TWICV Special with Raphael Courtland - Finances in Higher Education

Welcome back to another special episode of This Week in College Viability. Hi, my name is Gary Stocker, and we continue our series of interviewing folks throughout higher education who provide perspective that we might not otherwise get. Today, my guest is Professor Rafael Cortland, who is an experienced long-term higher education professional. He's taught finance and economics and accounting at colleges and universities in New York State and in Michigan. He also developed the programming that became the Certified Financial Planner Board-recognized and the Chartered Financial Analyst CFA University affiliate status. These credentials, as many of you will know, are recognized worldwide as the highest professional designations in their field. Rafael, thank you very much for making time to join me today.

Gary, thank you so much for having me on. I really, really appreciate it. I really think you're doing a phenomenal service with your data that you're allowing people to have access to so they can make good decisions for their future.

Well, thank you. I appreciate your kind words. You are now officially my favorite guest ever. So, you know, you and I talked a few weeks ago and chatted about higher education, just kind of for our listeners. Describe your perspective of where higher education, the industry, the higher education industry is in the summer of 2024.

I really think we're in a, a very fascinating situation, and I think it's a reflection of where America is today. I look at things from a financial perspective, being a finance guy, finance professor, and today we have issues with the middle class in America getting squeezed. We have issues with savings in the United States. So from a financial perspective, I think that's very similar to what's going on in higher education. I think we have a big split, those universities that are very well off financially, which have no issues. And then I think unfortunately, there are way too many institutions throughout the United States that have financial issues and financial problems.

And when we talk about financial problems, can you just briefly describe what that means from your perspective?

Sure. So I always like to relate this back to the global financial crisis of 2008 and 2009. So the issue that happened back in '08 and '09 was that credit was very easy to get. So basically everybody was borrowing to buy a home and people had access to money. So they went, they borrowed, they spent it to acquire their home. And unfortunately, there was so much debt at the time being taken on, and people unfortunately could not afford their payments. So they couldn't afford the house. Now, in higher ed, from a financial perspective, many of these institutions have huge amounts of overhead. They have to maintain the facilities. They also have to service debt that they took on. And unfortunately, if they're relying on tuition, to fund that and tuition starts, tuition revenue starts to go down because the number of students aren't available to the college or the university. That creates an issue. They're not able to service the overhead, the massive amount of dollars that are spent to maintain these facilities and also to service the debt. So that is a major problem and it's very reflective of what happened in the country in the '08-'09 financial crisis.

Yeah. So you're a finance guy, an experienced long-term finance guy. Let's talk about what— we'll just focus on private college leaders, Rafael. What are private college higher education leaders doing right? And then what are they doing that's not right?

I think it comes down to capital budgeting, Gary. And what I mean by that is they're focused today on attracting students. I, when you say higher education leaders, it really brings to mind a few different things. Education is first. Unfortunately, what's going on a lot of these institutions today is they're attracting students to their facilities, and they're focusing more in on the college experience than the actual education component. And that to me is something that higher education leaders are not doing right. So for example, college, you know, parents bring their child to a, you know, go look at a school. Oh, wow, look at how fantastic. I'll give you a real-world example. One of the schools I used to teach at, they had a finance, a quote-unquote finance trading room. So you walked in and there was all these computers and there was these clock, there were these clocks on the wall and there was, a trading ticker, and it looked very impressive. The reality is it was nothing but a computer lab with a stock ticker running across the screen. There was no financial resources and high-end data sources available at that school, but it looked good. So I think that from a higher education leader standpoint, a lot of these colleges are in competition over facilities, in competition over, you the quote unquote college experience for the student. And they're not focusing in on that basic aspect of education. And unfortunately, many, many students are taking on and paying a premium, paying a very high price for their education. And really what they're paying for is that experience. So I think higher education leaders are in this dynamic where they're almost feeding their own financial problems. There's a college now in New York, and I won't mention the college by name, but there's a college in New York that is known to have been in financial problems during the pandemic. They let people go, they cut programs, they did all kinds of things. And now the state has actually approved them to raid their endowment and invest in programs and the future of the institution. What was just released not that long ago, that they're going to build a— excuse me, an artificial turf field for $2.5 million. Now, this is a college with less— with, let's say, around 600 students. So 600 students And now they're investing millions of dollars in a turf field. Whether the student plays on grass or they play on turf, what is that the difference when it comes to education? So a lot of these higher education leaders— I also feel that a lot of these higher education leaders are being paid substantial amounts of money, amounts of money that you would normally see in leadership positions in the private sector. So recently, you know, there was an announcement, and I know you covered it on your previous show, about Wells College. Wells College closed. It was an institution that was known to be in financial trouble for many, many years. And the college president had compensation in excess of $300,000. There were news stories released not that long ago that he was receiving $50,000 bonuses. This is for a college that is failing. So are higher education leaders keeping these schools going when they know that there's issues going on? It's just a question. I'm not saying they, they, they are doing this or not, but it, it, it, it puts out the thought process of are they doing this? Are they keeping these quote unquote difficult or zombie institutions going so they can continue to make the amount of money that they're being paid.

So I'm seeing more and more of these endowment raids taking place. And that's a terrible indicator, terrible indicator of what's going on. I'm going to go to the next question, Ralph. And you mentioned, Raphael, excuse me, you mentioned a few weeks ago when we chatted, that I'm going to quote you here, that colleges are good at, quote you, feeding students' egos. What does she mean by that?

Well, I think it goes to the— when I look at colleges and I see the facilities, I think of a cruise ship. It's a docked cruise ship where students are going there. I understand that there's— when you're young, you want to enjoy yourself at college and you want to have a full college experience. But the real question from a financial perspective is at what cost, at what cost to your future? A lot of young people are taking on debt that is mortgage-level debt for a home to go to an institution where their outcome is not guaranteed. We don't know what kind of position or what kind of salary somebody is going to end up with after they graduate. Are they in a, are they hopefully educated, hopefully more prepared, hopefully are pursuing a profession which will have a potential payoff and put them in a better situation over the long term. Absolutely. But unfortunately, from an ego standpoint, I think that students are looking at college more— and I'm generalizing here, and this certainly can't be applied to everyone— but they're looking at the institution more of Again, what are the facilities? What are the sports programs? If I'm playing Division III sports at a small liberal arts rural college, I'm probably not going to make my living in the future playing sports. So the question is, where am I investing my time and my money? And am I getting, you know, am I getting Am I getting a good value for that? So from an ego standpoint, yes, listen, I understand that students want to live in the nice dorm. I understand that students want to have great facilities. I understand that students want to be put up on web pages for their sports achievements. I understand all those things. But from a long-term standpoint, there's going to be— if students are taking on debt, there's going to be a very, very long-term expense involved there. So you have to realize what you're going to college for, which is the education. I understand there's an experience component there as well, but you have to be careful what you're paying for. And I think that understanding that education comes first is very important.

Yeah. Yeah. So I want to take the discussion to kind of an inside baseball topic. It's a little complex, but I think it's especially for this listening audience. It's one that, that needs to be talked about more because I believe that bonds are really what's causing most of these colleges to close for better or for worse. So we talked about bondholders of higher education debt. And when we talked before, you indicated that bondholders of that college debt, whatever college it is, are securitizing that debt. So Rafael, what does that mean for colleges in financial trouble? And maybe even more importantly, what does that mean for bondholders?

So I think this goes back to the original question that we had on higher education leaders. Taking on debt is an obligation. That debt needs to be serviced. I will give you another example, a real-world example of a small college that built an extremely expensive dorm building. To the cost of in excess of about $200,000 per actual dorm room. And that dorm building was actually built in an area where the average home was around $200,000. So when we, when these colleges take on debt, they have to service that debt. How are they servicing that debt? What they're doing is these colleges that are tuition-driven, they're taking that tuition money, right, from the students who are borrowing it again and servicing that particular debt. So in this example that I gave you, the actual building was the security for that particular organization's, that particular college's debt. Now, unfortunately, what happened is the population of students got cut in half. So what happens? Now the college has less revenue coming in. They have to service this debt. So that becomes a financial drain on the institution. What happens? They have to come up with a solution. We discussed, you know, raiding the endowment. They may have to cut programs. They may have to cut staff. They may do deferred maintenance, whatever that may be. But really, when it comes down to education leaders and leadership, financial responsibility and not having too much debt is of the utmost importance, especially if they were forward-looking and were able to see that the populations of students is going to go down. So you have to be very careful with how you manage your obligations. So in this particular situation, what the college did is they went in and they renegotiated that. That's something that's happening on a regular basis. I know that happened at another institution where they renegotiated their debt. So these, these banks or institutions that have lent money for these, they don't want to own the facility. They don't want to have to deal with the maintenance issues. And on top of that, they don't want the negative publicity of, you know, calling in a debt. For a nonprofit organization if the college has that structure. So they end up, you know, reorganizing that debt. Often that's done quietly behind the scenes, and that could be an extension of the term. It could be any number of financial structure, but the reality is When a college closes, if it does close and there is debt there, if that debt's securitized, someone has to come in and sell off those assets to make those bondholders receive money back. I think that's going to be very difficult for the people that own these bonds. So when that starts to happen, institutions are going to look more closely and say to themselves, should we really be loaning money out to these particular institutions? Again, reminds me of the financial crisis, '08, '09, where they'd loan money to anybody and then all of a sudden it becomes an issue and they go, oh, wait a minute, what are we doing here? Maybe we shouldn't be loaning this money out. So this could have a tumbling effect to where if institutions are not able to get some money back, to pay back bondholders, that's going to create issues for lending money and wake up people down the— lenders down the line.

Yeah. Well put. I've heard that from many other folks as well. So, Rafael, my next question is kind of a two-parter. And I contended in the media that I do and the podcasts that I do I've contended that the die is cast for colleges in financial trouble, especially private nonprofit, especially small private nonprofit, especially rural small private nonprofit, that there's really nothing they can do that would materially change their financial or market position. So my first question with that assumption is, am I right or am I wrong?

Well, I think you have to make a classification there. Because I do think you are right. But we have to look at— and this is why your service, I think, is so important and so valuable for the consumer and for the student that's looking at attending a school— is what kind of condition is this school in? Warren Buffett has some very basic tenets from a financial perspective that when you look at his writings and his shareholder reports, you can draw some conclusions on. So if the college doesn't have big obligations, they don't have lots of debt where they have to service it, and they're financially well managed, even though they're a small school, even though they're rural, if they don't have too much debt and they've got a good endowment, they'll be able to make it through a difficult time, a reduction in the number of actual students that are going to attend the school. So I think that that's one classification. What is the financial position of the institution, even if they're dealing with huge reductions in the number of students that are attending school? And then you have another group where it's hand-to-mouth. They're looking for their next dollar every month. So the institutions that are in that have overleveraged themselves that have invested in facilities and are primarily tuition-driven. When that tuition money goes away because the number of students is reducing, those financial institutions are in serious trouble. Those financial institutions are probably, right, panicking at this particular point and looking for ways to generate revenue beyond tuition. But if they're really— these higher education leaders were really financially astute, they probably would have come up with alternative revenue sources already. You see this at some larger institutions like UCLA. They use their chemistry lab to do testing for different facilities. There's different engineering labs like Rutgers has in their packaging department that does testing for there are, there were other things that could have been developed. Why have leaders not done this? So I think there's two major classifications: those schools that are in financial trouble and have financial obligations, and those that potentially were well-managed financially and can make it through a particular storm. But I do agree that the die is cast for those that are in financial trouble. I don't think there's much they can do at this particular point considering where the, um, student body population, the number of students coming into college, is in the future.

So we're all familiar with U.S. News and World Report ratings of colleges, and Princeton has something, and there are a dime a dozen kind of rating systems. And even Forbes has done their annual college financial grades report. If you were to create a financial rating system for colleges, Rafael, what would that look like?

I think it has to be very simple because, again, when a student shows up at the college, they're not thinking about the financial ratings. They're thinking about the experience they're going to have as young people at this institution. The last thing they want to do is not think of things that are going to be enjoyable, right? So if I was going to do a financial rating system, it would be very simple. It'd be a 5-star rating system. 1 would be a college that is not well financed and in a good financial position, and 5 would be a college that's in a great financial position. For example, a 5 college would be a college that has endowments in excess of at least $100 million depending upon the size of the institution, has a reasonable debt level, And I think that keeping things as simple as possible so students can look at it and not have to go through, and if they're not financial or accounting people, not get overwhelmed by the data. Yeah, I think that's, I think that's very, you know, very important. Keep it simple.

So Rafael, let's put your prediction hat on here. And we have all been following the FAFSA debacle. And I ask this to all of the other guests I have on This Week in College Liability. The FAFSA debacle, Rafael, what happens this fall?

I think when with a situation like this with student loans, it just shows you how the huge dynamic change we've had in higher education over the last, let's say, 50 years. I remember my my parents and friends of my parents could take a part-time job and go to college and pay for it. And today we have this situation where it's so expensive to go to college. Students need to be able to get student aid, get loans. And if they can't get the loans, guess what? They can't go to school. So a lot of these situations where students don't have the funding to attend college, they're probably not going to show up because they don't have the funds. They don't have the ability to go get a part-time job and attend school. It's not possible today with where the costs are. So I think that's going to create a situation in the fall where many students who were considering going are not going to because they are unsure of what their financial situation is going to be. So that's probably going to— exacerbate the situation of the students that are available to go to college. That's already an issue with just demographics, and this is probably going to increase it. But I, but I think, again, this shows there's lots of information out there that if there was an emergency, the average person can't come out of pocket for a $1,000 financial problem in the United States. So I think that higher education needs to take a look at financially what they're doing. Is it really, should it really cost these amounts of money for somebody to attain an education to go into a profession that they'd like to? Or are we again funding students' egos, funding the facilities, funding the fields, funding the, which over the long term, what value has that brought over somebody's life? They may have enjoyed it for the period that they were there, but was it worth it? Was the value there. So I do think that this FAFSA is going to have an impact on the fall, and we may see, you know, more colleges. This may be a steamroll effect where momentum has caught up and may have more colleges, you know, have issues coming this fall, which again is why it's so important that people access your data and people access your information. The worst thing you could do is make an investment of time and money in an institution that's in trouble and then have to scramble. And that creates stress. Again, an 18- to 22-year-old, they want to enjoy themselves if they're of normal college age. They don't want to go through the stress of a college change, plus all the friends and everything else that potentially is lost during a college closure.

Yeah, good point. So let me go with a final question. And I'm going to look ahead a little bit. And this is something I, again, have talked about a lot. In all sorts of media. And I, my perspective is that the consolidation, mergers, consolidations, they're synonymous for me, of colleges in the next 3 to 5 years, 5 to 6 years, something like that, will evolve into larger scale mergers. Maybe Raphael, something like a single college that has a holding company that has 10 or even more than that, 10 or more colleges in its portfolio. Do you think that is something that may happen or not in higher education in the next few years?

I think it's a strong possibility. And if we look at, again, what's happened overall financially in the economic landscape in the United States, that's very similar. We had Main Street butcher shops, we had Main Street, you know, grocers, and Walmart's ridden into town and put all those small or mid-sized type family mom-and-pop Main Street businesses out of business. Everything in the United States is about bigger, bigger, bigger because these big institutions can deal with financial hardships. They have the capital, they have the equipment, they've got the property to deal with these situations. So yes, I do think that that's absolutely going to happen. I was sitting in a faculty meeting and the provost got up and spoke about how at the meeting that they went to for colleges and universities that the largest room was the mergers and acquisitions room and spoke about that. But unfortunately, when institutions get into trouble, who's going to want to take on those obligations? And I think those financial institutions that are in bad shape, it's going to be very difficult for them to merge. I know that some institutions have tried that. Too little, too late. They weren't able to do it. There weren't any takers. And ultimately, the college had to close. But yes, consolidation has happened throughout, throughout business. And now education, higher education is it's not surprising that that's moving into this field at all.

Yeah, interesting. Well, my guest today has been Raphael Cortlandt, who is a finance guy. If you listen to the podcast, you know that Raphael Cortlandt is a finance guy, and that has been our focus today. Raphael, again, thanks for your time. Thanks for your expertise. Thanks for your guidance. I appreciate it.

Gary, thank you so much for having me on. Again, you're doing a tremendous service for people. So I hope that the community out there takes advantage of it.

I appreciate those kind words. And for, for This Week in College Viability, my name is Gary Stocker. We'll see you every Monday for sure on This Week in College Viability, where we have news and commentary from news stories from across higher education. Gary Stocker for This Week in College Viability. We'll talk again soon.