Wall Street as cause and beneficiary of skyrocketing university tuition

A deep, carefully argued, carefully research report from Debt and Society makes a strong case that sky-high tuition (and brutal, lifelong student debt, up 1000% in 15 years) is not primarily caused by bloated administrations or high professors' salaries. The explanation is a lot more banker-y.

Cuts to public spending drove universities to hike tuition, and the students made up the difference through loans, which benefit financial institutions. The university-as-business ethos that followed drove administrators to float lucrative (for the financial sector) bonds to create showy physical plant for their campuses, further driving up the cost of tuition and the finance-sector revenues from student debt. It's even worse in the for-profit university sector, where all of these financial shenanigans and the attending lifetime of debt are accompanied by "dismal graduation rates."

The spending on actual education — classrooms, faculty, etc — has held steady through this period, but ten percent of America's $440B annual post-secondary education spend goes into investors' pockets.

When capital investments do not pay for themselves, tax and tuition payers can be left on the hook. Since 2002 public college and university systems such as the University of California have increasingly secured new bond issues by using pledges of all available institutional revenues, including tax dollars and tuition proceeds should project revenues prove to be insufficient.42 Under these indenture agreements, called general revenue bonds, if a university cannot secure sufficient revenue from dormitory, dining hall or recreation center fees, it is required by bond contracts to increase revenues elsewhere.

Financial losses on University of California at Berkeley's new Memorial Stadium provide a high-profile example of bond agreements requiring tax and tuition payers to cover payments on excessive debts for amenities. The UC Board of Regents, which governs the UC system, planned to pay off $445 million in bonds for the stadium by selling the rights for 2,900 luxury seats for up to 50 years.43 In June of 2013, however, UC officials acknowledged that sales of these rights had fallen $120 million short of their targets, increasing the odds that UC will use other revenue like tuition and tax dollars to pay off the bonds.

On the other hand, bond markets can reward behaviors that generate greater revenue but are at odds with the goals of public higher education. Bond investors are willing to accept the lowest interest rates from the safest prospects for investment and not necessarily from colleges and universities most capable of fulfilling their core missions. Moody's ratings methodology, for example, accounts for a higher education institution's "pricing power" in terms of high student demand and statutory flexibility to increase tuition, its "operational performance" in terms of the diversity of its revenue streams and control over expenditures on faculty, and its "capital investment" in facilities that draw in additional revenues. It also encourages colleges and universities to offer security provisions for bondholders that provide the broadest possible revenue pledges.44 By these mechanisms, the increasing costs of borrowing have been passed on to tax and tuition payers even when the borrowing is not for educational priorities.

Debt and Society | Borrowing Against The Future [Charlie Eaton, Cyrus Dioun, Daniela García Santibáñez Godoy, Adam Goldstein, Jacob Habinek and Robert Osley-Thomas]

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