Financial bubble reaches U.S. universities
American universities are facing a dire financial future,
according to a report by Bain & Company (consulting firm
and former employer of presidential candidate Mitt Romney) and Sterling Partners (private
equity firm). This is mainly due to the fact that students are no
longer able to support tuition fee hikes as their debt capacity is
already at its limits.
Last year, an investigation by Moody's Analytics illustrated
this warning that student loans may be the next financial bubble to burst. In 2010/2011 student loan debt
was totaling almost $920.000.000.000 while credit card debts
decreased from $1.000.000.000.000 to $800.000.000.000, making
student loan debt surpass credit card debt for the first time in
U.S. history.
source: Bain & Company,
Sterling Partners
Respond to disruptive innovation like online
education
A second factor contributing to worsening balance sheets of
American universities is scarcer financial support on behalf of
federal and state governments.
Consequently, two key figures have taken a hit. First of all,
the equity ratio (equity over assets) has decreased for many
universities putting them in danger of bankruptcy. Secondly, the
expense ratio (expenses over revenues) has climbed making their
operations increasingly unprofitable. In short, "institutions have
more liabilities, higher debt service and increasing expense
without the revenue or the cash reserves to back them up," it says
in the report.
Publishing their findings online, the companies reveal which universities
are particularly in financial trouble. Ways out of this misery are
manifold. They involve reducing overhead costs, creating revenue
streams from real estate property and responding to disruptive
innovation like online education.