt find they slip more firmly into a second tier among the elites, driven by financial aid policies, among other things.</p></li>
<li><p>non-elite private institutions. These folks have a problem. Right now, their generous financial aid policies, the ones that lead to an average cost that is affordable to most, depends on finding enough full pay students so that funds can be diverted to financial aid for the others. If these students stop coming and go to their state U instead, the financial impact will be devastating for a lot of these colleges. I have no doubt we will see quite a few colleges go out of business over the next few years. This has happened in past deep recessionary periods.</p></li>
</ul>

<p>Here’s what we will NOT see:</p>

<ul>
<li><p>Financial aid will continue to be available from federal sources. I even expect lending standards to get looser, because it is so important to our economy to encourage college attendance (it keeps unemployment down, and most think investing in human capital is a great thing.) Private loans have already dried up, of course. </p></li>
<li><p>Undergrad and grad school attendance will rise. This happens every downturn, because it is easier to get into and stay in college or grad school than to get a job in such an environment.</p></li>
</ul>

<p>-parents will be more selective regarding how they spend their educational $, hence the shift from middling private colleges to state colleges and universities. State institutions in turn will be under tremendous political pressure to accommodate these masses, even in the face of declining state financial support. After all, the legislatures still control them.</p>

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<p>[Student</a> Loans Make Money for Taxpayers - US News and World Report](<a href=“http://www.usnews.com/articles/education/2008/05/21/student-loans-make-money-for-taxpayers.html]Student”>http://www.usnews.com/articles/education/2008/05/21/student-loans-make-money-for-taxpayers.html)</p>

<p>They make money with the PLUS loans, I don’t see why the partner up with the private companies, only to have more fraud, confusing options, etc. When the government can do it itself and still make a pretty penny. So we lose some jobs. Boo.</p>

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<p>Good thread. My observation is that the extraordinary cost of higher education, which has inflicted double digit tuition costs over the last 10-15 years, has been correlated with the two bubbles during that same time, the internet stock bubble and the real estate bubble. The latter bubble has just burst and is spewing toxic sludge everywhere. Since it is correlated, somthing’s gotta give in higher ed, too. I hope it adjusts so that more people can really afford college in a reasonable manner with more FA coming our way.</p>

<p>My non technical observation is that these absurd and astronomical college education costs - only so absurd to typical middle class members; the rich as in times past have always been able to handle higher ed - are symptomatic of the times. In a similar manner that the inflated internet stock prices were really based on air-nothing (no capital), but whatever people wd pay, and real estate became wildly and absurdly inflated with no basis in people’s real incomes which had not gone up wildly, it also seems that higher ed prices went up wildly during the same timeframe without a concomitant rise in middle class’s real incomes. In fact, those incomes actually went DOWN in the last decade when adjusted for inflation.</p>

<p>I bet there will be an adjustment as sketched above by some posters.+ In the end, I bet the richer amongst us, as in times past, will avail themselves of college, thus ensuring their progeny’s continued place. However, college survivors, as Volker said on c rose yesterday, don’t go into financial engineering, but go into chemical engineering.</p>

<p>[A</a> discussion about the economic crisis with Paul Volcker - Charlie Rose](<a href=“http://www.charlierose.com/shows/2008/10/09/1/a-discussion-about-the-economic-crisis-with-paul-volcker]A”>http://www.charlierose.com/shows/2008/10/09/1/a-discussion-about-the-economic-crisis-with-paul-volcker)</p>

<p>+
newmassdad said–</p>

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</ul>

<p>New, did you mean ‘Financial aid will not continue…’ since you seemed to say right afterward that FA from the fed will be copious. Personally I hope that one thing that comes out of this mess is a SIGNIFICANT INCREASE in Federal aid, real aid, not just loans, to higher ed. In england, one pays $4k do go to Oxford (I know I know you have to get in, but you get the drift; I happen to know that stat off the top). </p>

<p>We as a nation should circle the wagons around higher ed, and we should all agree that it is a national priority to have the greatest number of us be educated in order for America to continue to innovate and create wealth into the next century. Else it will be the wasteland and the middle class as mad max</p>

<p>[YouTube</a> - Mad Max - Motörhead - Ace of Spades](<a href=“http://www.youtube.com/watch?v=H6Vw402IaII]YouTube”>http://www.youtube.com/watch?v=H6Vw402IaII)</p>

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<p>rod,</p>

<p>I should have been clearer: We will not see a decrease in Federal Aid. We will see the feds stepping in for loans, especially Stafford loans, where private parties will no longer lend.</p>

<p>The Oxford comparison is not a good one, because UK universities, even Oxbridge, are starved for funding these days. There is even talk about allowing them to charge more.</p>

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<p>newsmassdad, do you think that small non-elite private LACs (ones with $60 million endowments, as well as ones with nearly half a billion) will look to admit more students that can come up with at least half the COA (ie: families that can pay 20k before Staffords and work sudy) vs. a student that requires much more financial aid?</p>

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<p>NEM,</p>

<p>How many non-elite LACs out there have large endowments? Not many, depending on how you define elite. </p>

<p>Let’s look at one of these places that has a $60 million endowment. Let’s assume the place has 1200 students. That means they have $50,000 per student endowment. How much revenue do you suppose that generates even in a normal market? A few thousand per student. </p>

<p>So I think these poorly endowed non-elite colleges are sweating buckets right now, and looking for students that can pay far more than half the COA, because it takes a lot of these students to pay the bills.</p>

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<p>You are right about the definition of “elite”. I do think that the 1200 student school with an endowment of 60 million is sweating. I wish them luck in finding deep pockets, especially in this economy.</p>

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<p>Even elite school students are having their problems–as can be seen by this note sent to all MIT Sloan MBA students four days ago:</p>

<p>[Credit</a> Crisis Is Bad News for M.B.A. Students - Economix Blog - NYTimes.com](<a href=“http://economix.blogs.nytimes.com/2008/10/07/credit-crisis-is-bad-news-for-mba-students/]Credit”>Credit Crisis Is Bad News for M.B.A. Students - The New York Times)</p>

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<p>Calcruzer, </p>

<p>I already pointed out above that private loans have dried up. This is not news for anyone who follows the financial press. </p>

<p>BUT: Watch MIT develop an “innovative” new approach to the problem. Better for MIT to use its own funds for a lending program than to lose the revenue from existing students. For new students applying now, it will be self correcting - the ones that need more than federal aid and what MIT is willing to supply will either not apply or not matriculate. So it is a short term squeeze. And this is true elsewhere, too.</p>

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<p>Connecticut has a number of colleges that have been living under strained conditions for two decades or more. I doubt anyone on CC outside New England has even heard of them. They’ve survived by adapting. General Studies, Business Leadership, Employee Skills Development, Certificate Programs, etc. Perhaps more non-elite privates will join this group in the coming years. I think the Tier-1 and Tier-2 privates, and the publics will be fine.</p>

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<p>NewHope33,</p>

<p>A lot of these colleges you refer to get by because they cater to part time students, don’t have expensive physical plant (dorms and such) to support and make extensive use of adjunct (= inexpensive) faculty. Many of their programs cater to working folks who receive tuition benefits at work.</p>

<p>I suspect they’ll muddle along, since they are highly adaptable (is the hot thing this month environment? Roll out a new certificate in environmental studies…) and have relatively low fixed costs. In higher ed, they are intellectual bottom feeders, but we have a lot of need for the bottom (how’s that for elitist?), since many employed folks are far less interested in learning per se and far more interested in certification and credentialing, which some employers do pay attention to. </p>

<p>The LACs that I see having big problems are the ones that have yet to tap into this higher ed segment, often because they are too far away from employment centers. They have a proble.</p>

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<p>^ newmassdad - I agree with your observations. I probably should have added that a number of rural colleges have already turned their facilities into summer camps as an adaptation. That keeps dorms and the like busy. Considering how poorly many HS’s prepare students for college, I anticipate many brochures advertising Summer Academic Camps For Juniors and Seniors – two weeks, two grand. As for faculty, replacing full time staff with adjuncts has been a fact of life at many tier-3 and tier-4 privates for some time now. (No Ph.D. programs means no TA’s.) I guess what I’m saying is that sure, the financial crisis will have significant effects on tier-3 and tier-4 privates (and some tier-2 ones also) but I don’t expect to be seeing any headlines like “Dennison College liquidated! Wittenberg and Wooster College assets taken over by Ohio State University!”</p>

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<p>Newhope, the schools you listed have nice endowments with Denison’s looking nicer than Witt’s. Then there are schools with smaller endowments like Hartwick, or U of Tampa. How will they do? I believe that Hartwick was contemplating the idea of selling some land and/or artwork a few years back. I noticed on our tours of a few schools that camps were in session last summer. Drew was one example that I can recall.</p>

<p>newsmassdad, can you explain what you meant by this?</p>

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</p>

<p>Do you mean that they are too rural for the working adult to get there and take a class? They might need to begin online classes, if they have not done so. I know a woman who works full time, and was seeking some post grad degree. She takes her classes online, as well as flying to an OOS school periodically for a weekend (not sure how often, but it is doable, and the program is paid for and supported by her employer).</p>

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<p>NEM,</p>

<p>Yes, you got my drift. Distance education (online, for example) is no panacea for them because it is so hard to differentiate your offering in the distance ed market, and it is rather late to enter the game anyway. </p>

<p>I also see a backlash brewing against distance ed if it grows much more: employers may stop paying for it if the quality (which is not great to begin with) drops any more and accreditation organizations may well crack down more, although I suspect a lot of these programs are state accredited, not nationally already. Do not know for sure, though, as I have never looked into it. </p>

<p>Remember, employers hold the financial keys to most of the programs aimed at working adults. When they find they no longer need to fund substandard programs in order to keep employees, what do you suppose they will do? (think rising unemployment, recession, rising health care insurance costs etc…)</p>

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<p>There’s a very simple way to differentiate on distance ed: put out a quality product.</p>

<p>I’ve seen a few; but far more poor quality products out there.</p>