The Overleveraged University: The Crisis In Higher Education

  • Both universities and students are becoming increasingly more indebted
  • Public and private universities have different exposure risks, with public schools more reliant on tuition fees and private schools reliant on market returns.
  • Alternatives to traditional higher education are on the rise
  • The higher education industry is long overdue for an operational overhaul

The Debt Crisis: How Higher Education Operates

Universities and colleges for a long time, have operated on a very successful business model. They provide an incredible resource to each generation of students, enabling development from both a personal and professional perspective. They operate as non-profits and essentially have control over their own universe of supply and demand.

With the advent of cheap credit, more and more students began to enter the university business model. To gain their credentials, students participate directly for 4 to 5 years, often taking out student loans to do so. The idea of the necessity of a college degree for life success perpetuates the increase in enrollment, as the college path is drilled into students from elementary school, despite the fact that it is not always the best path for some students.

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Source: Bloomberg

The student loan debt crisis is several articles of information within itself. However, many universities are also experiencing their own debt crisis, increasing their own leverage to try and attract more and more students. As this “double-debt” issue grows, it becomes more apparent that something must give within the system. 

As average tuition as a percentage of median income continues to increase, despite stabilizing recently, more and more families are beginning to question the value of a hundred-thousand dollar degree plus interest payments. Federal funding has also been slashed in recent years, which exacerbates the debt problem for universities. Students are increasingly seeking out non-traditional routes, which exist primarily online, and some of which don’t require students to pay until after they secure a job. 


Source: Student Debt CrisisFRED

Traditional universities require payment upfront for the goods that they provide. This model has been in practice for years and years, and it has worked. But the top universities are not as reliant on that up-front payment, as they are able to rely on their endowment return model, which compounds tax-free.

The Disconnect Between Private and Public Schools

Colleges and universities have four main revenue streams: “state appropriations, research funding, gifts and endowments, and student tuition”, tuition being the only one that can be freely utilized. As a business operation, universities want to maximize this unrestricted revenue, and that involves increasing the price of tuition. But there is a point of maximization, as once a product has reached past its maximal market value, no one will want to buy that product anymore.

Endowments are the treasure chests of top universities, with investment returns generating much more revenue than tuition. Princeton, for example, generates 911% more on their endowment as compared to their revenue from what they charge students for attendance. Harvard generates 529% more from their endowment. MIT is 118% more, Stanford is 115% more, Brown is 29% more, and so on, and so forth.

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Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can ...

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