Very nice report from the folks at Debt and Society here about higher ed's tango with Wall Street. Lot's of distressing stuff, including the change from old fashioned bonds to newer, more risky types of debt:
Private and public colleges in the past more commonly issued municipal bonds that would be repaid using only tax revenue or revenue from a particular project like a dormitory. Investment banking houses like JP Morgan and Barclays today have helped some higher education institutions to issue general revenue bonds that collateralize all college revenue in exchange for lower interest rates. Such bonds pledge state appropriations, project revenue, and even future tuition increases if necessary to repay bonds. Other institutions have gone a step further, adding variable rate bonds to their debt mix. Other institutions still, from Harvard to the Peralta Community College district have securitized these variable rate bond offerings with derivatives known as interest rate swaps. For-profit institutions, on the other hand can turn to corporate bonds, stock offerings, and private equity capital.
There is also a nice history of higher education financing, describing how and why student and institutional indebtedness has exploded recently. In one decade alone the amount of institutional debt has tripled, much of it spent on new buildings and things related to athletics programs. It's a vicious circle. Colleges take out loans to expand amenities to attract students who will pay higher tuition, which requires raising tuition to pay off the debt, which requires expanding amenities, which requires taking out loans to expand amenities. . .*
It's a very weird thing to have happened right after the financial crisis that caused the current recession.** Maybe not that weird though. . . If history teaches anything it's that very smart people can collectively do very stupid things.
[*Also remember that, as recounted here, universities with the highest paid administrators and coaches also are the worst at larding their students up with debt and adjunctifying the faculty.
**Also, check out Ed's piece from March here, which has a nice discussion of how the expanded institutional indebtedness ends up dictating administrative policy.]