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.
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 percent 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.
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 home builders, 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. Fist tap Dale.
