When Your College Is a Poor Indebted Country and There’s No IMF Bailout

Zombie EconomicsRegular readers of this blog may remember that one of my screeds about U.S. higher education described Iowa Wesleyan College as a canary in the coal mine. It now looks like the canary has fallen off of its perch — the school apparently had to borrow to make payroll. This is a very bad sign, given that tuition revenue won’t start rolling in until late August at the earliest. Don’t be surprised if Iowa Wesleyan folds in another year or two.

Meanwhile . . . Mid-Continent University in Kentucky sacked its entire faculty and staff in April and is scheduled to close at the end of this month. The campus of St. Paul’s College in Virginia, which closed in 2013, is up for auction on June 25. And Paul Smith’s College in New York, with a enrollment that will drop to only 800 students in the fall, has declared financial exigency.

How did these and other schools get into trouble? In some cases, the heavy reliance on tuition revenue from an enrollment of about one thousand students put schools at great risk. When a fall incoming class is only a few dozen students smaller than expected, these schools can go into a financial tailspin from which it is extremely difficult to recover. Bad management only compounds the problem; for example, St. Paul’s College spent between $300,000 and $400,000 annually over a decade on a football team that, like the overwhelming majority of athletic programs across the country, didn’t generate revenue for the school.

Zombies Shopping MallBad financial management is not limited to colleges and universities with tiny enrollments. A recent report by the Center for Culture, Organizations, and Politics at UC Berkeley’s Institute for Research on Labor and Employment points out that institutional debt in higher education has expanded dramatically over the last decade. From 2002 to 2012, the cumulative percentage increase in interest costs per student from this debt increased about 175 percent for community colleges, 80 percent for public four-year universities, and 60 percent for private four-year nonprofits. What was this debt used for? Not academic programs, but on campus amenities like recreation centers and athletics, and the non-instructional staff needed to run them.

As described by Michelle Chen in an article on the report in The Nation, universities are buying stuff they can’t afford and expecting students to pay for it. Charging students more for things they might want but don’t need might make sense if more people were seeking admission to college, but not when the number of students is in decline. In a shrinking market, a large debt burden is not a good thing, especially if there is no competitive advantage that distinguishes your business from another — as schools in Pennsylvania and other states are now discovering.

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