Hurting for Cash, Universities Turn to Bond Markets; Would You Support Them?

Colleges and universities aren’t sure what the future holds. Will they have kids in class, or will everything be online? How many students will come back to online classes, and how many will take a gap year… or two?  And what about those sports?

Don’t forget that colleges make a pretty penny off of television rights for football and basketball. They’ve already missed March Madness, now the football season is in question. Then there’s the possibility of states slashing funding because they have their own revenue problems.

In addition to shaky revenues, the schools must put in place safety protocols for bringing back even some students and faculty.

To deal with it all, some universities are looking for a new source of cash… the bond market. With interest rates at record-low levels, schools can raise money that’s almost free. So far in 2020, universities have raised $11.4 billion in the bond market, which is twice what they raised in all of 2019.

The University of Virginia raised $600 million last month at a modest interest cost of just 2.256%, or less than what the best homeowner would pay for a 30-year mortgage.

J.J. Davis, chief operating officer at the University of Virginia, said:

“At these rates, why wouldn’t you?”

Why not, indeed.

If you’re wondering how this makes sense, that universities losing students, tuition, television fees, and state funding can borrow so cheaply, you only have the Federal Reserve and yourself to thank. The central bank has taken over the bond markets and pushed rates to incredible lows, and now forecasts it will hold rates there for years. This helps borrowers, like universities, pick up cash on the cheap.

As for who pays, well, that’s all of us as savers. By holding rates artificially low through bond-buying programs, the Fed is essentially moving value from all of us, as savers, who would have earned higher rates, to borrowers, like the universities, which don’t have to pay as much as they would have if the Fed was not putting its thumb on the interest rate scales.

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