'Tuition Bubble' Raises Risk for Colleges and Universities, Attorney Says

BOSTON, Sept. 1, 2011 /PRNewswire/ -- The nation's risk managers would be wise to prepare for the possibility of yet another bubble collapse—this time in higher education, where college tuition and fees have more than quadrupled over the past 25 years, writes veteran higher education attorney Robert W. Smith in a column published in the 2011 edition of the University Risk Management and Insurance Association's URMIA Journal.

"How likely is a collapse of the higher education bubble? Let's put it this way: in any other market ever observed by anyone, corrections have always come eventually and with any of these corrections comes a lot of pain," writes Smith, a Boston-based partner in LeClairRyan and leader of the national law firm's Education Industry Team.

Over the past few decades, generations of American parents have learned to associate sending their kids to college with fears of eye-popping sticker shock and astronomical debt. In fact, the National Center for Public Policy and Higher Education now estimates that average college tuition and fees have increased by 440 percent in the past 25 years. "This is more than four times the inflation rate and nearly double the rate of price increases related to medical care," Smith notes.

These stiff increases make the contours of the so-called higher education bubble even more obvious than those of previous bubbles in technology and housing, Smith argues. "Bubbles, unfortunately, are a structural reality throughout our economy," he asserts in the column. "As we should have learned from both the dot.com and subprime mortgage eras, when cheap money chases after something that nearly everyone regards as a critical necessity, a bursting bubble cannot be far off."

Both the mainstream media and education-focused publications such as The Chronicle of Higher Education have noted the growing sense that higher education is overpriced and under-delivering, but the risks this poses to higher education risk management has yet to be adequately explored, the attorney contends. The cascading effects of a bubble collapse "would impact risk analysis and preparedness in manifold ways," Smith notes. "For risk management professionals, a useful thought exercise is to envision an environment marked by plummeting enrollments, shrinking endowments, and disappointing levels of tuition income. Over the long-term, what might such a collapse mean for higher education and society? What should risk managers do in preparation?"

In the article, Smith details how the drop in tuition income would lead to layoffs and could create greater public safety and risk hazards, again with parallels to the housing bubble collapse. "State-of-the-art labs, new dormitories, gourmet food service, and Olympic-sized swimming pools might not be the functional equivalents of McMansions, but their upkeep and maintenance costs will loom large in the event of a bubble collapse," Smith argues. "In the event of a severe and protracted downturn, empty buildings could proliferate at the worst-hit institutions, not unlike the post-boom 'ghost towns' that now dot the collapsed exurbs of California, Nevada, and Arizona, our national poster children for teaser-rate mortgages."

But the effects would not just be physical—a catastrophic drop in tuition could also transform what and how colleges and universities teach. "The first casualties would be the likes of pottery or modern dance classes, but eventually, more substantial programs could end up on the chopping block in the brutal cost-benefit analysis that would surely follow a bubble collapse," Smith writes. Lawsuits would follow as students and professors alike chafed at the closure of cherished programs and schools that formed the basis of their livelihoods. If the tuition collapse were severe and long-lasting enough, it could even have far-reaching effects on American society and culture. "Will we witness the death of the humanities?" Smith asks. "With more students arriving at college with dollar signs in their eyes, prospects for a next generation of well-trained, competent, and enthusiastic teachers would also be curtailed, with potentially drastic consequences for the country."

Amid an unprecedented shakeup in American higher education, any number of smaller schools could go out of business, with only the largest and best endowed institutions remaining intact. However, Smith writes, even some of the country's biggest schools might face a rising threat from for-profit colleges—lean and mean businesses focused on leveraging technology to provide educational services better, faster, and cheaper.

In the column, the attorney details proposed solutions such as adopting year-round schedules, draconian belt-tightening measures and a sharper focus on online distance-learning. "Risk managers at the nation's colleges and universities are accustomed to contemplating a gamut of potential threats to university safety, financial health, and operations," he notes. "Given the proverbial writing on the wall with respect to the hypothesized higher education bubble, it seems prudent for the risk management community to begin asking some hard questions about today's tuition bubble."

Like the rest of us, risk managers have seen their retirement portfolios shrink. Many will be working a few years longer now in an effort to regain what has been lost. "What happens to them—and perhaps their own college-age dependents—if they lose their jobs?" Smith asks in the conclusion to the piece. "After all, the day might be coming, maybe even soon, when Mom and Dad look their sons and daughters in the eye and say, 'No more. We cannot pay a million dollars for your education. Time to go learn a trade.'"

About LeClairRyan

As a trusted advisor, LeClairRyan provides business counsel and client representation in corporate law and litigation. In this role, the firm applies its knowledge, insight and skill to help clients achieve their business objectives while managing and minimizing their legal risks, difficulties and expenses.  With offices in California, Connecticut, Massachusetts, Michigan, New Jersey, New York, Pennsylvania, Virginia and Washington, D.C., the firm has approximately 350 attorneys representing a wide variety of clients throughout the nation.  For more information about LeClairRyan, visit www.leclairryan.com.

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Robert B. Smith
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SOURCE LeClairRyan

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