[mcherm]

College tuition is too high and rising too fast -- that's nothing new. But this article wasn't (primarily) about that, this article was about how borrowing by colleges and universities is shooting up.

In their defense, I want to say that I think it is an example of wise financial management with a long-term view. Most institutions struggle to consider any time horizon beyond the current year (if not just the current quarter), but often schools can take a longer view. And right now, interest rates are hitting a once-a-century record low. I contend that an institution would be WISE to borrow as much as possible on a long-term basis. In a few years that 2% loan may be LESS than they are making on their investments (if their investments were locked in years ago, it may be less right now). Do all the building possible right now, then plan to ride out a couple of decades.

The article suggested that taking on this debt wasa sign of mismanagement and recklessness, but it seems to me like a sign of long-term vision. What do you think?

[jonnathanson]

Generally, and within reasonable limits, I would agree. With interest rates the way they are, debt financing is remarkably cheap right now, while saving is comparatively expensive.

That said, borrowing "as much as possible" can be problematic. Debt should be used to finance only what is necessary. Problems arise when institutions (or people) take on as much debt as they can, figuring they'll put it to use eventually.

You shouldn't stock more food in your pantry, so to speak, than you can eat in a reasonable timeframe. The stuff you don't get around to eating will start to spoil.

[hollerith]

The problem with your analysis is that eventually the loan comes due, and there's no guarantee that interest rates will still be low at that time.

[maxerickson]

Who knows what restrictions are placed upon it, but the spendthrift example from the article, the University of Chicago, has a $6.5 billion endowment. Lots of bigger private and public universities have similarly large financial resources.

I haven't looked, but I doubt U of Chicago have that much debt. I would guess that they can mostly service their debt on income from the endowment.

To the extent that individuals and businesses are using college degrees as signals, it does seem reasonable to expect lots of attempts at cheaper alternatives.

[mcherm]

The sort of loans that these institutions take probably do not come due all at once. And if they do (certain kinds of bonds) then the institution plans for it. If they're borrowing the money and planning to re-borrow when it comes due then they are truly foolish, but it is more likely that they plan to pay the loan off over time.

[rscale]

I had the same immediate reaction. Low-cost debt is a very useful tool for long-lived institutions. I'm certain that a few institutions are using it naively or foolishly, but the existence of debt doesn't prove the existence of a problem.

The graphs they chose for the article are also absolutely uninformative. As an example, the top graph indicates that long-term debt grew substantially faster than instruction costs from 2002-2008, but that's exactly what I would expect given that instruction costs were relatively static, but interest rates plummeted.