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Debt Financing on the Rise

Debt Financing on the Rise
September 8, 2005

This may not make American college officials feel any better, but the United States isn't the only country in which a decline in government support is forcing academic institutions to look for alternative sources of money, especially debt financing, according to Standard & Poor's.

A report issued by the credit ratings agency this week, "Report Card: International Higher Education Sector," examines the higher education markets in Canada, the United Kingdom, Australia and Japan in addition to the United States. 

Universities in all of the countries, S&P concludes, "continue to benefit from strong government funding," but "these public sources are becoming insufficient in supporting investment in infrastructure and staff in an increasingly competitive national and international market. 

"This has resulted in a trend of universities seeking to diversify their sources of revenue, thereby making them more exposed to market forces."

Although the higher education systems in the various countries have those developments in common, Standard & Poor's suggests, the situations they face differ widely from the United States, where many public institutions have seen a decline in state funds and many private institutions watched their endowments shrink in the first few years of this decade.

Canadian provinces are generally increasing their support of colleges and universities, but institutions' costs are rising and Canadian universities are issuing more debt to finance construction to deal with looming enrollment growth.

Government support for British universities is also improving, Standard & Poor's says. While the introduction of variable undergraduate tuition next year -- with most universities planning to charge the maximum allowable amount of £3,000 -- will bring in extra revenue, much of it will go to scholarship support for lower-income students. Because of their "generally thin financial margins and limited financial flexibility," British universities are increasingly recruiting students from outside the country, and while doing so "can improve cash position in the short run, overreliance on such income could lead to long-term instability due to the inherently more volatile nature of overseas student income," S&P says.

The government in Australia remains a central source of funds for higher education, the ratings agency finds, but the continuing "quasi" deregulation of the undergraduate student market there, and the university system's "continued reliance on revenue sources from full-fee-paying international students" are driving academic institutions to invest in capital infrastructure.

Standard & Poor's describes what it calls a "severe operating environment" for higher education in Japan, citing the country's "rapidly declining birthrate and deregulation, which has allowed more universities in the market." The situation has primarily hurt Japan's less-established and smaller universities more than its larger ones, S&P says, which predicts that over time, the competition will drive a bigger and bigger wedge in creditworthiness between the haves and the have-nots.

 

 

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