Saturday, October 25, 2008

The End of Independent Schools?

Forbes Magazine has an interesting article by Maurna R. Desmond called The Coming College Bubble?

I believe it is a harbinger of the fate many secondary independent schools will also face. Public education will be confronting a financial crisis very soon.

From the article:
Home builders and banks aren't the only ones facing economic headwinds these days. America's undercapitalized independent colleges are staring at a spiral of major threats to solvency as penny-pinching students and parents consider cheaper options, and funding sources dry up. As a result, they could be the next bubble industry to pop.

The crush is coming fast. According to a September 2008 study by the National Association of Independent Colleges and Universities, of the 504 member institutions surveyed, one-third said the credit crunch had hurt enrollment, and about a fifth of respondents said they had fewer returning students than expected. Roughly the same number said they had a smaller incoming freshman class than expected.

But while head counts slide, needs rise. Demand for student aid is up, but charitable donations from foundations and individuals will fall during a downturn. Ditto for investment returns. And thanks to tanking tax revenue, federal aid may take a hit, too. Taken together, many independent institutions start to look vulnerable. "They are financially precarious for sure," says Sandy Baum, a Skidmore College economist and senior policy analyst at the College Board.

"Country Club" Closed?

The crunch will be particularly bitter for the institutions that drained coffers to build "country club colleges" complete with luxury dormitories, spas and top of the line sports complexes to lure choice students, hoping that a sharper crowd would lead to more accretive diplomas, entering a profitable cycle of more successful alumni and increased donations.

Many had little choice. "If a college decides we're not going to have fancy dorms or build a shiny new gym, students are not going to that college," says Baum. "People are not choosing the lowest price college, and that's a consumer issue, not a public policy problem."

Adds William Powers, the president of the University of Texas at Austin: "The market is choosing quality regardless of incremental costs."

Blowing Bubbles

This is at a price. College tuition has increased by more than three times the rate of inflation for the last 20 years, despite U.S. wages flat-lining since 2000. The average tuition at a private four-year institution grew 6.6% year-over-year in 2007 to $23,712, according to the College Board. This is pricey in itself, but when you add in all the luxe living expenses, the total bill touches $50,000 a year at the high end.

To the chagrin of financial advisers, students are increasingly turning to higher interest private loans to meet the burgeoning college bill. Private loans made up 24% of total education loans in 2006-07, up from 6% a decade ago. In 2008, students secured $20 billion in private loans--amounting to roughly a fifth of total undergraduate borrowings for the year. Taxpayers pony up, too, chipping in an average $4,000 per student through government loans and grants to private institutions, which usually come up with $3,720 in aid (often in the form of discounted tuitions) as well.

It's a scenario familiar to anyone who watched the housing bubble blow. "We are at a trend line that cannot be sustained," says Matt Snowling, an analyst at Friedman, Billings and Ramsey, who covers the student loan industry. "Tuition must go down, or there will be limited demand at high-priced private schools."

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