Monday, May 21, 2012

Colleges That Are In Financial Trouble

The student loan bubble will result in many colleges collapsing because of poor financial structures. Many colleges in  the states of Arizona, Florida, Nevada, Washington,West Virginia, Kentucky, Tennessee, Illinois, Michigan, New York, Ohio,  Pennsylvania.,Alabama,Mississippi ,Iowa and Oklahoma.

Larry Doyle explains:

In my opinion, the size, scope, and impact of this problem is an enormous anchor weighing down  our next generation and our nation’s economy. 
Make no mistake, this anchor is not only impacting thousands of students and families but is also having an equally burdensome impact on colleges and universities nationwide.
I choose my words carefully here. The other day I entitled my commentary, Student Debt Bubble: Impending Doom for Colleges. 
Doom is a strong word. Why did I choose it? Let’s navigate.

In those circumstances, any of the inadequate-capital institutions and perhaps some of the marginally positive schools might find themselves unable either to meet their increased payment obligations or to repay their debts. The institution could then be effectively insolvent, even if its operations were otherwise healthy. While the institution might not be bankrupt, creditors could demand control of major operating decisions. This is, essentially, what has been happening to sectors of the business community, such as homebuilders, retailers, and newspapers, that have lost credibility with banks. That has apparently not happened to independent Higher Education, but the warnings from S&P and Moody’s about our sector’s prospects are ominous and could foreshadow a shift by rating agencies based on enrollment, or other, data. 
Bingo. With student debt burdens soaring ever higher. Demand for many of these at risk institutions will inevitably decline. Subsequently, these schools will get squeezed and be forced to close their doors.
Embedded within a very recently released Bloomberg commentary is a study by Richard Kneedler, President Emeritus of Franklin & Marshall College. In light of the economic crisis that hit our shores and continues to envelop our nation, in early 2009 Kneedler released a very granular review of the economic condition of close to 700 private colleges and universities. For anybody with even a passing interest in this issue, Kneedler’s work, is a MUST read.  What do we learn?
1. Using this post-crash model (and may it not be “mid-crash”), 207 colleges and universities—31% of the 678 institutions in the database— have, under at least some circumstances, more debts than cash and marketable investments. I designate them “at risk.” In the model these 207 inadequate-capital institutions have projected net financial asset balances ranging from a negative few hundred thousand dollars to nearly a negative $400,000,000. More than half of the 205 had negative projections from ($10,000,000) to ($100,000,000).
2. This means that the inadequate-capital institutions (which might include a third or more of NAICU members) are exposed to severe disruption from negative factors such as declines in cash and investments, escalation of interest payments on variable-rate debt, and required accelerated repayment of principle, particularly if several negative factors were to coincide.  
Bingo. With student debt burdens soaring ever higher. Demand for many of these at risk institutions will inevitably decline. Subsequently, these schools will get squeezed and be forced to close their doors.

The crash of these colleges will be a good thing. It will mean less students being ripped off for poor educations, as Mark Cuban points out, the trend of the future is non-traditional schools that will provide skills that will enable students to get jobs. There will also be educational facilities, like the Mises Institute, that will provide alternatives for those who seek more scholarly educational pursuits. Gary North is correct, the Empire is collapsing, as are all of the Empire's structures.

8 comments:

  1. I wonder if Mr. Obama will forgive student loans in a get out the vote push in mid to late October?

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  2. Sparks second leg down of housing in college towns.

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  3. Does anyone have information regarding lifetime earnings of degree holders in relation to lifetime earnings of non-degree holders? I am wondering if the value of starting in the labor force four years behind my peers and and with substantial student loan debt is worth the long-term capital investment?

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    1. A college degree will likely get you nowhere. I have two degrees and earned more money sweeping floors than I did in accounting. And I'm not the only one who experienced this bit of misfortune. Trust me, having a college degree or two is not worth the effort. Bottom line is that it depends on who you know, not what you know, that will get you ahead in life.

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  4. In answer to Cubans question (what is the difference between the housing market bubble and so-called student loan bubble?). According to the US Dept. of Education the average annual tuition for a four-year college education is $20,986 which equals $83,944 for four years. The average student loan is $20,000 which equals 23.8% of the cost of the education. The US census shows the average home price in October, 2011 was about $242,000, Wiki-Answers calculates the average outstanding mortgage balance to be $172,000 or about 71% of the cost of the house.
    The housing market was significantly more leveraged than the student loan market and is the reason there will be no similar financial crisis. Anecdotally, I graduated from a private university with a student loan of $10,000 in 1976. The Federal Reserve of Minneapolis’ inflation calculator shows that this is equivalent to $40,000 today. That’s twice the average student loan today. It did not crush me. I paid it off over a period of ten years and went on to an average career in banking and finance. My parents were solidly middle class and did not pay for my tuition. I was able to afford a private university by living with my parents and working part-time and borrowing $10,000.
    The crisis in education is directly related to the communication disconnect between the user and the provider. The primary source of revenues for the public universities is not student tuition but government taxes and grants. Thus the very powerful communication that occurs in a voluntary pricing transaction is lost. As a result the universities do not focus on meeting the needs of the students. This problem is worse at the K-12 level where parents and students have no influence. The schools receive all of their revenues from government and so focus little attention on the needs of the students. This won’t change until people are ready to abandon the coerced transactions of public schools for the voluntary transactions of the free market.
    Private colleges do retain some of the voluntary pricing transaction. The government funding comes in the form of student loans so the school is motivated to focus more attention on student need. Public universities however are completely dysfunctional and should be abandoned immediately.

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  5. The crux of the matter is not just student loans but the new practice of renting out endowment funds. The college and university boards have been packed with so called financial gurus who are shills for the new financial paper, which are really "rentals" of stuff already owned, borrowed for a short time to cover overdrafts. These borrowings are responsible for the kiting of value and debt to unbelievable heights. That is why our debt worldwide has balooned to trillions from billions.

    When institutions sign these instruments, they lose control of the funds since they are now in a separate operation. At this point in time, these institutions do not even know where or who has control of their funds. Like with Corzine, they are facing an unbelievable loss of everything and a legal nightmare to try and regain control of moniess they have rented out! They appear to be waking up to the fact they have been scammed out of everything!

    You should get Iris Mack to write on this.

    It is well to write re these problems but give the real whack to those who deserve it!

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  6. My father served on the board of a college local to him for a number of years and fought with the head of that institution as said individual expanded madly and racked up huge debts. I won't go into why that leader thought such a program would work out, but part of the calculation must have been that everyone else was doing it too. Given the particular student demographic targeted by this institution, I think there may be some very interesting times ahead (in the ancient Chinese curse sense...).

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  7. I would say the colleges are probably next after the mandatory government school system for high school, middle school, etc as the biggest threat to liberty. If those were radically changed to market based systems by and large, just imagine how different the mentality of the average american and their critical thinking skills would be? Look at how much work the austrians like ron paul have to do in order to circumvent all of the damage the school systems and colleges have done to the truth and the mindset of the average person?

    I personally think this is great news and hope the public school systems are next.

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