Financial bubble reaches U.S. universities

American universities are facing a dire financial future,according to a report by Bain & Company (consulting firmand former employer of presidential candidate Mitt Romney) and Sterling Partners (privateequity firm). This is mainly due to the fact that students are nolonger able to support tuition fee hikes as their debt capacity isalready at its limits.

Last year, an investigation by Moody’s Analytics illustratedthis warning that student loans may be the next financial bubble to burst. In 2010/2011 student loan debtwas totaling almost $920.000.000.000 while credit card debtsdecreased from $1.000.000.000.000 to $800.000.000.000, makingstudent loan debt surpass credit card debt for the first time inU.S. history.

source: Bain & Company,Sterling Partners

Respond to disruptive innovation like onlineeducation

A second factor contributing to worsening balance sheets ofAmerican universities is scarcer financial support on behalf offederal and state governments.

Consequently, two key figures have taken a hit. First of all,the equity ratio (equity over assets) has decreased for manyuniversities putting them in danger of bankruptcy. Secondly, theexpense ratio (expenses over revenues) has climbed making theiroperations increasingly unprofitable. In short, “institutions havemore liabilities, higher debt service and increasing expensewithout the revenue or the cash reserves to back them up,” it saysin the report.

Publishing their findings online, the companies reveal which universitiesare particularly in financial trouble. Ways out of this misery aremanifold. They involve reducing overhead costs, creating revenuestreams from real estate property and responding to disruptiveinnovation like online education.