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Research on financialization has been constrained by limited suitable measures for cases outside of the for-profit sector. Using the case of US higher education, we consider financialization as both increasing reliance on financial investment returns and increasing costs from transactions to acquire capital. We document returns and costs across four types of transactions: (i) revenues from endowment investments, (ii) interest payments on institutional borrowing by colleges, (iii) profits extracted by investors in for-profit colleges and (iv) interest payments on student loan borrowing by households. Estimated annual funding from endowment investments grew from $16 billion in 2003 to $20 billion in 2012. Meanwhile financing costs grew from $21 billion in 2003 to $48 billion in 2012, or from 5 to 9% of the total higher education spending, even as interest rates declined. Increases in financial returns, however, were concentrated at wealthy colleges whereas increases in financing costs tended to outpace returns at poorer institutions. We discuss the implications of the findings for resource allocation, organizational governance and stratification among colleges and households.
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The nancialization of US higher education
Charlie Eaton*, Jacob Habinek, Adam Goldstein, Cyrus Dioun,
Daniela García Santibáñez Godoy, and Robert Osley-Thomas
Department of Sociology, University of California, Berkeley, 410 Barrows Hall, Berkeley, CA
94720-1980, USA
Research on nancialization has been constrained by limited suitable measures for
cases outside of the for-prot sector. Using the case of US higher education, we con-
sider nancialization as both increasing reliance on nancial investment returns and
increasing costs from transactions to acquire capital. We document returns and costs
across four types of transactions: (i) revenues from endowment investments, (ii) inter-
est payments on institutional borrowing by colleges, (iii) prots extracted by investors
in for-prot colleges and (iv) interest payments on student loan borrowing by house-
holds. Estimated annual funding from endowment investments grew from $16 billion
in 2003 to $20 billion in 2012. Meanwhile nancing costs grew from $21 billion in 2003
to $48 billion in 2012, or from 5 to 9% of the total higher education spending, even as
interest rates declined. Increases in nancial returns, however, were concentrated at
wealthy colleges whereas increases in nancing costs tended to outpace returns at
poorer institutions. We discussthe implications of the ndings for resource allocation,
organizational governance and stratication among colleges and households.
Key words: economic sociology, nancialization, education, welfare state, institutional change
JEL classication: I22 Educational Finance; Financial Aid, I23 Higher Education, I24 Education and
Inequality, N2 Financial Markets and Institutions
1. Introduction
Financialization reshapes economic life in industrialized societies by extending the reach of
nancial markets, logics, and actors into new and varied domains (Epstein, 2005;
Krippner, 2011;van der Zwan, 2014). It is well documented that returns on nancial invest-
ments now account for an increasing share of both corporate and individual incomes
(Krippner, 2005,2011;Orhangazi, 2008;Nau, 2013). Other studies detail the growing
role of nance in the management of corporations (Fligstein, 1993,2001;Zorn et al.,
2005), municipalities (Pacewicz, 2013b) and households (Martin, 2002;Langley, 2008;
Socio-Economic Review, 2016, 129
doi: 10.1093/ser/mwv030
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Davis, 2009;Fligstein and Goldstein, 2015). While few areas of industrialized economies and
societies appear untouched, research has been constrained by limited suitable measures to
gauge the extent of nancialization outside of the for-prot sector. This, in turn, limits our
knowledge of nancializations impacts on important social structures, including systems of
social provision that encompass diverse household, non-prot and state institutions.
We address the problem of measuring nancialization beyond the for-prot sector by
asking how the size and distribution of nancial transaction costs and returns have
changed for the US higher education system since the beginning of the twenty-rst century.
Our aims are primarily descriptive. By comprehensively measuring the balance of all major
nancial transaction costs and returns for different types of organizations over time, we can
see both the reach of nancialization and key indications of how it allocates resources within
the eld.
A major contribution of this article is to introduce an original and comprehensive higher
education dataset that we have constructed to implement our novel approach to measuring -
nancialization. The rapid growth of student loan debt in the USA is already well known with
outstanding student loan balances nearly tripling from $364 billion in 2004 to $966 billion in
2012 (Avery and Turner, 2012;Brown et al., 2014, pp. 34; Houle, 2014). By linking annual,
college-level data from multiple surveys from 2003 to 2012, however, we are able to estimate
the total costs and returns for the four most signicant types of higher education nancial trans-
actions: (i) revenues from collegesendowment investment returns, (ii) interest paid on institu-
tional debts by non-prot private and public colleges, (iii) operating prot margins for equity
investors in for-prot colleges and (iv) interest paid on student loan debts by households. The
institution-level structure of our dataset also allows us to provide new details on the distribu-
tion of student loan borrowing and the other major nancial transactions across different types
and wealth strata of colleges in the USA. We are unaware of any other comparable datasets
with comprehensive, institution-level nancial transaction data over time for a eld that encom-
passes state, non-prot, for-prot and household organizations.
Analysing our original dataset, we nd surprisingly large relative growth in the real value
of costs and returns for all four of the major higher education nancial transactions. The size
and distribution of these increases indicates a multifaceted structural transformation in the
nancing of US higher education across all major types and wealth strata of state, non-prot
and for-prot colleges. All told, the combined real costs from interest for institutional debt,
operating margins at for-prots and interest paid on student loans more than doubled from
$21 billion in 2003 to $48 billion in 2012an increase from 5 to 9% of the total higher edu-
cation spending.
Annual funding for university operations from endowments also grew from
$16 billion to $20 billion in 2012 constant dollars.
While the increased costs from nancial transactions were widespread, funding increases
from endowment investments were highly concentrated at a small number of wealthy non-
prot institutions that enrolled relatively few students. Wealthy non-prot institutions also
had the largest increases in interest costs for institutional borrowing, but those borrowing
costs were far outpaced by funding increases from endowment investment returns. In fact,
1 This number is based on the authorsestimate for total spending on higher education by the state,
households and private funders, including money from donors and other sources such research
funding. For a full explanation of how we calculate total US higher education spending, see
Supplementary material, Appendix.
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high levels of institutional borrowing by the wealthiest institutions indirectly helped them to
grow their revenue from endowments by providing funds for capital investments at a lower
interest rate than the average endowment rate of return. On the other hand, less wealthy
state and non-prot colleges tended to use most of their institutional borrowing for capital
projects in areas that generate commercial revenue such as student residential services.
Overall, interest for state and non-protcollegesinstitutional borrowing nearly doubled
from $6 billion to $11 billion. At the same time, for-prot colleges with capital from equity
markets quintupled their annual operating prot margins from $1 billion to $5 billion.
Despite large increases in nancing costs for state, non-prot and for-prot colleges, we
nd that spending on interest for student loans increased much more. Growth in student
loan interest costs was driven by soaring student loan volumes, particularly among students
enrolled at for-prot colleges and at less wealthy private and public institutions. As overall
student loan volumes increased, annual student loan interest payments grew from $13
billion in 2003 to $34 billion in 2012. From 2003 to 2012, however, the lowest levels of
average borrowing by freshmen were at the wealthiest private colleges where average borrow-
ing actually declined.
Our ndings have signicant implications for economic sociology and the sociology of
higher education, laying the ground for future research. By detailing investment revenue for non-
prot endowments and interest costs for state-funded student loans, we show why nancializa-
tion should not be viewed as simply a new regime of prot accumulation (Krippner, 2005;
Orhangazi, 2008;Nau, 2013). Instead, future studies of potential causes of higher education
nancialization could ask about the role of professional projects and social ties between colleges
and the nance sector. In this vein, future research could also ask why different forms of higher
education nancialization have or have not occurred in particular countries outside of the USA.
The article proceeds as follows: in the next section, we explain how ananalysis of nancial
revenues and costs can capture the multifaceted nature of nancialization in which different
actors assume different combinations of roles in nancial transactions. We then go on to de-
scribe the sources and measures used in our original dataset. The following four sections de-
scribe the changes in nancial returns and the three main nancing costs in turn. Where
relevant, we disaggregate different trends across endowment wealth strata and college type.
We conclude by further discussing the implications of our ndings for future research on -
nancialization and higher education in the USA and elsewhere.
2. Financialization and higher education
At the most basic level, nancialization is the increasing use of nancial transactions to allocate
capital. But as actors experience nancialization, they assume different roles in nancial transac-
tions, including (i) that of an investor (Krippner, 2005;Orhangazi, 2008;Nau, 2013), (ii) that of
aborrower(Houle, 2014;Fligstein and Goldstein, 2015) or (iii) that of an investment recipient
(Fligstein, 1993). Individual persons and organizations may operate in one or more of these roles.
In most empirical research on nancialization, the nancial returns to investors overshadow
nancing costs for borrowers and recipients of investment.
By treating nancialization as a
2 For indicators, Krippner uses both measures of prots and corporate cash ow, which is equal to
prots minus depreciation allowances which indicate the amount of capital ex pended to accumulate
the capital that comprises a rmsprots (2005, p. 182).
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pattern of accumulation, this approach highlights prots from nancial transactions both
within and outside the nancial services industry (Arrighi, 1994;Orhangazi, 2008). In the
most thorough such account, Krippner (2005,2011) shows that the share of prots going to
nancial rms increased from between 10 and 20% in the 1950s and 1960sto between 30 and
50% in the early 2000. At the same time, the share of prots at non-nancial rms from inter-
est, capital gains and dividends increased from under 10% in the 1950s to over 40% at the
beginning of the 2000 (Krippner, 2005, p. 185).
Although there now exists a growing number of studies of nancialization beyond the cor-
porate sector (Martin, 2002;Langley, 2008;Davis, 2009;Pacewicz, 2013a,b), quantitative
work has lagged. In large part, this is due to the absence of comparable measures for nan-
cialization besides prot accumulation. We address this problem in existing research by devel-
oping a new approach for measuring nancialization in both the costs and returns incurred by
actors through their different roles in multiple types of nancial transactions.
The US higher education system provides a valuable case for assessing the reach of nan-
cialization as a multi-faceted process. The USA is unusual among national higher education
systems in its high degree of organizationalheterogeneity, including state-owned, private non-
prot and for-prot colleges. With their complex and varied reliance on state, commercial and
investment revenue, educational providers assume varying roles in nancial transactions de-
pending on the colleges ownership form and existing wealth. Despite this organizational di-
versity, there is an exceptional amount of untapped data for the use of nancial transactions
across all types of US colleges. This wealth of data presents us with an opportunity to system-
atically assess the change in the size and distribution of nancial costs and returns within a
hybrid system of social provision that includes both public and private service providers
(Hacker, 2002;Morgan and Campbell, 2011).
2.1 Returns and costs of nancialization
To document the extent of nancialization in a mixed domain of social provision such as higher
education, we adopt a straightforward approach to measuring nancialization across multiple
roles. We replace measures of nancially generated prots with a more general measure of nan-
cially generated revenues, and supplement it with measures of nancing costs stemming from
borrowing and equity investment. This method builds on the existing accumulation approach
by measuring both the share of revenues that are generated from nancial activities, as well as
the share of expenditures that are directed toward nancing costs.
By nancing costs we mean the gross costs associated with acquisition of liquid capital.
Our approach proceeds from the idea that the signicance of nance increases when actors
acquire a greater share of resources from the provision of capital, and when they devote a
greater share of expenditures to the acquisition of capital. Financiers provide recipients
with capital in order to fund a given use (in our case, investments by educational consumers
and educational providers). Such nancing may take the form of debt or equity. In return, -
nanciers seek income from interest, dividends or capital gains. Payments of interest to creditors
and prots to equity investors represent the resulting nancial costs. In the aggregate, nancial
returns and costs can be seen as two sides of the same coin; an increase in nancial prots
implies an increase in nancial costs paid by recipients of capital.
Our approach has several additional advantages for studying nancialization across differ-
ent types of organizations. First, it encompasses a wider array of transactions. For example,
households devote a growing portion of their total educational expenditures to interest
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payments on student loans. As the largest creditor for student loans, the federal government
receives substantial revenue from these payments, but the federal government does not accu-
mulate prots from this income in a way that is commensurable with prots accumulated by
private nanciers. Nevertheless, student loan interest payments provide a useful measure of
nancialization as experienced both by households in a borrowing role and by the government
in a lending role.
Second, our approach is sensitive to the fact that given organizations can operate in more
than one of the roles of investor, borrower or investment. This means that they accrue revenues
from nancial transactions at the same time that they pay nancing costs to acquire capital.
It is important to adopt an analytical approach that is attentive to both sides of this equation.
As we show below,some universities have become simultaneously both increasingly reliant on
nancially generated income from endowments and more indebted, with corresponding in-
creases in the portion of their total expenditures dedicated to servicing these debts. By attend-
ing to the costs and returns from all three of the primary nancial transaction roles, our
approach more fully gauges the extent of nancialization in a given organization or eld.
2.2 Higher education nance in the USA
Scholarship on markets and higher education in the USA has shown that colleges and univer-
sities earn revenue from complex and multi-layered sources, including state subsidies, tuition,
charitable donations, capital gains and commercial activities (Slaughter and Leslie, 1997;
Winston, 1999;Ehrenberg, 2000). The US colleges are commonly grouped into four
sectorsbased on their ownership and highest level of degree offered: (1) public colleges
and universities are state owned and almost never offer less than 4-year degrees, (2) commu-
nity colleges are state owned and offer no higher than 2-year degrees, (3) private colleges are
non-prot and almost never offer less than 4-year degrees and (4) proprietary colleges have
for-prot ownership and vary in offering less than 2-year certicates, 2-year degrees, 4-year
degrees or combinations of all three (Deming et al., 2012). Figure 1shows that full time
equivalent enrolment grew substantially across all four sectors from 1997 to 2012. Degree
programs, research and other activities across all of these diverse public, non-prot and for-
prot organizations require transfers, investment and borrowing transactions among an array
of funders, suppliers and consumers. Accordingly, any account of nancialization in higher
education must take account of its multiple levels and heterogeneous subsectors.
The rise of a market orientation in higher education parallels the decline in direct state ap-
propriations for colleges and universities (Slaughter and Leslie, 1997). State appropriations
and direct federal funding paid for the massive expansion of US higher education from
1962 to 1972 when enrolment tripled from 4 million to 12 million students (Rhoades,
1990, p. 194; Brown-Collier, 1998, p. 270). But most federal funding for undergraduate edu-
cation since the 1970s has been channelled to colleges through markets: the federal govern-
ment has provided funding to students rather than to colleges. Students then choose an
institution to which they will apply federal-aid funds. For most public universities, both the
share of direct funding coming from state governments and the total state funding per student
have also declined since 1990 (Quinterno, 2012;Weerts et al., 2012).
Nearly all USA colleges and universities must generate commercial revenues to fund opera-
tions. But at selective private colleges and universities, education costs have tended to increase
much faster than ination because these schools compete primarily to maximize their prestige
(Winston, 1999;Ehrenberg, 2000). As such, there has been little incentive for selective colleges
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to control costs, absent state intervention. Non-selective public colleges, however, have also
increased tuition as well as room and board costs much faster than the average income or
state-funded grant aid in order to compensate for reductions in federal and state appropria-
tions (Quinterno, 2012;Weerts et al., 2012). Proprietary colleges have meanwhile seized on
federal student-aid programs to increase their prots (Mettler, 2014). Together, these dynam-
ics have increased the costs which colleges pass on to students, even if colleges use state or
charitable resources to subsidize degree programs.
Colleges of all types also make capital investments to remain competitive in these markets
for commercial revenues. Research universities compete for federal and private research
funding, and therefore invest in facilities such as research centres, joint research ventures
and hospitals (Powell and Owen-Smith, 1998;Geiger, 2004,2006). Residential colleges
invest in revenue-generating services and amenities like dormitories, dining halls and
college sports in order to develop new income streams as well as to attract students willing
to pay higher tuition and fees (Slaughter and Leslie, 1997;Armstrong and Hamilton, 2013;
Jacob et al. 2013). Although some states and municipalities issue public bonds on behalf of
schools, especially community colleges, the majority of higher education organizations are re-
sponsible for acquiring most of their own capital to fund infrastructure, facilities and other
Different types of colleges and universities have different institutional origins and assume
different organizational forms (Stevens et al., 2008), with large variations in assets, income
and sources of capital. Four-year public colleges receive support from a mixture of sources:
state appropriations, endowments, student tuition, research funding and auxiliary services
such as dormitories, sports programs and hospitals. In 2012, the 331 public college systems
in the USA enrolled well over 6 million or 41% of all enrolled, full-time equivalent (FTE)
Figure 1. Enrolment by sector.
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Four-year private colleges typically do not receive direct state funding, but other-
wise compete for the same sources of support as public colleges. Private colleges enrolled
over 3 million or 21% of FTE students at 1641 systems or independent institutions. The
2-year community colleges receive state appropriations, but have very limited access to
funding for research and auxiliary services. The 819 community college systems enrolled
over 4 million or 27% of FTE students. Proprietary colleges lack access to many of the nan-
cial channels available to non-prot colleges, but do have access to federally nanced student
loans and equity investment from the stock market or private equity. Proprietary colleges en-
rolled under 2 million or 10% of FTE students at 1320 colleges. Together, these four sectors
enrolled 99% of all FTE students at 2-year or above colleges in 2012.
Consistent with their organizational heterogeneity, colleges have access to different forms
of capital with different types of nancing costs, depending on their sector and the activities
they seek to capitalize. Public, community and private colleges can establish endowments, the
income from which is exempt from taxation. They can also borrow using tax-exempt muni-
cipal bonds, notes, capital leases and commercial paper. These funds pay for capital projects
such as research facilities, hospitals, dormitories and athletic centres. State or local govern-
ments can issue municipal bonds on behalf of public, community or private colleges, but
public and community colleges increasingly issue bonds directly. In either case, colleges
must pay interest for such debts as a nancing cost.
In contrast, proprietary colleges are not eligible to run tax-exempt endowment funds, or to
raise capital through municipal bonds. Instead, proprietary colleges raise capital through
equity markets and corporate borrowing. Proprietary colleges may invest this capital in
capital projects, upgrades or their intensive spending on advertising and marketing. Equity
capital may entail either public stock offerings or investments by private equity rms. The -
nancing cost of raising such capital is the prots that such proprietary colleges earn to satisfy
their equity investors.
As we document below, nancialization has occurred across all four subsectors, but in dif-
ferent ways and to varying extents. One commonality across all four sectors is a growing
burden of educational expenditures on households. With aspirations for the higher wages
and the status promised by a college degree, students and their households have therefore in-
creasingly relied on student loans to pay for rising college costs (Avery and Turner, 2012).
In addition to their other roles, colleges also function as nancial intermediaries by con-
necting student borrowers and nancial lenders. College nancial aid ofces arrange custom,
individualized student aid and loan packages for households to purchase degree programs. In
some cases, particularly in the for-prot sector, colleges have also acted as a private student
loan lender to their own students (Consumer Financial Protection Bureau and US Department
of Education, 2012). Student loan lending by colleges is rare, however, and we are unaware of
any accessible data on the extent of lending by colleges. To the extent that collegespass their
nancial aid administration costs on to students, those costs would be included in the amount
3 We aggregate all data for colleges up to the level of a college system when a college shares any nan-
cial functions like debt issuance with an administrative ofce or parent institution.
4 We do not examine 2-year private colleges because they enrolled just 1% of all FTE students in 2012.
We do, however, include them in calculating enrolments and spending for all higher education at
2-year-and-above colleges.
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borrowed by students. As such, it is appropriate to maintain our focus on the overall amount
of student loan borrowing and the cost of interest for these loans to households.
In borrowing to nance educational costs, households have increasingly borrowed directly
from the federal government, underscoring the important role that the state can play in nan-
cialization as a lender itself. Between 1993 and 2010, households could borrow for higher
education expenses using three main different types of loans: federally funded student
loans, loans funded by private banks but guaranteed by the government Federal Family
Education Loan (FFEL) program, and private student loans issued by banks without a
federal guarantee. However, the US Congress halted the origination of privately funded
FFEL loans in 2010, and lending by banks without a federal guarantee collapsed after the
2008 nancial crisis. As a result, loans funded directly by the federal government have
come to make up nearly 90% of new loan origination since 2010.
While the radical increase in student loan borrowing is well documented, existing scholar-
ship has yet to account for how rising student loan interest and other higher education nance
costs have gured in the overall trajectory of higher education costs. We provide ndings to
that effect below. Before presenting these ndings, however, we will rst explain how we se-
lected appropriate measures in each case. We will also detail how we assembled comprehen-
sive data for those measures.
3. Data and measures
We gauge nancialization in higher education by tracking the use of four key nancial transac-
tions for acquiring and investing capital: (i) investment returns from college endowments, (ii) in-
stitutional borrowing by colleges, (iii) equity investment in for-prot colleges and (iv) student
loan borrowing by student households. Our data includes only those colleges that grant
2-year degrees or higher and are eligible for funding under Title IV of the federal Higher
Education Act.
For this paper, we created a dataset for higher education nancing costs and
related organizational variables based on Integrated Postsecondary Education Data System
(IPEDS) historical data for all such institutions, which we have harmonized with other datasets.
3.1 Financial revenues from endowments
We use data on endowment asset values, returns and funding of university operations for
4-year public and non-prot institutions from both IPEDS (National Center for Education
Statistics, 2014) and NACUBO. As a professional organization for college business and
nance ofcers, NACUBO has collected detailed data on endowment asset levels, investment
returns and spending on college operations from endowment funds (2013). By harmonizing
NACUBO data with IPEDS data, we were able to obtain data for endowment assets for all
years from 2003 for 209 public systems and 871 private systems. This provides us with full
endowment data for 68% of all undergraduate-enrolling public systems. We have the same
coverage for 69% of private systems. This is the most complete dataset for endowment
5 We limit our analysis to only these colleges because this paper relies heavily on data from the US
Department of Educations Integrated Post-Secondary Education Data System (IPEDS), which only col-
lects information for Title IV eligible institutions. Accredited colleges that are less-than-2-year institu-
tions enrolled less than 2% of the 21 million post-secondary students in the USA in 2012, and an even
smaller share of FTE students.
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assets that we know of, and it is likely that many of the institutions for which we lack data do
not actually operate endowments with substantial assets.
We also use NACUBO data on the amount of funding provided byendowments for spend-
ing on university operations and programs every year. This is the best available measure of the
resources that endowments actually provide to colleges for higher education activities.
Measures of allocations for operations from endowments is much better than the amount
of annual investment returns which are extremely volatile, swinging from positive returns
to net losses from 1 year to the next. This measure is also better than rolling multi-year
averages of investment returns because it reects the actual planning and options available
for allocating resources. The number of public, undergraduate-enrolling systems for which
we have data on spending from endowments ranges from 117 in 2003 to 132 in 2012.
Such data for private systems ranges from 377 systems in 2003 to 434 in 2009. For the remain-
ing public and private systems for which we have full endowment asset value data forall years,
we estimate spending from endowments by using the average endowment spending rate for the
institutionssector for the given year. For further details, see Supplementary material,
3.2 Interest costs for institutional debts
For publics and non-prots, we calculated the total annual gross costs of institutional debt
using data from IPEDS. This is measured as the total annual expenditure on interest payments.
The number of public undergraduate-enrolling systems for which such data are available
ranges from 182 or 59% of such systems in 2003 to 211 or 69% in 2012. It is not known
what share of the remaining systems actually issue their own debt as opposed to receiving
capital projects funding nanced by borrowing or appropriations by state governments,
local governments, tribal authorities or by federal appropriations in the case of military insti-
tutions. The number of private undergraduate-enrolling systems for which such dataare avail-
able ranges from 806 or 62% of such systems in 2003 to 850 or 65% in 2012. As in the case of
endowments, we use IPEDS data on total spending by college to calculate spending on interest
for institutional debts as a share of total spending by colleges.
3.3 Equity investment in proprietary colleges
Within the for-prot subsector, equity nancing is the primary means of acquiring capital
investment. Because data on the distributions of prots to investors do not exist, we instead
measure the operating surplus of those proprietary colleges which have received capital
from stock offerings or private equity.
We do so by taking the net revenues from opera-
tions and subtracting the costs of providing services (i.e. instructional spending), as well as
general administrative/overhead costs, depreciation/amortization and marketing costs.
Operating prots are a useful proxy for the nancial costs of using equity capital
because they capture the difference between household and government expenditures on
education, on the one hand, and the costs incurred by the provider rms, on the other
We also account for differences among for-prot colleges across ownership forms. This
is the rst paper to take this factor into account by using data collected by the authors in
6 Since most for-prot colleges do not report any non-operating income, operating prot is synonymous
with EBIT (earnings before interest and taxes).
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order to code the 7000 plus Title IV eligible for-prot colleges from 1997 to 2013 by the
ownership form of each colleges parent company. In doing so, we are able to distinguish
prot growth of for-prot colleges by closely held, publicly traded and private equity -
nanced rms. The aggregate gures reported below represent the sum of rm-level
gures for 28 publicly traded higher education companies from 1997 to 2012,
as well
as 81 college rms owned by private equity rms during the same period (company
prots are only included during years when the company was publicly traded or owned
by private equity).
By comparing operating margins reported in IPEDS with the income sheets of scal
year-end 10-K statements for publicly traded rms, we determined that operating margins re-
ported in IPEDS accurately reect the actual operating margins of for-protcolleges.We
therefore used IPEDS data to calculate comparable operating margin measures for all for-
prot colleges by using revenue and expenditure gures reported in IPEDS.
3.4 Interest costs for student loans
For both federal and private student loans, we provide the rst publicly available estimates of
which we are aware for annual interest paid by the loan type. In doing so, we estimate the
annual nancing costs for households to pay for higher education.
Interest payments on private student loans and Federal Family Education Loans (FFEL),
the largest area of student loan origination prior to 2010, have never been tracked at any
level to our knowledge. To address this inadequacy, we used data on annual student loan ori-
gination by the loan type from the College Board (2013), the annual interest rates for each
student loan type and also the average time in deference and in repayment for student loans
overall to estimate annual interest payments for each student loan cohort by the loan type. For
each year, the total student loan interest payments by loan type are the sum ofpayments across
all cohorts, reported in constant 2012 dollars. The sources for the multiple data points used to
estimate annual interest payments are discussed in detail in Supplementary material,
With the available data, student loan interest payments cannot be disaggregated by a sector
or college. Nor can interest payments across the higher education system be estimated well
prior to 2003. The College Board, however, has published annual totals of all student loan
origination since 1972 and totals for student loan origination by sector since 1993. Because
loan origination levels have been the most decisive factor in student loan interest costs, we use
the College Board data to assess earlier phases in student loan nancialization than the trans-
formation since 2003.
Again for the rst time that we are aware, we calculate annual student loan borrowing by
full-time freshmen by both sector and cross-classications of endowment wealth levels since
2003 (the rst year for which we have adequate endowment data). We were able to do so
having harmonized data from IPEDS and NACUBO.
7 These include American Public Education, Apollo, Bridgepoint, Capella, Career Education Corp.,
Corinthian, DeVry, EDMC, Grand Canyon, ITT, Kaplan (see note 12 below) , Lincoln, National
American University, Strayer and Universal Technical. Most of these publicly traded rms operate mul-
tiple college brands.
8 We matched individual campus records in the IPEDS data by institutional afliation, and subtracted
total expenses from total current funds revenues.
10 C. Eaton et al.
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In the next section, we will describe the size and distribution in the increase of endowment-
funded expenditures as a share of all higher education expenditures. Then, we detail the size
and distribution of increases in spending per student on the three principal nancing costs for
acquiring capital in the US higher education system.
4. College endowments and nancial revenues
Endowments play an increasing role in nancing US higher education. Since the 1980s, more
institutions have sought to build endowments and thereby assume the role of nancial inves-
tors. NACUBO reports show that just 148 undergraduate-enrolling systems reported operat-
ing endowments to NACUBO in 1977 and just 36 of them were public.
By 2009, the number
of public systems reporting endowments had grown to 158, with an increase to 501 for
undergraduate-enrolling systems overall. The total endowment asset values reported by
NACUBO increased 10-fold in 2012 constant dollars from $39.8 billion in 1977 to a high
of $456 billion in 2007. From 2003 to 2012, when more detailed data are available, assets
at public institutions doubled from $61 to $122 billion, while private college endowment
assets grew by 49% from $201 billion to $300 billion, Together with fundraising, investment
returns provided for net growth of both public and private endowments.
4.1 The concentration of endowment assets
Although the use of endowments has diffused to less wealthy colleges, the growth in asset
values has been concentrated disproportionately at the wealthiest institutions (Piketty,
2014, p. 448). Among the nine undergraduate-enrolling private institutions that held more
than 1 billion dollars in endowment assets in 1977, the total endowment assets of more
than quadrupled from $17.2 billion in 1977 to $77.8 billion in 2003, an average of 594 thou-
sand dollars in assets per FTE student. Using more detailed data for years since 2003, we nd
that the exponential growth of endowment assets has continued among the wealthiest institu-
tions. Table 1shows endowment asset values and FTE enrolments of all students at
undergraduate-enrolling public and private 4-year systems by quantiles for endowment
wealth in 2003, 2007 and 2012. The gures in the table are based only on those institutions
that reported endowment asset values in every year, so the trends are not driven by compos-
itional changes in the sample population. All quantiles in the table based on 2003 endowment
asset values.
The increasingly skewed distribution of endowment assets is most apparent when consid-
ered on a per student basis. Public endowments assets per FTE student grew by 73% from
$7600 to $18 800, while private college endowment assets per FTE student grew by 25
percent from $71 300 to $89 500. The weighted mean endowment asset values per student
at public systems between the 50th and 89th percentile was just $13.7 thousand in 2012,
only $3.9 thousand higher than in 2003. In contrast, endowment asset values per student
for the eight private institutions in the 99th percentile were $886 thousand in 2012, $178
thousand higher than 2003 levels. In 2012, these nine institutions controlled 27% of all en-
dowment assets, but enrolled around 1% of FTE students attending public and private
9 At present, the authors lack annual machine-readable data on endowments prior to 2003.
The nancialization of US higher education 11
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4.2 Endowment returns and spending on college operations
As wealthy universities saw their investment assets grow, they also spent increasing amounts
of investment-generated income to fund operations. Concretely, endowment investment
returns provide resources for higher education through annual allocations from endowments
for higher education activities. From 2003 to 2012, themean percentage of endowment assets
allocated for college and university operations ranged from 4 to 5% annuallyamong all public
systems and among private institutions below the 90th percentile of wealth. Average spending
rates from endowments among institutions in the top two quantiles of private institutions
ranged between 4.4 and 6.2%, increasing as endowments reported large losses from the
global nancial crisis in the 2009 scal and academic year.
Given the stratied distribution of nancial assets documented above, we can expect that
the reliance on nancially generated revenues would also be uneven. Figure 2shows the actual
Table 1. Endowment asset measures by sector and percentiles for 2003 endowment wealth
Public Private
2003 Institutions 194 19 2 784 79 8
$29.4 B $34.3 B $21.6 B $39.5 B $84.2 B $80.1 B
Total enrolment 3 748 328 1 220 786 330 124 1 604 254 513 737 113 118
assets per
$7841 $28 134 $65 475 $24 635 $163 855 $707 925
2007 Institutions 194 19 2 784 79 8
$50.8 B $57.9 B $33.7 B $57.5 B $129.4 B $131.4 B
Total enrolment 3 941 821 1 307 892 355 761 1 763 605 549 666 118 225
assets per
$12 879 $44 232 $94 609 $32 628 $235 437 $1 111 215
2012 Institutions 194 19 2 784 79 8
Total endowment
$49.7 B $57.1 B $34. B $50.8 B $113. B $113.8 B
Total enrolment 4 400 779 1 468 703 400 452 1 958 368 597 768 128 440
assets per
$11 304 $38 873 $84 996 $25 930 $189 016 $885 953
Source: IPEDS and NACUBO.
Note: Community-college-only systems, military institutions and institutions that do not enrol undergraduates are
excluded. Percentiles are for institutionsendowment wealth in 2003 and are calculated for each sector separately.
Endowment assets per student are total endowment assets for the quantile over total FTE students for the quantile.
B, billion.
Total endowment assets are in billions.
12 C. Eaton et al.
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spending per student from endowments on college operations by quantiles of 2003 endow-
ment wealth. From 2003 to 2008, spending from endowments per student at private univer-
sities in the 99th percentile increased from $34 900 to $48 100. This represents an increase
from 19.5 to 24.3% of those institutionstotal expenditures. When the global nancial
crisis caused massive losses for these institutions in the fall of 2008, these colleges actually
increased the share of endowment assets spent on operations. Spending from endowments
by the top 1% of colleges reached a new high of $52.3 thousand per FTE student in 2010.
In contrast, nancially generated revenues played a very limited role in funding those in-
stitutions in the bottom 99% of public colleges and those in the bottom 90% of private insti-
tutions. These non-beneciaries of endowments, however, together enrolled 7.9 million or
98% of FTE students at institutions with full endowment data. In short, revenues from nan-
cial channels played a growing role in funding higher education, but this was conned to the
wealthiest institutions.
5. College institutional debt and interest costs
Municipal bonds are the primary instrument by which public and private non-prot colleges
issue debt. Higher education bonds may be issued by states, by local governments orin an
increasing number of casesby higher education institutions themselves. Money raised on
bond markets customarily goes to nance capital improvements, including classroom con-
struction, new dormitories and physical plant maintenance. Bonds may be secured by
pledges ranging from the full faith and credit of the issuing entity to more limited pledges
of state or local appropriations, ad valorem property taxes, or revenues from projects built
using proceeds from the bond.
Figure 2. Spending per student from endowments on college operations by sector and 2003 endowment
wealth quantiles.
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Public, private and community colleges have all taken on increasing amounts of municipal
bond debt since at least 2003. Using IPEDS data, we nd that public and community college
debt more than doubled from $73 billion to $151 billion over the last decade.
IPEDS does
not report debt levels at private colleges before 2010, but in 2012 private college debt stood at
$95 billion. Interest payments on institutional debt are available since 2003 for all college
types; these have nearly doubled from $6 billion to $11 billion.
Average spending on insti-
tutional debt rose faster than enrolments at community, public and private colleges alike, and
spending also grew across all levels of endowment wealth strata, although at much faster rates
for the wealthiest 1% of private colleges.
5.1 The nancing costs of institutional debt
Debt nancing costs have grown across private, public and community colleges. Figure 3
shows the weighted mean spending per student on interest payments by sector. From 2003
to 2012, public collegesannual spending on interest payments per FTE student increased
by 45%, from $519 in 2003 to $750 in 2012. Interest costs per student for private 4-year col-
leges increased 23%, from $1,047 to $1,289. Interest costs per student at community colleges,
however, increased to 76%, from $222 to $390.
These increases in spending on interest are primarily due to increased borrowing. They
cannot be explained by increases in either interest rates or enrolment. According to all avail-
able measures, the total interest payments have increased even as interest rates have fallen.
Figure 3. Spending per student on interest for institutional debt by sector.
10 Comparable historical numbers are not available from private colleges during this period. Data on
debt for private colleges is only available beginning in 2010. In 2012 their debt amounted to an add-
itional $95 billion, up from $91 billion in 2010.
11 Adequate data are not available to measure institutional debt prior to 2003.
14 C. Eaton et al.
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Further, the growth of college and university debt payments has far outpaced growth in en-
rolments across all sectors.
5.2 Institutional debt and endowment assets
Figure 4breaks down interest expenditures by endowment asset quantiles. Interest costs per
student increased by substantially larger amounts at wealthier private and public institutions.
Spending on interest costs as a share of all institutional spending also increased fastest at
wealthy private and public institutions, doubling between 2003 and 2012 for the top percent-
ile of both public and private institutions. This transformation was most dramatic at Harvard,
Princeton and Yale, the three wealthiest private institutions. Spending on interest at these three
institutions increased from 3.0% of all spending in 2003 to 7.0% in 2011 before declining
slightly in 2012 to 6.6%. The interest spending rate increased from 2.3 to 3.3% across all
private institutions in the 99th percentile. The rate increased from 1.1 to 2.4% at the 99th
percentile of public systems for endowment wealth. All other quantiles saw a positive but
smaller change in this rate.
The rapid growth in nancing expenditures at the wealthiest institutions initially appears puz-
zling. These wealthy, high status institutions could have afforded to pay for capital projects with
endowment assets, and enjoyed lower marginal borrowing costs. Endowment investments,
however, yielded higher rates of return than prevailing interest rates for bond debt. So, taking
on debt to fund all kinds of capital projects is much cheaper than dipping into endowments or
donor gifts (Congressional Budget Ofce, 2010). By leveraging their strong credit ratings, wealthy
institutions could use inexpensive debt to effectively maximize their overall nancial returns.
Table 2shows the net balance between funding for university operations from endow-
ments and institutional debt interest costs. This net balance is calculated by simply subtracting
each institutions total interest costs per student from its total spending on college operations
from endowments per student. The 99th percentile of private institutions increased this net
Figure 4. Interest as a share of total institutional spending by sector and 2003 endowment wealth
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balance per student from $30 800 in 2003 to $37 800 in 2012, peaking at $45.8 thousand in
2010. This net balance declined for all other quantiles over the full period.
Wealthier institutions tended to spread borrowing more widely across multiple purposes
including prestige-boosting investments in instruction and research. Among less wealthy
private institutions, however, we can see that the largest and fastest increases in institutional
debt costs were for capital investments in the nancial reporting categories of auxiliary and
student services that include student amenities. Such amenities include dormitories, cafeterias,
stadiums, college athletics and recreation centres.
Figure 5shows that interest costs for the
category including amenities rose faster and more consistently than interest costs for any other
Table 2. Per student balance of spending from endowments and interest costs For institutional
Public Private
2003 $63 $718 $1259 $1100 $6900 $30 887
2004 $66 $826 $1705 $1279 $7385 $32 629
2005 $71 $735 $1419 $1195 $6998 $33 361
2006 $58 $668 $1379 $1227 $6861 $34 642
2007 $19 $753 $1711 $1379 $7837 $41 302
2008 $77 $707 $1386 $1085 $6718 $43 221
2009 $193 $412 $821 $728 $5398 $35 061
2010 $159 $451 $1289 $1107 $6987 $45 770
2011 $132 $650 $1275 $1178 $7622 $42 856
2012 $192 $415 $853 $904 $5968 $37 846
Source: IPEDS and NACUBO.
Note: Community-college-only systems, military institutions and institutions that do not enrol undergraduates are
excluded. Quantiles are for institutions2003 endowment wealth and are calculated for each sector separately. Per
student balance of spending is the total balance of endowment spending minus interest costs for the quantile over
total FTE enrolment for the quantlie.
12 The net balance for 90th to 98th percentile of private institutions declined from $7212 to $6278. The net
balance for public institutions above the 90th percentile and private institutions in the 50th to 89th
percentiles all declined by at least 22.5% but remained positive, having started in 2003 at around
$1000 per student. The net balance between funding from endowments and interest spending was
negative throughout the period for the bottom 90% of public systems and the bottom 50% of
private institutions, declining to less thannegative $209 for the former and negative $139 for the latter.
13 We adopt the same approach here as Jacob et al. in grouping auxiliary services and student services
together as the categories that include amenities spending. The overwhelming majority of spending
on interest for these categories is for auxiliary services. It should be noted that auxiliary services can
include activities that are not generally considered as amenities, such as research parks. The large
shares of interest spending in auxiliary services as less wealthy public and private institutions,
however, suggests that the type of amenities we discuss are at greater play than research park enter-
prises. Student services, on the other hand, can also include spending on improved student academic
and career counselling.
16 C. Eaton et al.
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purposes at private institutions in the bottom 90% of endowment wealth. Interest costs for
amenities as a share of all interest costs increased from 36.2 to 44.3% at institutions in the
former quantile and from 41.7 to 46.0% for the latter quantile.
Comparable data are not
available for public systems prior to 2010. The distribution of interest spending by purpose,
however, is comparable at public institutions in those years for which data are available.
The high level of reported interest spending on auxiliary services indicates that less wealthy
public and private colleges are using institutional debt towards maximizing commercial rev-
enues, while at the wealthiest institutions it was oriented toward maximizing nancial reven-
ues. Scholars have argued that colleges expanded amenities to boost commercial revenue by
attracting more students willing to pay higher tuition and fees (Jacob et al., 2013). In 2003,
Clare Cotton, president of the Association of Independent Colleges and Universities in
Massachusetts at the time, told the New York Times,its exactly the psychology of an
arms race. From the outside it seems totally crazy, but from the inside it feels necessary and
compelling(Winter, 2003). As we see in Figure 5, borrowing for capital investments offered a
potentially potent resource for staying competitive in the college amenities arms race.
Figure 5. Private institutionsspending per student on interest by purpose of debt and percentiles for
endowment wealth.
14 For public systems, data are only available to disaggregate interest spending by purpose from 2010 to
2012. As such, we cannot assess trends in interest spending over time in the case of publics. In all
years for which data are available, however, interest costs for amenities made up the largest area of
average interest costs for public systems in all years acrossall of the quantiles we use for endowment
wealth. The average share of interest spending for amenities purposes at public systems ranged from
46.8 to 48.9% for the 99th percentile, from 52.7 to 54.4% for the 90th to 98th percentiles, and from 35.2 to
36.2% for the bottom 90 percentiles.
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6. Proprietary colleges and prots as the cost of equity investment
The above sections showed how endowment revenues and interest costs have assumed a
greater role within the traditional public and non-prot subsectors. In this section, we focus
on the rapid growth of investor-owned, for-prot colleges as a third form of nancialization
within higher education. Whereas public and non-prot colleges rely on credit and endow-
ment capital, proprietary colleges principally rely on a different type of nancing: equity
capital from investors. The operating prots generated by these institutions to satisfy equity
investors can thus be thought of as the nancing cost for proprietary collegescapitalization.
In this section, we track the for-prot subsectors contribution to higher education nanciali-
zation by estimating the costs of nancing higher education with investorsequity. Specically,
we chart annual net operating prots among those institutions owned by publicly traded and
private equity rms.
6.1. Equity capital and proprietary college growth
As we saw in Section 2.2 and Figure 1, for-prot colleges became the fastest growing type of
higher education institution at the end of the 1990s. IPEDS data show that enrolments at pro-
prietary colleges expanded by 306.5% in 13 years from 429 183 in 2000 to 1.7 million in
2012. For comparison, the public college sector had the next highest growth rate, increasing
by 31.0% from 2000 to 2012.
Small, privately-held proprietary colleges long lled a niche role within the higher educa-
tion ecology. Traditionally, these rms specialized in 1- or 2-year technical and vocational-
training programs. They were typically owned and operated locally. In 1990 there was not
a single publicly-traded higher education rm. During the 1990s, however, proprietary col-
leges attracted growing interest from private nanciers. The Apollo Group, which owns the
University of Phoenix, rst went public in 1991, followed by DeVry in 1994 and
Educational Management Corporation in 1996. Soon, corporate-holding companies and
private equity rms began entering the higher education sector. They often did this by assum-
ing control of existing proprietary or non-prot schools that already possessed an
From 2003 to 2012, the number of for-prot college companies owned by private equity
rms increased from 18 to 61 and the number of publicly traded for-prot college companies
increased from 10 to 21. The number of campuses owned by private equity companies accord-
ingly increased from 84 to 195 and the number of campuses owned by publicly traded for-
prot college companies increased from 237 to 536. Figure 6shows that the radical growth
of the for-prot sector was driven most by publicly traded rms and private rms nanced by
private equity. Enrolment at closely held college rms grew by just 76% from 193 146 in 2000
to 339 843 in 2012. Enrolment at private equity nanced college rms, however, grew by
1035% from 24 492 in 2000 to 277 979 in 2012. Enrolment at publicly traded college
rms increased by 433% from 211 545 in 2000 to 1.1 million in 2012. (A portion of the pub-
licly traded growth was driven by previously private equity nanced college rms that went
public.) By 2011, colleges owned by publicly traded or private equity rms together accounted
for over 75% of enrolments at proprietary colleges.
Investors instituted a scale-based, rapid-growth business model that sought to corral the
maximum number of tuition payers through the doors (or online portals) while maintaining
18 C. Eaton et al.
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minimal marginal costs. The case of Education Management Corporation (EDMC) provides
an illustrative example of this transformation (US Senate Committee on Health Education
Labor and Pensions, 2012). EDMC was founded in 1962, and had long been reputed as
one of the higher quality proprietary college companies. In 2006, EDMC was taken over
by a private equity consortium led by Goldman Sachs along with Providence Capital
Partners and Leeds Capital. Goldman and its partners installed new executives who promptly
reallocated resources from instruction to marketing and recruitment. Total enrolment across
EDMCs brands, which include Argosy University, South University, Brown Mackie College
and the Arts Institutes, more than doubled between 2006 and 2010. By 2011, colleges in
which Goldman Sachs was the dominant owner enrolled over 150 000 students, captured
over $486 million in federal Pell Grant funds, and netted an operating prot of over $501
As we will discuss later, however, enrolments at for-prots have declined since
2011 amid reregulation, lawsuits and a political backlash against perceived predatory
6.2 Measuring proprietary college prots as the cost of equity nancing
Below we estimate the cost of using equity capital to nance higher education expansion by
charting the total annual net operating prots among those institutions owned by publicly
traded and private equity rms.
Figure 7shows the proprietary college net annual operating prots from 2003 to 2012,
expressed in constant (base 2012) dollars. Over the decade, the size of annual net operating
prots increased ve-fold from over one billion dollars in 2003 to just over ve billion dollars
in 2011 before falling back to three billion dollars in 2012 as enrolments failed to keep pace
with expanded capacity.
Figure 6. For-prot enrolment by college ownership form.
15 See EDMC 2012 Annual Report. The private equity consortium reoffered EDMC on the NASDAQ stock
exchange in 2009. As of September 2013 Goldman continued to hold a 43 percent ownership stake.
The nancialization of US higher education 19
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An analysis of income data reveals that the proprietary college industry was characterized
by very high margins: gross margins among the publicly traded rms in this study averaged
55% during the period under study.
This is signicantly higher than the 33% average
gross margin across 99 major industries in the US (standard deviation: 14%; median: 31%).
It is worth noting that the decline in total prots among proprietary schools after 2011
resulted from concerted policy shifts. The entire sector contracted after the Obama adminis-
tration tightened rules for proprietary schools to recruit and enrol federal funding recipients.
The resulting decline in the share of higher education spending that goes to prots for equity
investors represents a real reversal in this form of nancialization. We discussthe role of policy
further in the discussion section below.
7. Student loan debt and interest payments
As colleges increased tuition, room and board costs, they increasingly assumed the role of
student loan broker to arrange nancing for households to pay for these costs. As discussed
at the end of Section 2, the federal government increasingly acted as the direct lender in these
transactions. On the other side of these loan transactions, households increasingly took on the
role of borrower. As a result, household spending on student loan interest payments increased
more persistently than for-protnancing costs or anyof the other higher education nancing
costs that we have examined. In this section, we explain our estimation that household spend-
ing on interest on student loans increased from $14 billion in 2003 to $34 billion in 2012. As a
Figure 7. Operating prots for proprietary colleges.
16 Author calculations using 10-K income statements for publicly traded for-prot colleges.
17 Authorscalculation using industry average margins dataset acquired from Aswath Damodaran
( Gross margins are calculated as EBITDA SG&A/Sales.
20 C. Eaton et al.
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result, we estimate that student loan interest payments increased from 14 to 20% as a share of
all household spending on higher education.
7.1 Increased student loan borrowing as the driver of student loan interest
Figure 8shows that student loan borrowing per FTE student
increased across all sectors after
2002. The average borrowing began to increase 2 years earlier at for-prots, however, and
borrowing increased most at for-prots and non-prot private colleges. Increased borrowing
at for-prots and non-prot privates widened a disparity over public institutions.
For the years since 2003, we can disaggregate average borrowing per full-time freshman
student (this IPEDS measure does not include borrowing by parents which is included in
Figure 8) by quantiles for public and private collegesendowment wealth (see Figure 9). When
we do so, we see a widening gap between low student loan burdens at the wealthiest private in-
stitutions and greater borrowing across other institutions. Average annual freshman borrowing
actually declined at private colleges in the 99th percentile for endowment wealth, from $1601per
student (not borrower) in 2003 to $1082 in 2012. The highest levels of student loan borrowing
occurred in the bottom 89% of private institutions where average borrowing per student in-
creased from under $3549 to more than $5110. The increase in borrowing was more uniform
across public systems where average borrowing increased across all endowment wealth quantiles
but also increased most at systems in the bottom 89% for endowment wealth.
Figure 8. Annual student loan origination per FTE student.
18 We estimate total household spending on higher education by adding total household spending on
student loan interest to total household spending on tuition and fees from IPEDS. We do not include
spending on room and board in this estimate because we lack adequate data.
19 These gures are per FTE student, not per borrower, because aggregate borrowing amounts are
available by sector for the full time series fromthe College Board but aggregate numbers of borrowers
are not.
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7.2 Increasing student loan interest spending
These dramatic increases in borrowing have led to large increases in household spending on
interest for student loans. Figure 10 shows the total annual estimated interest costs borne by
households for student loans, broken down by loan type. Our analysis includes all federal
loans and non-federal loans except for the small federal Perkins loan program. Shifts in the
mix of loan costs over time reect changes in their relative interest rates, as well as changes
in their relative volume of origination.
The dotted line in Figure 10 shows that spending on interest increased from 14 to 20% as a
share of total household spending on higher education.
The radical jump in interest as a
share of household spending occurred entirely from 2004 to 2007 and reects a lagged in-
crease in loan repayment after the counter cyclical surge in student loan borrowing during
the 2001 recession. Repayment of federal student loans, however, does not begin until the
end of a sixth month grace period after higher education enrolment ends for a borrower.
As such, borrowers who are just entering a 4-year degree program may go 4 years or more
before entering repayment. Because our estimates end in 2012, they do not include the
surge in student loan interest payments that we should expect from surges in borrowing
since 2007.
Figure 9. Borrowing per full-time freshman bachelor degree student by sector and endowment wealth
20 The share of payments due to subsidized Stafford loans declined after 2008 because the federal gov-
ernment reduced the interest rate for these loans. So, even though origination of subsidized Stafford
loans continued to grow, total annual interest costs for these loans actually decreased. Interest rates
for other federal loan types remained steady for new cohorts while the total origination of all federal
loan types increased in real dollars.
21 Ibid.
22 C. Eaton et al.
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The case of federal student loans reinforces how examining nancing costs can reveal
forms of nancialization that are invisible using prot-accumulating measures. The federal
government terminated the Federal Family Education Loan (FFEL) loan program for guaran-
teeing federal loans that private banks fund in exchange for prots on interest. So, while out-
standing FFEL loan debt remained at $423 billion in 2013, no new FFEL loans have been
issued since 2010. In addition, private loan issuance by banks without federal backing col-
lapsed after the 2008 nancial crisis to just $6 billion a year or less than 5% of all new
student loan origination (Consumer Financial Protection Bureau and US Department of
Education, 2012, p. 3). Instead, student loans funded directly by the federal government
have become overwhelmingly the largest source of lending with more than $617 billion in out-
standing loans by 2013 when overall student debt topped $1 trillion (Congressional Budget
Ofce, 2013). Yet neither federal student loan nancing costs nor federal government reven-
ues from student loans appear in traditional measures of prot accumulation from nancial
8. Quantifying the costs of higher education nancialization
This article has shown that nancialization has been multifaceted for US higher education as a
hybrid eld of social provision that includes for-prot, non-prot and public organizations.
We have thus far detailed how revenue and costs from nancial transactions tended to change
according to the ownership forms and wealth strata of the colleges involved. Now we can
quantify the total economic costs of increasing reliance on all four of the key higher education
nancial transactions together. We can also compare the aggregate returns and costs from
each transaction type. In doing so, we will show that rising nance costs far surpassed
Figure 10. Interest payments on student loans by loan type and interest as a share of total household
college spending.
The nancialization of US higher education 23
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increases in nancial returns. We also nd that the costs of nancial transactions increased
much more for households than for colleges.
Figure 11 compares the relative growth in total real per student expenditure with growth in
each of the three costs of nancial transactions that we discussed above. From 2003 to 2012
these costs increased on a per student basis while overall spending on higher education per
student remained at. Together, annual higher education nancing costs increased from
$21 to $48 billion. Financing costs across all years totalled just over $350 billion. While
this shift was large, it was neither uniform nor linear for all three of the principal higher edu-
cation nancing costs.
Interest spending per student for collegesinstitutional borrowing increased steadily and
throughout public, private and community colleges. When measured per student for all
FTE students, these costs increased by 40% from $476 in 2003 to $668 in 2012. (This meas-
urement differs slightly from those reported in Section 5 which measured per student increases
by enrolment at only those colleges reporting institutional interest costs. See Supplementary
material, Appendix for further details). In contrast, prots per student for proprietary colleges
nanced with equity capital increased radically by 162% from 2003 to 2011 before collapsing
(again, we measure this cost per student for all US students, not just those enrolled at propri-
etary collegesthis represents how the relative growth in scale of the proprietarysector affects
overall costs for the entire higher education system). Average education loan interest costs per
student saw the largest persistent increase of 90% from 2003 to 2012.
The turn to nance also provided growing resources for higher education through returns
on endowment investments. Annual spending from endowments increased from $16 to $20
billion. We estimate that collegesspent $188 billion from endowment-generated revenue
Figure 11. Change in higher education costs per FTE student since 2003.
24 C. Eaton et al.
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during our period.
However, this gure is considerably lower than the $350 billion in nan-
cing costs that we have estimated. Moreover, nancial revenues from endowments have been
concentrated in a small fraction of the overall higher education system. As a result, spending
from endowments remained essentially at as a share of all university spending at 4%. In con-
trast, the costs of the three other nancial transactions increased from 5 to 9% as a share of all
higher education expenditures.
The above comparisons show that nancialization has manifested itself more broadly in
the increasing share of higher education expenditures that go to nancing costs, which in-
creased from 5 to 9%. In a sense, one could say that colleges beneted most broadly from -
nancialization through the use of student loans to pay for increasing tuition and student
services costs. This use of nancial transactions, however, came at a radically increased
expense to households. In some instances, this offset state funding reductions. In comparison
to nancing arrangements that rely more on direct state appropriations funded by tax revenue;
however, it is fair to say that nancialization drained more resources from higher education
than it generated for the sector.
9. Conclusions
Our study holds implications for both economic sociology and the sociology of higher
education. By adopting new conceptualizations and measurement strategies, we bridge
accumulation-based perspectives (Arrighi, 1994;Krippner, 2011) with the need to consider
the different nancial transaction roles assumed by the broader array of actors who populate
hybrid arenas of publicprivate social provision (van der Zwan, 2014). Using this framework,
we have documented the growing role of nance across the heterogeneous subsectors of US
higher education: traditional public and non-prot educational providers have come to rely
more heavily on nancially mediated ows of investment revenue and debt-funded capital.
Meanwhile, equity capital fuelled the growth of an explicitly nancialized subsector of for-
prot providers. Finally, educational consumers have been saddled with growing interest pay-
ments as debt balances grew.
Although nanciers have proted enormously from the increasing the use of credit instru-
ments, the nancialization of higher education cannot be reduced to prot accumulation or
rent extraction. Nor is the process of nancialization reducible to privatization of public pro-
vision. In fact the state has been one of the main participants in the transformation we de-
scribe. Before 2010, the majority of student loans were privately nanced at least in part.
Now, the federal government directly nances and administers more than 90% of US
student loans, and it is the largest recipient of interest income from student loan payments.
It is a testimony to the active role of the state in nancialization that the US Department of
Education has been one of the fastest growing consumer creditors in the US since 2010.
This transformation of student lending underscores the growing role of nancial funding me-
chanisms even for redistributive social policies (Krippner, 2011;Quinn, 2012).
Our ndings raise many questions and open several lines of future research. First, we have
deliberately said little about the causes of the trends documented above. Why have colleges
22 This number is higher than the sum of endowment spending reported earlier because we include
here estimated spending based on average annual endowment spending rates by sector for those
systems and institutions that did not report annual spending rates.
The nancialization of US higher education 25
by guest on February 11, 2016 from
increasingly taken on the roles of borrower, investor or both? Organizational studies might
examine how the adoption of nancialized practices and strategies is embedded in particular
networks, professional projects and conceptions of control. For instance, we have some evi-
dence from case studies that nancialized strategies were transmitted through networks and
board interlocks between investment banks, at least at the University of California (Eaton
et al., 2013). Future work might probe the migration of personnel from nancial rms to
other elds.
Our ndings also raise a variety of further questions about the broader consequences of
nancialization for households, universities and social stratication. Studies suggest that -
nancialization in the private sector has shifted organizational power and governance, heigh-
tened stratication and allocated resources away from productive investments (Orhangazi,
2008;Tomaskovic-Devey and Lin, 2011;Goldstein, 2012;Lin and Tomaskovic-Devey,
2013). To what extent have comparable consequences been felt in higher education? How
does nancialization affect educational outcomes and educational stratication, either by re-
orienting organizational priorities or redistributing resources?
We might expect the effectsto be especially pronounced within the for-prot sector, where
nancialization entails direct organizational control over educational providers. As Wall
Street took over for-prots, investors demanded higher returns, which shifted resources
from instruction to recruitment (US Senate Committee on Health Education Labor and
Pensions, 2012). We have also shown that studentsaverage student loan borrowing increased
fastest and to the highest levels at for-prots. Yet for-prots and the poorest public institutions
disproportionately enrol minorities and students from lower social class backgrounds.
Together, these aggregate facts suggest that the nancialization of higher education may
play a signicant direct role in exacerbating educational and economic stratication. Future
research should explore this possibility using household-level data and plausible counter-
factual conditions.
We can also expect signicant (though perhaps less dramatic) effects among public and
non-prot institutions. As shown above, borrowed capital has disproportionately funded in-
vestments in non-instructional commercial activities, including amenities. Scholars have
tended to explain the trend towards amenities spending as a marketing tactic to attract tuition-
paying students (Armstrong and Hamilton, 2013;Jacob et al., 2013). However, the shifting
relationship between universities and nancial markets may also play an independent role.
Resource-dependence theory suggests that the power of nancial managers and experts
within universities should increase as their organizations become more dependent on
capital markets. The need to appease capital market audiences such as ratings agencies
pushes organizations to have to focus more on revenues in order to continue accessing
low-cost capital. Moodys ratings methodology, for example, accounts for a higher education
institutionspricing powerin terms of high student demand and statutory exibility to in-
crease tuition, its operational performancein terms of the diversity of its revenue streams
and control over expenditures on faculty, and its capital investmentin facilities that draw
in additional revenues (Moodys Investor Service, 2011). Increasing dependence on nancial
markets may thereby bias resources towards revenue-generating commercial projects and in-
creased student loan origination. In this way, bond markets promote organizational beha-
viours that may be at odds with the goals of cost-efcient social provision in areas like
higher education.
26 C. Eaton et al.
by guest on February 11, 2016 from
A related question is to what extent funding higher education through nancial transac-
tions may exacerbate stratication in resources across institutions (Muller and Shavit, 1998;
Brewer et al., 1999; but for a word of caution, see Gerber and Cheung, 2008)? Our ndings
imply that wealthy institutions seized on the opportunities provided by nancialization by
using debt to effectively bolster investment returns from endowments. In contrast, poorer
public and private institutions were not in a position to offset increasing interest costs from
institutional debts with increased nancial returns from endowments.
Finally, there is a need for cross-national comparative research on the scope and conse-
quences of nancialization in higher education. More than 70 countries are known to have
student loan programs. In contrast to the USA, however, most nations have programs that
are signicantly subsidized to offer low or zero interest rates and multiple provisions for avoid-
ing excessive repayment burdens (Shen and Ziderman, 2009). Under these conditions, student
loan programs may help to increase college attainment by covering tuition or the cost of living
without exposing students to risky credit obligations that may exceed future income benets.
This contrast suggests that cross-national studies will offer insights into how particular forms
of nancial transformations, either through student loans or through capital nancing for
educational institutions, may help or hinder educational policy objectives.
Supplementary material
Supplementary material is available at SOCECO online.
We would like to thank members of the UC Berkeley Center on Culture, Organization, and Politics
seminar for their valuable feedback.
This research was supported by a research gift from the American Federation of Teachers.
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