The Hidden Costs of Financing U.S. Higher Education
America’s higher education system is gaining a reputation for high costs and large inequities. In 2012, the U.S. spent $491 billion on higher education1 and twice2 as much per student than comparable industrialized countries. Where is all that money going?
Scholars have offered several explanations for these high costs including faculty salaries, administrative bloat, and the amenities arms race.3 These explanations, however, all miss a crucial piece of the puzzle. In fact, financing costs for college institutional debts, equity investments in for-profit colleges, and student loans have also come to soak up a growing portion of educational expenditures by households, taxpayers, and other private funders of higher education.
In recent years, students’ families and colleges have increasingly sought capital from three main financial markets. Public colleges faced declining state appropriations, and the average cost of tuition, room, and board increased much faster than grant aid for needy students.4 This pushed families to borrow increasing amounts from student loan markets to pay for college costs.5 Private and public colleges increased institutional borrowing, particularly from municipal bond markets for capital projects.6 And the rapid growth of for-profit colleges was fueled by equity investors that provided them with capital. All of this financing comes at great cost, in the form of either interest payments or profits earned to satisfy equity investors.
In this report, we estimate – for the first time – the total cost to the American higher education system of reliance on capital from each of these markets. The report covers the years for 2002 to 2012 – the only years for which adequate data are available.7 For student loans, we estimate the total interest paid annually on all outstanding student loans — both private and federal. For institutional borrowing, we describe total interest payments on college and university debts — the largest share of which went to funding amenities.8 In the case of for-profit colleges with capital from equity markets, we estimate the costs to students and taxpayers of profits made by these institutions —and the vast share of revenue they brought in from federal student aid programs — to satisfy stock shareholders and private equity investors. Except where noted, our estimates cover all colleges that received federal Higher Education Act Title IV funds9 and granted two-year, four-year, or graduate degrees between 2002 and 2012.
For 2002, the three financial costs totaled $21 billion in 2012 constant dollars.10 These costs began to rise steeply in 2005, reaching $40 billion in 2009. In 2009, more than $3 billion of these costs were operating profits for for-profits owned by equity investors. More than $8 billion was spent on interest for colleges’ institutional debts. More than $28 billion was spent on interest for student loans. As student loan interest payment growth slowed, overall growth in the three financial costs slowed as well until reaching $45 billion or nine percent of all higher education spending in 2011, up from just five percent in 2004.11 Overall growth was flat in 2012 due to a dramatic decline in earnings by for-profits capitalized by equity markets. Note that these figures do not include additional costs associated with financial services for colleges, such as fees for commercial banking services, endowment and investment management, and interest rate swaps. Nor do these figures account for spending on interest for home equity, credit card or other consumer debts that may be used to pay for college costs. Likewise, our estimates do not include students’ fees for campus debit and credit cards. We lack comprehensive data for these costs across the higher education system.
Neither inflation nor the growth of higher education enrollment accounts for the growth of these financing costs. The financing costs totaled $1,865 per currently enrolled student in 2002 in constant (2012) dollars. By 2012, these costs had grown to $2,861 per student, an increase of 53 percent in real terms. In comparison, spending on instruction remained relatively flat (see Figure 1).
This report proceeds in four parts. First, we provide a brief history of U.S. higher education financing to illustrate the expanding role of capital markets in higher education. Second, we show that the aggregate costs of institutional borrowing have increased as both private nonprofit and public colleges have taken on ever-greater debts. We note that community colleges in California used this debt to offset state funding cuts. Four-year public and private colleges, on the other hand, used the largest shares of their borrowing to invest in amenities like recreation centers, dining halls, dormitories, and athletics. Third, we show how equity markets capitalized a massive expansion of for-profit colleges and their profits without producing a commensurate number of graduates. Notably, the 15 largest of these corporations received between 66 percent and 94 percent of their revenue from federal student aid programs in 2010. Fourth, we document the rising aggregate interest costs associated with increasing reliance on student loans to households. We conclude by discussing the potential risk of student loan borrowers or colleges becoming unable to afford rising finance costs.
Click here to read the full report.