Higher Education Policy and Practice

Underwater Mortgages and College Finance

On June 7 2011, the NASDAQ news service reported that nearly 28% of all U.S. mortgages were “underwater” (the principal balance was greater than the market value of the mortgage).  On the same day, the Wall Street Journal (WSJ) stated that 40% of second mortgages were underwater.

Why should college presidents care about these headlines?  In 2008, as the real estate market was sliding downhill for the second straight year, a survey by the Smart Student Guide to Financial Aid showed that 6.5% of the parents of entering first year students applied for home equity loans, and 53.8% were denied.  This suggests that for every 100 students, approximately seven students expected to have home equity loans pay for their education, but the parents of only three of those students actually could get a home equity loan.

The implication is that at least four out of a 100 new students will have greater financial need per the Smart Student guide.  It is also conceivable that the four students who needed extra financial help have increased since 2008 given the NASDAQ and WSJ reports.

Therefore, presidents should have their CFOs and Financial Aid Directors prepare contingency plans for the next year to respond to the greater chance that more students will not be able to fully fund their education from second mortgages.  If the economy continues into a double dip recession, which is not out of the question, maintaining or even increasing enrollment and assuring adequate cash flow from tuition could become even more challenging.

President will need to continue to focus on setting effective tuition rates, financial aid strategies, and cost cutting plans to assure the financial well being of their institution if a double dip recession does occur during the next year.  Stevens Strategy is here to help you develop pricing, financial and operating strategies to respond to the uncertainties in
the economy.  Contact us at:   [email protected].

Michael Townsley, PhD

Senior Consultant, Stevens Strategy

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