According to data published last quarter by the Board of Governors of the Federal Reserve Board, US consumers owed $980 billion in revolving debt. Revolving debt is – for the most part – credit card debt. This figure represents a decrease from the all-time high of $1.1T, set in February 2020 – just prior to the widespread onset of the pandemic. The revolving debt figure is a snapshot in time, but it reveals the fact that many US households are getting by on debt.
Credit card debt is meant to be repaid every month, but less than 40% of consumers actually do. Put another way, more than 60% of consumers incorporate deficit spending into their monthly budgets. They’re getting by on debt. Individuals who do not pay off their credit cards each month owe on average about $5,700. Revolving debt varies by age, with consumers ages 45-54 owing the most – an average of more than $9,000. Consumers in this age bracket are at their peak earning potential, and yet they also owe more credit card debt than any other age group. This daunting sum likely represents a long-term accumulation of what is supposed to be short-term debt.
No financial advisor would ever recommend deficit spending as a standard strategy for money management. Avoiding deficit spending requires either an increase in income or a decrease in spending. For consumers already at their peak earning potential, the strategy is clear: they must cut their expenses.
Consumers aren’t alone in bad money management
But consumers aren’t the only ones getting by on debt. Institutions are increasingly turning to debt financing for everything from pension obligations and construction projects to investments and even operating expenses. Higher education institutions that can issue debt are using the tactic regularly.
By law, most state governments cannot run budget deficits. They must balance their budgets every fiscal year. There are surprisingly few areas where state officials can trim their budgets. Higher education happens to be one of them. Between 2008 and 2018, states reduced higher education budgets by a total of $6.6B. During this period, 82% of states reduced their overall spending per student. The average reduction was 13%. Six states reduced per-student spending on higher education 30% or more.
So, it’s easy to see why institutions need more cash, and they have few ways of increasing their revenues. Raising tuition is one option. On average, college tuition grows by about 8% per year. This is far higher than the rate of inflation. Inflation isn’t the only thing that can make costs rise, so it’s probably unfair to expect tuition to keep a lockstep pace with inflation.
Borrowing is another way to generate cash. The State of Michigan pays for 75% of the cost of qualifying construction at universities, but only 50% of the cost of qualifying construction at community colleges. Community colleges have one power that universities do not: with the permission of the district voters, they can levy taxes. A new tax stream can fund the repayment of long-term debt. Community colleges usually use this route to finance construction projects.
Community colleges can ask residents to finance capital projects
Two-year colleges can also issue debt that’s guaranteed by their operating funds. This strategy commits a portion of the college’s annual budget to debt repayment. It is akin to credit card debt. Money that the district taxpayers authorized for college operations is diverted to debt repayment instead. (Debt repayment is not considered an operating expense.) The more debt a college has, the more operational dollars it must divert to repay it.
Just as consumers can have multiple credit cards, community colleges can have multiple bond issues. But the more debt an institution takes on, the harder it becomes to focus on its primary operations. Debt constantly siphons off the institution’s operational dollars. The institution is left with few choices: raise tuition and/or fees, somehow generate other revenue, or cut expenses.
Raising tuition too much or too often can price students out of the institution. Generating “other revenue” comes with its own risks, as the Health and Fitness Center is demonstrating.
But for some reason, college administrations are loath to cut expenses. Since 1980, the growth of college administration outpaced the growth of college faculty by five times. The only reason to grow an institution’s faculty is in response to growth in the student body. So, it stands to reason that the student body is not growing at a resounding rate.
And yet, somehow, colleges have acquired an overabundance of administrator, each of which consumes operational dollars. Combined with decreases in state spending on higher education and stagnant or slow-growing student enrollment, it’s even easier to see why higher education’s first position is that it needs more money.
Getting by on debt is a bad plan
Students don’t enroll in an institution because its administration is so awesome. If institutions (or more likely their governing boards) enforced strict limits on the size of the institution’s administration, they would have more money to develop new academic programs – which can attract more students. They could also avoid taking on debt to finance unnecessary expenses – like construction. And they’d have more cash to pay for legitimate operational expenses.
Getting by on debt is no way to operate.
Photo Credit: Café Credit, via Flickr