Colleges Flunk Economics Test as Harvard Model Destroys Budgets

(Bloomberg) -- On a Thursday morning in March, the $32 million School of Management building at Simmons College in Boston is all but deserted. Three students lounge in armchairs facing floor-to-ceiling windows that look over the quad with its winding walkways and greening lawn; another makes photocopies.

“This building is always empty,” says Raya Alazzouni, a sophomore from Saudi Arabia who’s studying graphic design and taking courses in the management school.

Simmons, home to 4,700 students, opened the 66,500-square- foot (6,200-square-meter) center in January, two months before the U.S. stock market hit its lowest point in 12 years. Even before the ribbon cutting, enrollment in the management school had been dropping.

Now, the vacant halls are reminders of the new math confounding U.S. colleges. Students, pummeled by scarce loans and savings plans that have fallen as much as 40 percent, are heading for less expensive schools. The perks designed to lure them during boom times -- from hot tubs to dorm-suite kitchenettes, to in-room cable TV -- are crushing universities with debt. Even projects like Simmons’s “green” management building, with its rain-absorbing roof patio and toilets with two flushing modes, can turn into burdens as schools struggle with rising expenses, plummeting endowments and needier applicants.

‘Spending Binge’

“The spending binge by colleges and universities was part of the same trend that created the bubble in the rest of the economy,” says Ronald Ehrenberg, an economics professor at Cornell University in Ithaca, New York, and author of “Tuition Rising: Why College Costs So Much” (Harvard University Press, 2000). “Now we’re seeing it burst.”

From Harvard University to California’s 3 million-student community college network, the American system of higher education is in turmoil. The economic crash is upending each step in the equation that families use to determine where students will spend four of their most formative -- and expensive -- years. Today is the deadline that most schools set to receive a decision from accepted applicants.

Independent colleges that lack a national name or must-have majors are hardest hit. Many gorged on debt for construction, technology and creature comforts. Now, as endowments tumble and bills mount, they’re struggling to attract cash-strapped families who are navigating their own financial woes.

Shutter Their Doors

Such mid-tier institutions may be forced to change what they do to survive. In the best case, they’ll merge with bigger schools, sell themselves to for-profit organizations or offer vocational training that elite colleges eschew, says Sandy Baum, a senior policy analyst at the College Board. In the worst case, they’ll shutter their doors for good.

Standard & Poor’s predicts bankruptcies will rise from the typical one or two schools that fold each year.

“Small colleges with no reputation could go out of business,” Baum says. “They’re very tuition-driven, so if they can’t get tuition revenues, they’ll be in really bad shape.”

College of Santa Fe, a private liberal arts institution, is one casualty. On March 24, the 1,900-student school in New Mexico announced it was closing. The reasons: It couldn’t pay its $30 million in debt, and talks to join with New Mexico Highlands University, a state school, broke down.

Richard Kneedler, a former president of Franklin & Marshall College, a Lancaster, Pennsylvania-based college founded in 1787 with financial support from Benjamin Franklin, says many small schools face the same predicament.

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