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Mark Cuban: Will Your College Go Out of Biz?

Posted by Larry Doyle on January 28, 2013 12:10 PM |

Last spring as part of a continuing effort to address the Student Loan Crisis here at my blog, I wrote Why So Many Colleges May Fail. That particular commentary went viral in the blogosphere.

Clearly the topic of higher education in general and the funding of higher education specifically is forefront in the minds of many American families. There are many thousands of good reasons for families to be concerned. 

Higher education is going through profound changes. Mark Cuban, owner of the Dallas Mavericks and serial entrepreneur provided a hard hitting commentary the other day on this topic. Not that many ensconced in ivory towers may appreciate what Cuban has to say but for parents and children sitting around the kitchen table and looking out at the future, Cuban’s commentary is highly recommended.

He writes, Will Your College Go Out of Business Before you Graduate? 

I’ve been getting a lot of questions from high school kids asking whether or not they should go to college. The answer is Yes.

College is where you find out about yourself. It’s where you learn how to learn. It’s where you get exposure to new ideas. For those into business, it’s where you learn the languages of business, accounting, finance, marketing and sales.

The question is not whether or not you should go to school, the question for the class of 2014 is what is your college plan and what is the likelihood that the college or university you attend will still be in business by the time you want to graduate.

Still in business? Yep. When I look at the university and college systems around the country I see the newspaper industry.

The newspaper industry was once deemed indestructable. Then this thing called the internet came along and took away their classified business. The problem wasn’t really that their classifieds disappeared. It was more that they had accumulated a ton of debt and had over invested in physical plant and assets that could not adapt to the new digital world.

When revenue fell, the debt was still there — as were all the big buildings they had purchased, all those presses they had bought and the declining-in-value acquisitions. But the debt accumulated to pay for them never went away.

They were stuck with no easy way out.

The exact same thing is happening to our 4 year schools. You can’t go to a big state university and not see construction. Why ?

Why in the world are schools building new buildings? What is required in a business school classroom that is any different than the classroom for psychology or sociology or english or any other number of classes? A new library, seriously? What is worse is that schools are taking on debt to pay for this new construction.

Think about this from a business perspective. Schools are seeing state and federal funding decline, as they should. Why should taxpayers be paying for another building?

They are seeing their primary revenue source — tuition, once a number that was never really questioned — becoming a value decision by prospective students. As they should.

Unless your parents are wealthy or you quality for a full ride or something close, the days of picking a school because that is the school you always wanted to go to are gone.

The class of 2014 and beyond now has to prepare a college value plan. What classes are you going to take online that enable you to get the most credits for the least cost. What classes are you going to take at a local, low-cost school so you can get additional credits at the lowest cost.

Then, with your freshman and sophomore classes out of the way, you can start to figure out which school you would like to transfer to, or two years from now, which online classes you can take that challenge you and prepare you for the areas you want to focus on. If you have the personal discipline you may be able to avoid ever having to step on a campus and graduating with a good degree and, miracle of miracles, no debt.

For the smart student who cares about getting their money’s worth from college, the days of one school for four years are over. The days of taking on big debt (to the tune of $1 TRILLION as I write this) are gone. Going to a four-year school is supposed to be the foundation from which you create a future, not the transaction that crushes everything you had hoped to do because you have more debt than you could possibly pay off in 10 years. It makes no sense.

Which in turn means that four-year schools that refuse to LOWER their tuition are going to see their enrollment numbers decline. It just doesn’t make sense to pay top dollar for Introduction to Accounting , Psychology 101, etc.

Of course, the big schools are going to argue this all day long. They want and need your money. They want to tell you how beautiful their campus is. The social aspects of going away to college. The amazing professors they have. The opportunities they create. The access to alumni and sports. All were great arguments in 2001 when tuition was still somewhat reasonable. They no longer hold water.

So back to the economics of four-year schools. Before you go to college, or send your child to a four-year school you better check their balance sheet. How much debt does the school have? How many administrators making more than $200,000 do they have? How much are they spending on building new buildings — none of which add value to your child’s education, but as enrollments decline will force the school to increase their tuition and nail you with other costs. They just create a debtor university that risks going out of business.

There will be colleges and universities that fail, declare bankruptcy or have to re-capitalize much like the newspaper industry has and long before the class of 2018 graduates.

The smart high school grad no longer just picks a school, borrows money and wings it. Your future depends on your ability to assemble an educational plan that gets you on your path of knowledge and discovery without putting you at risk of attending a school that is doomed to fail , and/or saddling you with a debt heavy balance sheet that prevents you from taking the chances, searching for the opportunities or just being a screw up up for a while. We each take our own path, but nothing shortcuts the dreams of a 22 year old more than owing a shitload of money.

Now is the time to figure it out and avoid the mess schools are creating for themselves and for those who take the old school way to college graduation.

Plenty of food for thought with that meal.

Thoughts and comments from students and parents facing these issues would be appreciated.

Larry Doyle

Larry Doyle

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

 

  • Peter Scannell

    There are 74 colleges and universities in our nation with endowments exceeding $1 Billion.

    The top five:

    1. Harvard $31.7 Billion.
    2. Yale $19,3 Billion
    3. Texas $17.1 Billion
    4. Princeton $16.5 Billion
    5. Stanford $16.5 Billion

  • Andrew

    Fortunately, the schools won’t need an economics department anymore. Bernanke has replaced Econ 101, 202, etc., with “QE in 3 easy steps…” Therefore, a huge cost savings will be realized when the econ professors are dismissed.

    Maybe QE4 will include the purchase and forgiveness of student loan debt?

  • Hal

    SOOO true ! I just paid my last tuition payment to the Univ of Michigan. Its one third the tuition if you live in state, that’s amazing !

    Luckily I could afford to send her to a great school and she already has a job in your favorite industry – Banking. I do think there is so much waste and overpaid Professors, Deans and Presidents that its the next disaster du jour.

    I’ve thought this for years ! Only the well to do, athletes and great students will be able to get a 4 year experience.

    Hard to believe it hasn’t happened yet. Thanks for bringing it to your blog.

  • Russ

    Larry,

    In my opinion, the reason that colleges and universities may go out of business is because of the government.

    By offering low interest loans to students, who in most cases can’t pay them back (think the housing crisis), the government is artificially providing abnormally high liquidity to colleges and universities.

    As soon as the student loan bubble pops (and it definitely will), just like the housing market, revenues will decrease by 50%.

    When that happens, the infra-structure that is being put in place today, will not be able to support its debt service. Any time the government sets an interest rate or any derivative that takes the determination out of the hands of the free market, a crash is inevitable.

    • LD

      Russ,

      You are spot on. Like every other sector where it tries to help, the market takes Uncle Sam to the cleaners for a while and then the market crashes.

      Will the old man ever learn?

      • Russ

        No, the old man will never learn because he is too busy being “Touchy Feely” and doing the politically correct thing.

        Who doesn’t like to hear that no matter what your financial status in life, you can still go to college?

        The public is WAY to stupid to follow the money and see that the colleges are going to take advantage of the system and it is going to end up costing the tax payers huge money.

        This government is every bit as corrupt as Venezuela (but I digress).

  • fred

    LD,

    Nice article in The Atlantic yesterday The PHD Bust: Americas Awful Market for Young Scientists, includes 7 charts showing job prospects/underemployment trending lower.

    Is higher ed now just an indebture scam to encapture low paid, highly trained, post doc workers? Post 2000, the answer is certainly yes. Cuban is spot on.

    • LD

      Fred,

      Higher education is under enormous cost pressures while simultaneously confronting real pressures on the very model for education currently in place.

      The other day I read a chilling vision put forth by The American Interest, which writes,

      In fifty years, if not much sooner, half of the roughly 4,500 colleges and universities now operating in the United States will have ceased to exist. The technology driving this change is already at work, and nothing can stop it. The future looks like this: Access to college-level education will be free for everyone; the residential college campus will become largely obsolete; tens of thousands of professors will lose their jobs; the bachelor’s degree will become increasingly irrelevant; and ten years from now Harvard will enroll ten million students.

      We’ve all heard plenty about the “college bubble” in recent years. Student loan debt is at an all-time high—an average of more than $23,000 per graduate by some counts—and tuition costs continue to rise at a rate far outpacing inflation, as they have for decades. Credential inflation is devaluing the college degree, making graduate degrees, and the greater debt required to pay for them, increasingly necessary for many people to maintain the standard of living they experienced growing up in their parents’ homes. Students are defaulting on their loans at an unprecedented rate, too, partly a function of an economy short on entry-level professional positions. Yet, as with all bubbles, there’s a persistent public belief in the value of something, and that faith in the college degree has kept demand high.

      The figures are alarming, the anecdotes downright depressing. But the real story of the American higher-education bubble has little to do with individual students and their debts or employment problems. The most important part of the college bubble story—the one we will soon be hearing much more about—concerns the impending financial collapse of numerous private colleges and universities and the likely shrinkage of many public ones. And when that bubble bursts, it will end a system of higher education that, for all of its history, has been steeped in a culture of exclusivity. Then we’ll see the birth of something entirely new as we accept one central and unavoidable fact: The college classroom is about to go virtual.

      The End of The University As We Know It

      • fred

        LD,

        Back in the early 1980’s I was employed at a technology company that was offering graduate level (accredited) courses via eight track tape from a local university.

        Obviously ahead of their time, but, the concept never went “viral”. Why, the government sponsored education for all model offering student loans to anyone lacking $$ was in it’s infancy and ready to steamroll anything in it’s path.

        The higher ed model in this country will not change until it has to change (when money and credit conditions tighten).

        This will happen at the source (gov’t gtds/subsidies) or in the ability to service the debt.

        Our greatest enemy in this country is our own standard of living, it is under attack from globalization. The reality, our children will be going to school longer to earn less money; the amount of student loan debt they will be able to service will have to decline as a result.

        Cut off the source or cut off the ability to service.

  • S

    funny how a guy gets extremely lucky, becomes a billionaire, now everyone thinks he’s smart. I would like to be able to lay down a bet someplace that Cuban is full of it on this one. People forecasting the end of thousands of colleges don’t have the faintest idea what they are talking about. What’s the alternative to a college degree? Not manufacturing. The nation needs only so many plumbers. So the next question is, ‘can’t students go virtual?’ I wouldn’t give an engineering student’s resume more than 10 seconds look-see if his degree was from the University of Phoenix or some other such diploma mill. So Fiddle-de-dee Cuban, you don’t know squat.






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