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.