The media's depiction of the current economic crisis has largely focused on either troubled homeowners or failing investment companies. Over the past couple of months, however, another big loser has emerged: educational institutions.
For example, five Wisconsin school districts recently announced that they were on the brink of losing $200 million. The money, which was part of the districts' retirement and healthcare funds, had been invested in what appeared to be solid, conservative bonds. Unfortunately, these investments, while rated "AA" and "AAA," were actually based in CDOs, or synthetic collateralized debt obligations. Thus, through the magic of financial wizardry, the school districts were actually investing in Fannie Mae, Lehman Brothers, Freddie Mac, and Washington Mutual. As these titans have fallen, the districts have watched their money evaporate.
This is a particularly egregious case, and the districts are now suing their investment adviser. However, it points to a larger problem: from the Madoff scandal to inflation to the recession, the economic hardships that have struck across the country have not spared educators. In some cases, this has had a positive effect: Yeshiva University, which lost $110 million in the Madoff scandal, has used its misery as a springboard for a series of discussions about the importance of ethics, money, and greed in determining the aspirations of its students. For many Yeshiva students, the Madoff scandal may well be a defining event in both their religious and secular education.
Other schools haven't been quite as successful at finding the educational value in their current economic straits. At Wisconsin's Beloit College, for example, cuts in enrollment and failed investments have directly led to massive layoffs and reductions in student necessities like toilet paper. Beloit is trying to put a good face on this by claiming that the loss of adjunct professors means that tenured professors will be teaching a greater percentage of classes. However, for the students who are attending the college's town meetings, the message is pretty clear: they're looking at spending a lot of money to sit in larger classes that are often taught by an increasingly overwhelmed faculty.
Beloit is hardly the only institute of higher education that is facing a major financial problem. Today's New York Daily News reported that Cornell University is looking at a $1.4 billion hit to its endowment. This will result in large budget cuts, ranging from 5% at the main campus to 8% at Cornell's medical college. At the same time, the University plans to increase tuition by between 4% and 7.2% over the next year. Further cuts are already being planned for 2010, ensuring that Cornell students can continue to expect to pay more for less.
While the recent economic misery has clearly had a major effect on this crisis, it has only exacerbated a problem that has been developing for decades. With enrollments boosted by cheap student loans and the fear of economic handicaps, colleges and universities have had little reason to keep an eye on their bottom lines. As Zac Bissonnette noted a month ago, tuition increases in the last 25 years have outstripped family income growth by nearly three to one. Furthermore, although some universities have used this massive influx of cash to improve their research programs, many have also gone on spending sprees, erecting outrageously expensive buildings and engaging in other white elephants.
While this is a hard time to send a child to college, it isn't completely hopeless. The Obama administration has cited tuition assistance as one of its priorities. Moreover, while we wait for better funding to develop, there are always community colleges. As we've noted in the past, community colleges are an affordable and convenient way to save on education costs. Many universities accept up to 60 credits of community college, which means that savvy students can save a massive amount on the first two years of their education!
Take the first steps to building your portfolio.View Course »