The Role of Debt in Financing Higher Education

This paper examines the use of debt, leverage levels, and cost of debt for US four-year public and private non-profit universities. Universities have become increasingly reliant on debt with issuance amounts increasing from $3 billion in 1985 to more than $50 billion in 2019. We find that public universities have a lower cost of debt than private universities by about 25 basis points. Consistent with this reduced cost of debt, we document a 50 percent increase in leverage for public universities while private universities have experienced a 25 percent decrease in leverage over the last 20 years. We find a one percent increase in the excess issuance cost over the risk-free rate following the decline of the municipal insurance market. We document large increases in the use of taxable debt over time due to the more flexible nature of its use. Lastly, we document the increasing use of debt by US universities has contributed to the increasing cost of higher education. Debt issuances result in no detectable increases in educational quality but are instead directed towards increasing the quality of university amenities. In summary, our results provide context for the increasing use of debt by higher education and its implications for students and other stakeholders.