Universities – why not take on debt..?

Yesterday, I blogged about how the economic crisis affects universities in a weird way.  One of the key differences is that they don’t operate on debt, as far as I know, so the credit freeze hasn’t killed it the way it has companies.  Other than hits on endowments, I’m not aware of problems in general.  “Just” general liquidity issues.  (Then again, universities are all about liquidity, so that is a HUGE problem).

Just recently, Pfizer pulled off a gigantic purchase of its competitor Wyeth, $40 billion or so of which was financed through loans from a number of banks.  This was a huge deal because it indicated that banks will loan, it just depends on the recipient.  They have confidence in Pfizer, so they went for it.

Well, universities have pretty good tax ratings and most have solid and consistent revenue streams from tuition.

So…why not take out a loan to even out the issues for the next couple of years?  Especially for small universities, where the endowment isn’t that big, why not take out $100 million in debt?  Or even $500 million?

I’m sure there are lots of reasons why a school would be reluctant and possibly even not allowed.  But I’m just wondering…

Comments (2)

  1. Debbie

    Ok…prima fascia your argument makes sense, but WHY? Why should a university, with razor thin “margins” as it is, take on debt if it doesn’t need to? Debt = more cost and the cost of higher ed has already been dramatically outpacing inflation for years.

  2. kaiyen (Post author)

    Well, as a business, the model makes sense. Liquidity problem + low margins = need for infusion of cash to (hopefully) invest in capital and improve productivity to increase margins.

    And the issue here is that you’re saying universities don’t need to take on debt. Well, they need money. Debt is one way to get money.

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