The Star (South Africa), May 05, 2009, Tuesday

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The Star (South Africa)

May 05, 2009, Tuesday

HEADLINE: No way out of ocean of debt for US colleges

BYLINE: Yalman Onaran New York

BODY:
On a Thursday morning in March, the $32 million (R268.5m) School of Management building at Simmons College in Boston is all but deserted. Three students lounge in armchairs facing floor-to-ceiling windows that look over the quad with its winding walkways and greening lawn; another makes photocopies.

"This building is always empty," says Raya Alazzouni, a second-year student from Saudi Arabia who is studying graphic design and taking courses in the management school.

Simmons, home to 4 700 students, opened the 6 200m² centre in January, two months before the US stock market hit its lowest point in 12 years. Even before the ribbon cutting, enrolment in the management school had been dropping.

Now the vacant halls are reminders of the new maths confounding US colleges.

Students, pummelled by scarce loans and savings plans that have fallen as much as 40 percent, are heading for less expensive schools.

The perks designed to lure them during boom times - from hot tubs to dorm-suite kitchenettes to in-room cable TV - are crushing universities with debt. Even projects like Simmons' "green" management building, with its rain-absorbing roof patio and toilets with two flushing modes, can turn into burdens as schools struggle with rising expenses, plum-meting endowments and needier applicants.

The spending binge by colleges and universities was part of the same trend that created the bubble in the rest of the economy, according to Ronald Ehrenberg, an economics professor at Cornell University in Ithaca, New York, and au-thor of Tuition Rising: Why College Costs So Much. "Now we're seeing it burst," he said.

From Harvard University to California's 3 million-student community college network, the US system of higher education is in turmoil. The economic crash is upending each step in the equation that families use to determine where students will spend four of their most formative and expensive years.

Last Friday was the deadline most schools set to get a decision from accepted applicants.

Independent colleges that lack a national name or must-have majors are hardest hit. Many gorged on debt for con-struction, technology and creature comforts.

Now, as endowments tumble and bills mount, they are struggling to attract cash-strapped families who are navigat-ing their own financial woes.

Such mid-tier institutions may be forced to change what they do to survive. In the best case, they will merge with bigger schools, sell themselves to for-profit organisations or offer vocational training that elite colleges eschew, says Sandy Baum, a senior policy analyst at the College Board.

In the worst case, they will close their doors for good.

Standard & Poor's predicts bankruptcies will rise from the typical one or two schools that fold each year.

"Small colleges with no reputation could go out of business," said Baum. "They're very tuition driven, so if they can't get tuition revenues, they'll be in really bad shape."

Failures will rise further if the recession persists beyond this year, according to Richard Kneedler, a former presi-dent of Franklin & Marshall College.

"If the markets normalise in a year, most might survive," he says. "If we've got a second year like this, the number of schools in danger will multiply by 10."

Colleges like Simmons - mainly undergraduate schools offering some master's degree programmes - are in the worst financial shape, says Kneedler.

These colleges have turned to borrowing for the amenities that they used to entice students to small programmes.

Now they are drowning in debt, Kneedler says.

Simmons president Helen Drinan says she hopes the new building and accreditation in March by the Association to Advance Collegiate Schools of Business will make it easier to market the School of Management to prospective stu-dents.

The school hired Deloitte's higher education advisory unit to suggest ways to navigate its current bind, as well as to find further savings.

Like the housing bubble, Simmons' woes started with easy credit.

The school borrowed more than $140m, tripling its debt in the seven years through last year. It added classrooms connected via wireless networks. It renovated its library. And it spruced up its student centre with a coffee bar and mix-your-own-milkshake cafeteria.

"That was a pretty bold borrowing strategy," according to Kneedler.

Simmons followed suit as US colleges jacked up tuition by an average of 3 percent above inflation every year. It counted on a rising endowment, parents' bull market-fed wealth and burgeoning private loans that more than doubled student debt from 1998 to last year.

It raised annual tuition and living expenses to $41 500 last year, 22 percent above the $34 132 average for private colleges. Sarah Lawrence College in Bronxville, New York, the costliest US school, charged $53 166 last year.

Then credit markets collapsed. Simmons - and even better-known schools such as nearby Boston University - felt the aftershocks.

Like many now-struggling companies and municipalities, Simmons had sold variable rate bonds and hedged against rising interest rates through swap agreements, which fixed interest costs for the school.

When rates fell, Simmons owed more than $10m on the swaps. When it refinanced the bonds, it had to accept more than triple the interest rate it had been paying before the credit crisis.

Drinan expects to settle the swap with bankrupt Lehman Brothers Holdings at a lower cost. Wall Street provided the tools for schools to take advantage of cheap credit.

Bankers introduced college finance executives to the rate swaps and similar innovations that are costing colleges, according to Andrew Evans at Wellesley College.

"I don't know why they did the School of Management building," says Katelyn Scalera, a second-year student from Massachusetts' Cape Cod, who is studying nursing. "They didn't have the money for it, so we're further in debt. And then they announce these cuts and increase tuition."

With families hurting, Drinan says it will be difficult for Simmons to entice more students. - Bloomberg

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