Ivies Borrow Billions, but Whatever

Elite higher education institutions have billions in debt, but they're probably good for the money.

August 27, 2013

Eleven of the nation’s most selective universities together have $26 billion in debt on the books, according to a new analysis.

But while much smaller debt loads would be seen as risky and perhaps life-threatening for less-well-off institutions, these universities have top-notch credit ratings and could probably borrow more if they wanted.

The Ivy League colleges plus Duke University, the Massachusetts Institute of Technology and Stanford University had $26.42 billion in debt at the end of the 2012 fiscal year, according to figures reported by the Cornell Higher Education Research Institute.

In an article for Cornell Alumni Magazine, which is operated by the alumni association independently of the university proper, the institute’s director, Ronald Ehrenberg, and research assistant, Ross Milton, argue that the figures alone don’t tell the full story. Instead, they argue, observers need to look at why and for what a college borrows.  

Of the institutions they examined, Cornell had the highest ratio of debt to endowment size -- $1.8 billion in debt and a $4.4 billion endowment.



“The real issue to me is, what is the impact of each of these debt-financed projects on the operations of the university?” Ehrenberg said in an interview.

Cornell’s annual debt service payments ballooned to 7.3 percent of operating revenue in 2010 from just 3 percent in 2009, just before the financial meltdown. The annual payments now amount to about 5 percent of Cornell’s operating budget and are expected to continue to shrink. Still, Cornell's administration curbed debt-financed spending, particularly on what it considers nonessential capital projects.

Ehrenberg said he was ready to write an “exposé” of Cornell’s borrowing but he came away mostly reassured by his examination, which included e-mail exchanges with university executives and close looks at university data.

Before the financial crisis, the university began long-term borrowing to invest in infrastructure upgrades to cool and heat the campus. These projects, Ehrenberg said, drive down energy costs and will be environmentally friendly.

“So, these things did not have any effect on tuition rates because the cost of operations were lower because of them, not higher,” he said.

In the 1990s, the university borrowed to improve dining halls and student living. This was paid for by fees on students who used the service and not tuition, Ehrenberg said, something he considered a plus.

The university borrowed to build three new research buildings after it was unable to raise enough money from donors. This was crucial, the authors said, for the university to carry out its research mission.

Cornell also borrowed $500 million in taxable bonds to have cash on hand during the worst of financial crisis. In doing so, Cornell was not alone -- Harvard, Princeton and other elite institutions across the country did the same. The effort allowed the institutions to avoid selling endowment assets during the worst of the crisis when they could get the worst prices, said Roger Goodman, a partner at Yuba Group, which helps universities with debt issues. Its clients include Cornell, Columbia University and Brown University. Ehrenberg and Milton used some of the firm’s data.

“These liquidity borrowings that were done -- there are elements of some of those borrowings that were done in a more defensive perspective, to protect the institution from being forced to make decisions that weren’t in their long-term best interests, like liquidating their endowment at the bottom of the market,” Goodman said.

Still, top colleges can borrow money at very low interest rates and lenders are ready to lend to them.

That’s because, without exception, the Ivies have gold-plated credit ratings.

“We don’t think they are over-leveraged," said Edie Behr, an analyst at Moody's Investors Service.

The lowest credit rating assigned to an Ivy League institution by Moody’s is the Aa2 rating, its third-highest rating, which is assigned to the University of Pennsylvania. 

Ehrenberg said he was unable to conclude if tuition went up or faculty salaries were depressed by the level of debt at Cornell.


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