Academic Bankruptcy

By MARK C. TAYLOR

Published: August 14, 2010

WITH the academic year about to begin, colleges and universities, as well as students and their parents, are facing an unprecedented financial crisis. What we’ve seen with California’s distinguished state university system — huge cutbacks in spending and a 32 percent rise in tuition — is likely to become the norm at public and private colleges. Government support is being slashed, endowments and charitable giving are down, debts are piling up, expenses are rising and some schools are selling their product for two-thirds of what it costs to produce it. You don’t need an M.B.A. to know this situation is unsustainable.

With unemployment soaring, higher education has never been more important to society or more widely desired. But the collapse of our public education system and the skyrocketing cost of private education threaten to make college unaffordable for millions of young people. If recent trends continue, four years at a top-tier school will cost $330,000 in 2020, $525,000 in 2028 and $785,000 in 2035.

Yet most faculty and administrators refuse to acknowledge this crisis. Consider what is taking place here in New York City. Rather than learning to live within their means, Columbia University, where I teach, and New York University are engaged in a fierce competition to expand as widely and quickly as possible. Last spring, N.Y.U. announced plans to increase its physical plant by 40 percent over the next 20 years; this summer Columbia secured approval for its $6.3 billion expansion in Upper Manhattan. N.Y.U. is also opening a new campus in Abu Dhabi this fall.

The financial arrangements for these projects remain obscure, but it is clear that they will not be completed without increasing the universities’ already significant and perhaps unsustainable levels of debt. Last year Columbia reported $1.4 billion in outstanding debt against a $5.89 billion endowment. N.Y.U. had a staggering $2.22 billion debt with a relatively modest $2.2 billion endowment — one that had shrunk by more than 11 percent over the previous fiscal year. For universities, as for banks, the question is not only the value of current and projected assets but also the availability of liquidity so they can pay off interim debt obligations during a time of financial instability.

There is a similarity between the debt crisis on Wall Street and what threatens higher education. Just as investors borrowed more and increased their leverage in volatile markets, many colleges and universities are borrowing more and betting on an expanding market in higher education at the precise moment their product is becoming affordable for fewer people.

Financial aid is drying up and government support is not keeping pace with the rising cost of college, so students and parents are being forced to borrow more heavily. For decades, admissions offices have marketed themselves by promising a significant return on the investment in the form of higher lifetime income. But with the cost of an undergraduate degree well into the hundreds of thousands of dollars, this argument is no longer persuasive. Students and their parents are carrying unsustainable levels of debt, which is likely to lead to a crisis that will mirror the collapse of the subprime mortgage market. To make matters worse, student debt is even more toxic than a soured mortgage, because it is nearly impossible for a person to legally walk away from student loans the way a homeowner can walk away from a mortgage.

The competition between Columbia and N.Y.U. is an example of what educational institutions should not be doing. Universities should be looking for new ways to provide high-quality education to more students at a lower price. In today’s world, it no longer makes sense for every school to cover every subject.

For example, it is absurd for Columbia and N.Y.U. to be have competing philosophy departments at a time when there are few jobs for philosophy academics. Instead, they could cooperate by forming a joint graduate and undergraduate program, which would reduce costs by requiring fewer faculty members and a more modest physical presence, while at the same time increasing course choices for students. And in our wired world, universities on opposite sides of the globe could find similar ways to collaborate.

American higher education has long been the envy of the world, but today our institutions are eroding from within and are facing growing competition from countries like China and India, which are developing ambitious plans to enter the global higher education market. Capital can be intellectual and cultural as well as financial; it is vital that American higher education remains the reserve currency of the global educational system. No less than Wall Street, our colleges and universities are in dire need of reform.

Mark C. Taylor, the chairman of the religion department at Columbia University, is the author of the forthcoming “Crisis on Campus: A Bold Plan for Reforming Our Colleges and Universities.”