Degrees of Debt: Colleges’ Debt Falls on Students After Construction Binges

A decade-long spending binge to build academic buildings, dormitories and recreational facilities — some of them inordinately lavish to attract students — has left colleges and universities saddled with large amounts of debt. Oftentimes, students are stuck picking up the bill.

Overall debt levels more than doubled from 2000 to 2011 at the more than 500 institutions rated by Moody’s, according to inflation-adjusted data compiled for The New York Times by the credit rating agency. In the same time, the amount of cash, pledged gifts and investments that colleges maintain declined more than 40 percent relative to the amount they owe.

With revenue pinched at institutions big and small, financial experts and college officials are sounding alarms about the consequences of the spending and borrowing. Last month, Harvard University officials warned of “rapid, disorienting change” at colleges and universities.

“The need for change in higher education is clear given the emerging disconnect between ever-increasing aspirations and universities’ ability to generate the new resources to finance them,” said an unusually sobering introduction to Harvard’s annual report for the fiscal year ended in June.

The debate about indebtedness has focused on students and graduates who have borrowed tens of thousands of dollars and are struggling to keep up with their payments. Nearly one in every six borrowers with a student loan balance is in default.

But some colleges and universities have also borrowed heavily, spending money on vast expansions and amenities aimed at luring better students: student unions with movie theaters and wine bars; workout facilities with climbing walls and “lazy rivers”; and dormitories with single rooms and private baths. Spending on instruction has grown at a much slower pace, studies have shown. Students end up covering some, if not most, of the debt payments in the form of higher tuition, room and board and special assessments, while in some instances state taxpayers pick up the costs.

Debt has ballooned at colleges across the board — public and private, elite and obscure. While Harvard is the wealthiest university in the country, it also has $6 billion in debt, the most of any private college, the data compiled by Moody’s shows.

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.

The pile of debt — $205 billion outstanding in 2011 at the colleges rated by Moody’s — comes at a time of increasing uncertainty in academia. After years of robust growth, enrollment is flat or declining at many institutions, particularly in the Northeast and Midwest. With outstanding student debt exceeding $1 trillion, students and their parents are questioning the cost and value of college. And online courses threaten to upend the traditional collegiate experience and payment model.

At the same time, the financial crisis and recession created a new and sometimes harrowing financial calculus. Traditional sources of revenue like tuition, state appropriations and endowment returns continue to be squeezed, even as the costs of labor, health care for employees, technology and interest on debt have generally increased.

Students are requiring more and more financial aid, a trend that many believe is unsustainable for all but the wealthiest institutions.

“We’ve had a lot more downgrades than upgrades in the last five years,” said John C. Nelson, managing director of the higher education and health care practice at Moody’s, which has a negative outlook on all but the top state universities and private schools. “There is going to be a thinning out of the ranks.”

For now, the worst financial struggles are confined to stand-alone professional schools and small, tuition-dependent private colleges. For instance, $63 million in debt has left Mount St. Mary’s University, a small Roman Catholic college in Maryland, with thin financial resources and junk-rated credit, according to a Moody’s rating in March.

“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.”

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.

Article source: http://www.nytimes.com/2012/12/14/business/colleges-debt-falls-on-students-after-construction-binges.html?partner=rss&emc=rss