As Yale Law School students roam the halls of their newly renovated place of study, the mention of the word “debt” makes stomachs churn. The high cost of three years of law school, especially at a prestigious private institution like Yale, forces many law students to take out tens of thousands of dollars in loans.
But while law students have a legitimate concern about the prospect of having to pay off loans well into their 30s, they are not alone in their indebtedness. Yale University, the institution that enables high-profile law careers at a handsome price, also has a debt burden — about $1 billion worth.
A recent surge in capital spending, fueled mainly by extensive renovation projects, has resulted in the University assuming more debt. While current debt levels are by no means alarming, the amount Yale spends annually paying off money it has borrowed has increased, especially with interest rates rising until last month.
As a result, interest and amortization costs are now taking up a slightly larger percentage — over six percent — of the University’s operating budget, doubling since 1995.
Administrators insist the numbers are no reason for concern, but admit that the greater debt burden does, in theory, limit other budget spending, presumably on academic programs.
Yale regularly uses debt, along with annual budget allotments paid for largely by endowment income and alumni donations, to fund its biggest initiatives.
“By any external measures, we do not carry a huge burden of debt,” said Provost Alison Richard, Yale’s chief academic and financial officer. “There isn’t a monster lingering out there.”
In fact, Yale’s debt situation is viewed to be extremely safe — the University has a bond rating of Aaa, the highest possible. Just over a dozen American universities, including Harvard, Princeton and Stanford, have the same rating, said Larry Goldstein, senior vice president of the National Association of College and University Business Officers. The triple-A rating is coveted as it enables universities to issue bonds and to repay them at a lower interest rate.
Figures such as endowment-to-debt ratio and debt-to-total operation ratio are statistics closely examined by ratings issuers like Moody’s. Yale, with its $10 billion endowment, has a 10-to-1 endowment to debt ratio, which is excellent, Richard said.
Even assuming the debt Yale will incur as it finances upcoming renovation projects, the University is well in the clear.
“We haven’t really pushed the limit nor will our [future] projects push us,” Yale budget director Gary Sax said. “When we look out over the decade, our plan calls for $2 billion in terms of spending, and only a third of that will be debt.”
Other Ivy League universities find themselves in the same financially safe, but debt-utilizing situation.
Princeton, which also has a Aaa rating, carried $429 million in debt as of June 30, Princeton treasurer Chris McCrudden said. That school has an operating budget half the size of Yale’s, making its debt-to-operating budget ratio very similar.
But some universities are not as fortunate, and even Ivy League institutions can struggle with debt. The University of Pennsylvania lost its Aaa rating several years ago in the wake of a financial crisis caused by huge losses in its hospital operations. It is now rated A.
The debt issue is becoming more important nationwide for higher education.
“It’s not prevalent yet, but it’s going to become prevalent,” Goldstein said. “Yale is a unique case — it hasn’t borrowed as much as other schools have.”
Richard points to alumni. She has said the more donations received for a particular initiative, the more Yale can spend borrowed money on other projects, or spare itself from having to assume debt in the first place.
In addition to the 6 percent budget allotment to interest and amortization expenses for the fiscal year 2000, 43 percent was spent on employee salaries, 10 percent on employee benefits, 8 percent on student aid, 2 percent on utilities and 30 percent on various other items.