The Haves, Have-Nots, and Have-Nothings: When the Higher Ed Bubble pops, Division I athletics could pop with it

Mike Ehrmann

A housing "bubble" was a prime culprit in the economic downturn of the late-00s, and now some economists are suggesting that higher education is a still-inflating bubble as well. The United States is home to thousands of colleges, but only a small elite among them are thriving with-or-without tuition revenue.

According to the U.S. Department of Education there are currently 4,599 accredited post-secondary degree-granting institutions operating in America as of their most-recent data in 2011. Most of those are 4-year schools, 2,870 to be precise, a growth of over 900 schools since 1980. Not surprisingly, enrollment figures have also boomed for schools, as college becomes more and more attainable for average Americans.

College sports, meanwhile, are also seemingly booming, with schools constructing new stadiums and practice facilities and big-money television contracts being doled out by ESPN and Fox. A big time college basketball program can easily find ways to spend tens of millions of dollars in a single school year and overall department budgets are often even larger. School administrators at Division I schools barely bat an eye at these numbers, big time sports cost money, but the benefits are important too -- especially in a world where there is so much competition for students.

Right now, colleges and universities in America have money to burn, with tuition-dollars making up the lions share of their revenue stream and the bulk of their annual budgets.

Mark Cuban, billionaire owner of the Dallas Mavericks, is worried, and so are multiple economists.

It's inevitable at some point there will be a cap on student loan guarantees-Mark Cuban


They argue that higher education is in a bubble state, inflated by easy money being thrown around in the form of student loans, and it is stretching ever closer to popping. It is a potential political hot-potato, with both parties alternating in propping up the system of lending that has encouraged millions of American teens to enroll in colleges every year in hopes of securing their future.

According to a report from the Federal Reserve Bank of New York, Americans now carry more student loan debt -- $1.2 trillion -- than credit card debt or auto loans. The cost of attendance at college ranks second among sources of personal debt in the US, behind only mortgages. About one-in-five people in their 20s and 30s live with their parents (60 percent of that generation receiving some financial support from them), according to the New York Times, after boomeranging home post-college. High debt and under-employment are making it difficult for young Americans.

That lending has underwritten the growth of colleges, who have consistently and drastically increased tuition costs at a rate faster-than-inflation. The market where Federally-backed loan money is easy for prospective students allows Universities to dictate their price without a huge concern for the market -- taxpayers assume the bulk of the risk, while higher education budgets can expand dramatically.

Assuming Cuban is correct, the bubble will surely pop. The debt burden will get too high, like Icarus soaring too close to the Sun, and students will be wary of buying a degree that may not pay off.

Between 1979 and 2010, the price of a private college education increased 1,000-percent.


According to an Op-Ed in the Wall Street Journal by economists Richard Vedder and Christopher Denhart, just 1% of taxi drivers had a college degree in 1970, but more than 15% do today. The advantage in earning potential that college graduates have over those without degrees is still there, but it has declined significantly from its peak.

At the same time, workers in skilled trades like plumbing, electrical and HVAC are becoming highly sought-after, and earning potential for those trades is growing.

Those factors are what could lead to a burst bubble, as teens and their parents become wary of taking on extreme debt, especially if the economic advantage to be gained is more moderate.

Meanwhile, once the bubble bursts, American colleges and universities will likely be forced into austerity when looking at their budget. For many schools, those cuts will include some portion of the athletics largesse that we are witnessing today. When that happens, the landscape of college athletics could shift in a completely different direction from the high-flying times we have witnessed recently.

About the Bubble

"It's inevitable at some point there will be a cap on student loan guarantees," Cuban said in an Inc. Magazine interview. "And when that happens you're going to see a repeat of what we saw in the housing market. When easy credit for buying or flipping a house disappeared we saw a collapse in the price housing, and we're going to see that same collapse in the price of student tuition, and that's going to lead to colleges going out of business."

In the housing market, low interest rates and easy loans encouraged a flurry of real estate buying. Home ownership rose, but the risk levels of the financial marketplace rose with them -- rates were so low that even bad credit risks (subprime) were able to secure loans and the Federal Housing Administration and Freddie Mac facilitated that sub-prime lending. Similarly, lenders have freely issued loans backed by the Federal Stafford and Perkins programs.

Between 1979 and 2010, the price of a private college education increased 1,000-percent. During the same span, the price of homes increased a comparably-paltry 400-percent, while all commodities (an approximation for the rate of inflation) rose around 280-percent. As the cost of education skyrocketed, the demand for post-secondary programs also increased -- allowing schools to continue to increase their revenues through tuition increases.

How many of those 2,870 4-year colleges and universities go out of business (as Cuban predicted) is a question that is difficult to answer. It won't be Harvard, and it probably won't be your large flagship state universities who will turn to state subsidies and federal grants to ease the budget-crunches that such a collapse may cause. The schools that will feel the greatest pinch will be the smaller private schools that don't have a massive endowment like Harvard.

About 79 schools have endowments eclipsing $1 billion, including a few state school systems like the University of Texas, University of California, Penn State and Purdue, among others. The rest are largely among the most elite of private Universities and Liberal Arts Colleges.

Villanova University, for example, reports a total annual operating budget of $352 million -- and that doesn't include the costs of construction projects and other one-off expenditures that the university makes. According to Moody's, 83% of the school's operating revenue is derived from tuition and fees paid by students, and the growth of that revenue source has slowed significantly, showing no real growth (after discounting) between 2009 and 2012. Law school enrollment has declined, but online graduate programs have offset that decline in recent years. Just 6% of the operating budget at Villanova is income from it's current $425 million endowment. Villanova also carries $231.8 million in debt and is planning to take on another $150 million in debt as part of the main lot construction project.

Essentially, it takes multiple billions in an investment fund for a small, private university to be able to truly survive off of an endowment alone in the 21st century. Only 2.8% of America's 4-year institutions have reported endowment funds of $1 billion or more, so the vast majority of the 2,192 private schools will be in danger of financial crisis if the bottom were to fall out of the tuition market.

With less revenue from tuition, schools will look for ways to cut spending. This is already the case at many smaller schools, where full-time, tenured faculty positions have been phased out in favor of utilizing larger numbers of poorly-paid adjunct professors to teach classes. That cost-cutting has, however, been met by growing expenditures on facilities, athletics and administration -- non-academic staff have accounted for a 28% expansion of the higher education workforce between 2010 and 2012.

At most private schools, student tuition revenue and fees make up the bulk of the universities annual revenue and operating budgets. Small Christian school, Liberty University, for example, bankrolls it's annual operating budget and ongoing facilities construction with over 90,000 online students paying tuition, allowing its expenditures to more-than double over the last decade.

Cutting Athletics

If tuition revenue nose-dives, something has to give. Some of those cushy administrative positions at universities may wind up on the chopping block, but perhaps the first areas to go will be expenses in the athletics departments. The cost of college sports, has risen dramatically in recent years, and while the amount of administrative overhead elsewhere in universities has also increased, the growth of athletic spending has been the most high-profile.

It is also likely the easiest to cut. Non-revenue sports get the axe all the time when schools with disappointing revenues put pressure on universities to add to their subsidies or make tough decisions. That has seen track and field programs cut at Seton Hall and Delaware, for example, and Temple recently cut its offering of sports from 24 to 17 teams.

Under the NCAA's rules, a member who sponsors either football or basketball at the Division I level, must sponsor at least 14 sports at that level in total (7 men's and 7 women's). If a school wants to sponsor football at the FBS level, however, that minimum goes up to 16 sports, each of which could have a six-figure operating budget before scholarship costs are added in.

For the other 92-percent of Division I, athletic subsidies are a way of life


Even the smallest Division I budget requires expenses reaching seven-figures, while most schools competing in the NCAA's top division will have an eight-figure budget for their Athletic Departments. Some, including the University of Texas, have an athletic budget well over $100 million, but the Longhorns are members of an elite group of (maybe) 22 schools whose Athletics Departments have turned a profit.

For the other 92-percent of Division I, athletic subsidies are a way of life -- transferred funds from a university's operating budget or a fee tacked onto student accounts will make up the difference between ticket sales and television money (if there is any) and the cost of operations. Those gaps are easy to fill right now, with students footing the bill by taking out ever-larger student loans, but once the bubble pops, there won't be as much cash to go around.

The first round of cuts will likely see programs with low revenues cut down to bare-minimum standards. Will small schools be able to subsidize even 14 programs without the largesse of student loan-backed tuition increases? If a second round of cuts were to come along, it could be like Godzilla trampled through Division I.

Many less-prominent programs could drop their programs to Division II or III, which have lower expenses and more localized conferences. It is also possible that the NCAA rulebook could see a re-write that decreases the minimum number of sports a school must sponsor to help keep programs afloat.

The quote-unquote Superconferences may not even be immune. While massive television payouts will give those schools a lot of protection, the fact remains that most of their 64 schools still report a loss at the end of the year. Perhaps the saving grace of the power conferences will be their tendency toward public school (and elite private school) membership, where lower tuition prices may keep their enrollments filled.

Though the small private schools and poorer conferences would likely be the hardest hit, everyone is likely to face some cuts if the bubble eventually bursts.

The O'Bannon Effect

With the trial in O'Bannon, Jr. v. National Collegiate Athletic Association having come to a close, it would potentially be foolish not to mention the effect that the landmark case could have on college sports going forward. Though the appeals process could delay a full resolution by years, the trial court ruling could have a profound effect on the economics of college sports.

The case has already challenged presumptions about Title IX's effect -- a federal law that promotes opportunities for women athletes at colleges. Specifically, through a ruling before the trial that noted that the NCAA could enact rules designed to share more licensing revenue with so-called "non-revenue" sports, even if they were also forced to share revenue with athletes.

Should the plaintiffs win, the court will find a valid antitrust complaint against them and NCAA rules that restrict the ability of athletes to receive payment for their name, image and likeness will be effectively eliminated. Should the schools wish to control those rights, athletes would have to be compensated for them by the schools, sharing the licencing revenue and decreasing the war chests that departments build up around their football and men's basketball programs.

With the bubble intact, this could cause a small amount of financial stress for some schools in Division I. For smaller schools, it could cut their revenue down and require a slightly-larger subsidy to their athletics departments from the general budget or student fees.

How much the finances would shift to players is difficult to calculate without a final ruling on the case to provide guidance. However, one study conducted by Roger Noll for the Plaintiffs suggested that a 2009 Michigan basketball player would have made $250,000 under revenue distribution rules similar to ones that are used in professional leagues. That would have cost the Wolverines over $3 million over their existing budget to compensate a 13-man roster.

Depending on the impact of the ruling, even the "Haves" could see their athletic budgets carved up significantly by an academic bubble popping.

The Haves, Have-Nots,  and Have-Nones

Even Division II or III won't be a safe landing spot, spending on athletics at schools in those divisions have been increasing their spending at a high rate as well. Division III schools without football teams had their total athletic expenses double over a five-year period from 2004 to 2009.

There is practically no outside revenue to speak of for these schools' programs, but athletics can still be underwritten by student tuition and fees. Outside of a few elite liberal arts schools, Johns Hopkins, and the members of the UAA conference, you won't find many Division II and III members who can afford to support an athletics program solely on the earnings of their endowments.

While we currently are in an era where the "haves and have-nots" dominate the discussion of NCAA governance, a bursting higher-education bubble could have us talking about the Haves, Have-nots and Have-nones.

Spelman College, a well-known historically black liberal arts women's college in Atlanta has already joined the Have-nones. The college dropped all intercollegiate athletics programs at the end of the 2012-13 academic year, after spending $900,000 in the program's last year to support just 80 athletes -- none of whom had a scholarship -- and costs were likely to increase had the department stuck around.

That won't be the last example if the bubble pops. Tons of schools have plowed tuition and fees proceeds into major athletics growth that would be unsustainable should the gravy-train run out of steam.

Austerity across the NCAA

The SEC, Big Ten, Pacific-12, Big 12 and ACC are likely to be the least-effected. Their members receive 8-figure annual pay-outs from television partners, have access to the biggest bowl games, place a high percentage of members in the NCAA basketball tournaments, and just 11 of their 64 members are private schools.

Most of those 11 private schools have an endowment valued at over $1 billion (the lone exception being University of Miami), and most are relatively elite academic institutions like Duke, Notre Dame, Stanford, and Vanderbilt as well. These private schools may feel a pinch from the bubble bursting and won't be entirely immune to austerity measures like athletics cuts, but the revenues afforded by their status in a power football league should allow them to keep funding their premier programs at a competitive level.


For the other 53 schools, demographics that already skew toward in-state students in the general population may skew a little further toward in-state residents, but as long as state funding isn't revoked or seriously-reduced, they should be slightly more immune than other universities that aren't flagship institutions. They are also some of the most financially-sound athletics departments in Division I -- all of the NCAA's schools that operate without an athletic subsidy or turn a profit department-wide are in this grouping.

Austerity will hit the 64 schools in power conferences, but not nearly as hard as it will hit elsewhere. Schools in leagues like the Atlantic-10 and West Coast Conference could be hit pretty hard, while schools in even smaller leagues like the Metro Atlantic Athletic Conference (MAAC) could be devastated. Those leagues are mostly comprised of smaller, mostly-private schools with small endowments and smaller athletic revenue streams. After the bubble pops, those schools may have to severely discount tuition to maintain enrollment figures, which means a big hit to their revenue.

For a league like the Big East, the picture is a bit hazier. The Big East schools look a lot like some in the other non-FBS leagues in some ways. They are all private schools with endowments ranging from $119 million to a little over $1 billion. The lone 10-figure endowment belongs to Georgetown University, and it more than doubles the next-best bank account -- Villanova's reported $425 million. The Hoyas' savings aren't going to make much difference, however, if the bubble hits them since they report that only 6.7% of their operating budget is funded by proceeds from that endowment.

What the Big East schools have that the other non-FBS schools don't, is a lucrative television contract. It isn't as big as the contracts sported by the football powers, but these schools also don't have big-time football expenses to pay. That revenue source can help to cover the expenses of big time programs, and while austerity may affect department budgets in other ways, the Big East will find it difficult to dial back on the hardwood. If anything, it is the academics, facilities and administrations at these schools where the biggest cuts should come.

The least-fortunate schools will perhaps be forced to downgrade or disband athletics, but a bursting bubble would have less-dramatic effect among the top 2.5% of schools, even if many of them still faced hard times.

Is the bubble real?

As with any academic debate, there are always (at least) two sides to the coin. Some dispute the bubble state,pointing out that college graduates still have better employment statistics than those who did not attend, and earn more than less-educated workers -- but the wage premium isn't as good as it used to be, at least not compared to the price. While a college grad will surely out-earn an unskilled high school graduate, a skilled plumber, electrician, or HVAC technician can earn a salary exceeding what most 22 year-olds with a degree in Philosophy can expect.

Law school enrollments are down significantly in the last few years, and schools are beginning to discount prices significantly -- the average Harvard student on financial aid is paying just $15,550, and Southern Cal undergrads are averaging just $27,500 in tuition, when the list price is $60-grand. Seton Hall has even worked out some merit-based tuition discounts for students, that will have them matching Rutgers' in-state rates for around 16% of freshmen.

Big-time schools with big time bank accounts can afford to do that, the have-nots aren't so flexible.

Soon, the have-nones will begin to emerge from their ranks. College athletics will not be as free-spending across-the-board as it has been, should seismic change be brought on by a deflated education bubble. Some smaller schools will close -- that includes some of the bubbles worst-abusers, the for-profit schools -- others will re-organize their priorities like Spelman.

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