Stop subsidizing colleges’ 100-year debt binge

Guest Column:
Richard Vedder
The Barack Obama administration and Congress purport to care about the rising costs of college. Yet the government’s policies are only fueling the higher-education arms race. More

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OP-ED / LETTERS TO THE EDITOR

Stop subsidizing colleges’ 100-year debt binge

Guest Column:
Richard Vedder
Posted 11/11/13

The Barack Obama administration and Congress purport to care about the rising costs of college. Yet the government’s policies are only fueling the higher-education arms race.

I have written before on how the expansion of federal student-loan programs has encouraged colleges to simply raise their costs. Students are left to pile up more debt while colleges indulge in their Edifice Complex - building luxury dorms and gyms and stadiums (all “sustainable,” of course) at the expense of poorer students. There is another, related government subsidy that also has perverse effects and needs reform: the tax-exempt debt binge by universities.

Schools are exuberantly borrowing, in some cases issuing 100-year (century) bonds. Some bond offerings are justified, even wise, as schools are taking advantage of low interest rates to reduce future debt-service obligations. But a lot of this activity is financing construction of high-end student housing, faddish “centers” and stadiums.

Many bonds are tax-exempt. The more money borrowed, the more generous the exemption, creating in effect a taxpayer subsidy for rich universities. Should there be no cap on the tax exemptions private colleges can claim on their bond debt, and is it appropriate for the government to subsidize all types of projects at these schools?

For state universities, there is the implicit and explicit expectation of government support.

The public institution where I teach, Ohio University, plans to spend almost $1 billion on buildings from 2013 to 2019, financed largely by borrowing $568 million - far more than the total endowment. With the money in the pipeline, the school has decided to tear down a perfectly serviceable lab facility (against the wishes of several prominent researchers using the building) that is less than 50 years old and previously was merely going to be remodeled.

University presidents defend the spending splurge. President Barry Mills of Bowdoin College showed chutzpah last year in announcing that the school would borrow $128 million by issuing century bonds (at an average interest cost of more than $6 million a year, or about $3,400 for every student), largely to refinance old debt and partly for new construction. Mills said the plan provided unique opportunities “for the college to prosper, to grow our endowment.” He didn’t explain how borrowing money enhances the endowment.

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