Thursday, April 23, 2009

The Cost of College

Lost in much of the discussion about admissions and costs is the drastic change this year in loan rates and availability. Though loans for those who have a home and a strong credit rating (either through home equity loans or re-financing) are relatively easy to come by and rates are very low, other loans are much harder to get and the difference of rates between secured and unsecured loans is higher than I have ever seen. For instance, NJ Class loans rate were less expensive than most home equity loans and went up over 2% from last year to 7.62 percent. Unsubsidized Stafford loans are at 6.8% and plus loans are at 8.5%…when home equity loans or lines of credit can be had from 4-5%. In addition, it is getting much harder to qualify for loans with a reasonable rate of interest. This is one further impediment to access to post-secondary education for all but the well-to-do.
The Future of College Admission
I hate to sound like the Chicken Little, but I think we are in for a period in college admissions over the next two years that will be unlike any other. Because admissions are on a cycle, everything is delayed somewhat. I believe that the crisis that we are seeing in housing and banking will be coming to college admissions over the next two years.

This year there will be some impact. We will see some private colleges that are not highly selective taking some relatively desperate steps to meet their expenses: canceling capital improvement projects, freezing salaries, laying off staff, taking out loans to cover operating expenses, admitting and funding students to get short-term cash infusions, selling assets (one college recently sold their art collection, for example), etc. I did admissions at a private high school which declared bankruptcy, so I certainly know what it's like to try to get cash together in a tuition driven school. These schools will have a number of simultaneous pressures: returning full-pay students seeking aid, more freshmen seeking aid, more merit or need-based aid needed to attract applicants, higher loan rates, etc.

The other trend will be record numbers of students flocking to public colleges. As parent and student college funds tank in the market meltdown and loan rates for everything but home equity loans skyrocket, more and more students will be forgoing the benefits of small, private colleges for the financial benefits of public colleges. This will be less apparent at the highly endowed and "prestigious" colleges, but even they will see the impact. Many parents and students will associate the opportunity to attend college with financial risk, sacrificing financially only on what will be perceived as a return on one's investment.

The real crisis will hit in May of 2010. College closings in the news will be as common as home foreclosures. The costs of the short term financial decisions of 2009 will come home to roost. Colleges will need to start paying back the loans and will not have the stability to get more loans. What were decisions to get short term capital in 2009, particularly dramatic increases of financial aid budgets, become huge liabilities, and the ability to raise cash quickly will become much more limited. There will be fewer assets to divest, greater need to get revenue and more and more students and parents expecting less selective private colleges to match the costs of public colleges.

I hope I am wrong, but I fear that even if we are to emerge from this recession, the trends are not good for a large number of tuition driven schools. I think that there is a long term mindset of economy, return on investment and financial security that will drive huge numbers of students to less expensive colleges or to colleges which offer large amounts of aid. This could be a crushing blow to rural or regional colleges who do not benefit from state funding and who are at the financial margins now.