“As the managers come to know more, they assume they know what’s best,” said Cary Nelson. “The more financially ignorant faculty are, the less they can intervene intelligently and the more managers will want to keep them uninformed. Financial secrecy in the corporate university eviscerates any notion of shared governance.”
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Although most parents and taxpayers remain unaware of how much of their tuition money is going directly into the pockets of party school administrators, there are signs that faculty members are finally rising up and threatening to revolt. The best example of this is at the University of New Mexico, where the faculty overwhelmingly passed a vote of no confidence against President David Schmidly and his top administrators, charging them with “diversion of instructional funds to pay excessive administrative compensation, as well as cronyism and other irregular hiring practices by the administration.”
Schmidly has a compensation package worth $587,000. An anonymous whistleblower complained about cronyism in the hiring and promotion of twenty-one employees, including Brian Schmidly, the president’s son. The faculty complained that funding for instruction increased by 19 percent while tuition increased 50 percent during the same time. “Where has the rest of the money gone?” asked Ursula Shepherd, associate professor of biology.
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Meanwhile, the corporate CEO lifestyles of some college presidents have come under attack by critics. In Tennessee, for example, one college president charged $1,500 to the college so he could take his wife to Barbados. Another spent $4,700 for expenses related to a football bowl game, including a pep rally and reception in Tampa. And a third spent $5,700 to take his wife to a commencement address he gave in Ethiopia.
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When the Tennessee Board of Regents prepared its annual report for the twenty-four campuses of the University of Tennessee, the total for presidential travel added up to $470,000, including the use of the university’s own airplane. The annual audits were required after a previous president, John Shumaker, was found to have misused funds and used the plane for personal trips.
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In many states, state university administrators are among the highest paid public officials—many making two or three times the salary of the governor and supervisors of state government departments.
Endless Tuition Hikes, and How Party Schools Get Away with Them
College administrations pay for all this—from the fancy facades on the golden walk and marketing research to their own high salaries—by jacking up tuition costs. Since 1980, college tuition has increased by 375 percent, far faster than the 127 percent increase in family income. Although the cost to educate students at public universities remained nearly constant from 1996 to 2006, tuition increases averaged 6.6 percent per year.
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The party school industry has gotten away with raising prices at two or three times the inflation rate, year after year over the past two decades, with nary a complaint from parents and taxpayers, who seem happy to pick up the tab.
Parents are so convinced that a bachelor’s degree is the magic key that opens the door to future success that they pay the outrageous admission price, despite the endless tuition hikes, hidden fees, and surcharges. They take out second mortgages, cash out their retirement plans, and go deeply into debt. For them, this is an emotional issue. They want the best for their children and are willing to make tremendous sacrifices to get the best for them. Neglecting to get their child into a top college seems like a form of child abuse. But for party schools, this unlimited demand for their product makes it easy to keep pushing up the price tag year after year.
The ability to raise tuition whenever they want to has encouraged colleges to be models of inefficiency. Where is the incentive to be frugal, cut costs, or weed out deadwood when you can simply raise the price to cover the cost of any projects you can dream up? Colleges can go on buying sprees whenever they want by simply increasing the price that their customers pay. No matter how steeply the costs rise, parents always manage to come up with the cash. What parents don’t realize is that very little of that tuition money is being spent on instruction. Most of it is wasted on frills.
Only twenty-one cents of every tuition dollar goes towards instruction, according to Richard Vedder, an Ohio University professor and author of
Going Broke by Degree
. The kinds of exorbitant tuition hikes we have seen over the past fifteen years are simply not sustainable, he said. As universities have become less productive and less efficient, more of the tuition money is spent on frills like athletic programs, climbing walls, hot tubs, and gourmet food courts. When state legislatures increase support for public colleges, Vedder said, they rarely use the money to make cuts in tuition. Instead, they use it to “fund large salary increases, add staff members, and build more luxurious facilities.”
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Vedder found that the additional funds were used to raise the salaries and fringe benefits of administrators, hire assistant administrators to lighten the load of administrators, finance public relations programs, support athletic teams, and build top-quality food courts, condominiums, student centers, and elaborately designed campus landmark buildings. They also use the additional money to sponsor community arts programs, build alumni centers, and sponsor free rock concerts. That means parents who send their children to party schools are therefore getting less and less education for a higher and higher price.
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Economists think the college tuition bubble that has built up over the last fifteen years simply cannot expand any more without reaching a tipping point where parents will simply not be able to pay the price, even with the aid of cutthroat predatory lenders. They think the long buildup and sudden crash will echo the housing bubble, in which many thought the price of houses would increase forever. In the meantime, though, if parents complain that they don’t have the money to pay the bill, party school administrators simply hand them the application forms for private loans.
The “Unholy Alliance” with Predatory Lenders
Just as this book was going to press, Congress significantly revised the federal student loan program to cut out the predatory banks that had been administering the zero-risk student loan program guaranteed by the federal government. Before that change, however, students were the victims of a scheme that left them seriously impoverished for years.
Robert Shireman, director of the Project on Student Debt, said more than two-thirds of students required loans to complete their studies and the average debt level at graduation had increased 63 percent from $9,250 in 1993 to $22,000 in 2007. “It has been too easy to just throw higher education’s apparent need for more money on the backs of students,” he said, especially when graduates are drowning in debt and unable to get high-paying jobs to pay them off.
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It would be bad enough if these loans had been fair and above-board. They were not. On March 15, 2007, New York Attorney General Andrew Cuomo called a news conference to announce the results of a month-long investigation of the cozy relationship between student loan companies and college administrators. The colleges, he said, were taking kickbacks from the lenders in return for placement on the colleges’ “preferred lender” lists aimed at parents trying to find the best loan deals.
Students were victims in what Cuomo called an “unholy alliance” between colleges and the $85-billion-per-year student loan industry. Among the targets of his investigation were six of the leading lenders—SLM Corporation (Sallie Mae), Nelnet Inc., Education Finance Partners Inc., EduCap Inc., the College Board, and CIT Group Inc.—as well as more than one hundred colleges and universities that seemed to be in league with them to fleece students.
This “unholy alliance between banks and institutions of higher education . . . may often not be in the students’ best interest,” Cuomo said. “The financial arrangements between lenders and these schools are filled with the potential for conflicts of interest. In some cases they may break the law.”
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Lenders paid kickbacks to schools based on the number of students who took out loans with them. Lenders footed the bill for all-expenses-paid trips for financial aid officers to posh resorts and exotic locations. Lenders purchased computer systems for the schools and even put college financial aid officers on their advisory boards to curry favor. Lenders set up funds and lines of credit for schools to use in exchange for putting the banks on their preferred lender list and for the colleges dropping out of the direct federal loan program, which was designed to provide low-interest loans to students.
In addition, colleges allowed lenders to set up call centers that directed calls from parents to the college about student aid directly to the lenders’ call centers, where the people who answered the phone pretended to be college employees. They were actually salesmen from the loan companies. Why bother with the government loans and all those forms, parents were told, when the predatory lenders here can do all the work for you? Here’s their number for you to call.
The lenders then completed the fleecing of parents by getting them to sign up for student loan money that went directly from the lenders to the colleges, with the parents getting stuck with the bill. The students who contacted the lenders on the colleges’ preferred list were found to have paid higher interest and accepted less beneficial terms than if they had shopped around for the best deal, Cuomo said. Often, colleges neglected to tell parents and students about the federal direct student loan programs where the rates were much lower.
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Cuomo’s announcement, which played on the front page of newspapers around the country, sent the nation into full denial. College administrators were crooks? Those tweed-encased, nerdy navel-gazers stealing money from their own students? Taking kick-back money from shady moneylenders? How could this be? It was, for most Americans, the first look at the rot inside the ivory tower that Diplomas Inc. had created, the first hint that a new breed of robber baron college administrator was running wild in the groves of academe.
With the benefit of hindsight, it’s possible to see that it was inevitable that as college administrators began to act like businessmen, they would adopt some of Wall Street’s nastier habits. There was, in fact, little oversight over how colleges raised and spent their money. State legislators and the press were not paying attention. Accreditation groups were too focused on minutia about requirements for majors to see the bigger picture. With $85 billion per year flowing from banks directly to the colleges, it was perhaps only a matter of time before someone figured out how to divert some of it into their own personal pocketbooks.
The fallout from this scandal continues today as we are slowly finding out how devastating the combination of sky-high tuition and predatory lending has been to graduates and their parents, who were forced to make loan payments the size of a small mortgage for decades after graduation.
Since the scandal broke, author Alan Michael Collinge, himself a victim of the student loan scam, traced the problem back to its source in the early 1980s, when hundreds of small student loan providers began to combine into giant corporations. Sallie Mae, which started out as a government agency, became private and the nation’s largest provider of student loans. Sallie Mae and other huge lenders made significant campaign contributions to members of the House Committee on Education. In return, legislators systematically removed the rules that protected students from exploitation by lenders. They quietly removed student loans from the Truth in Lending Act and the Fair Debt Collection and Practices Act. Then they changed the bankruptcy law so that student loans could never be forgiven, even if the student declared bankruptcy.
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With the protections removed, student loan companies were free to become loan sharks on a massive scale, setting up loans with high interest rates and oppressive terms that actually encouraged students to default on their loans, thereby imposing penalties and fees that could double or triple the amount the student owed. All of this helped set up the scam that Cuomo exposed, but as of this writing, in November 2009, Congress had still not replaced the regulations to protect students from predatory lenders.
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There were many interesting stories about the administrators caught by Cuomo. During the remainder of 2007, news continued to emerge from the investigation as Cuomo subpoenaed college and lending company records looking for deceptive or misleading practices. “The student loan industry is a very complex and confusing marketplace, and as students try to navigate its murky waters to get the best loan at the best terms, the last thing they need are sharks baiting them with glossy promotions and deceptive offers,” Cuomo said in October. “Students should be wary of such marketing and not allow it to deflect them from careful consideration of the merits of a company’s loan offering.”
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