Study: HBCUs pay more to issue debt, and racial bias could be to blame
- A study forthcoming in the Journal of Financial Economics examines differences in bond debt markups between HBCUs and non-HBCUs. Researchers analyzed data from 4,145 tax-exempt municipal bonds issued by 965 nonprofit four-year colleges over a 23-year period. They found that HBCUs pay, on average, 92 cents out of every $100 raised while non-HBCUs pay 81 cents out of every $100 raised.
- To account for contributing factors such as lower credit quality, the researchers only looked at transactions with AAA ratings, The Atlantic notes. They also controlled for bond amount, bank quality, early payment ability, enrollment, rankings and alumni donations.
- They concluded that the higher premiums HBCUs face appear to “reflect the higher costs of finding willing buyers,” and that racial bias could be to blame. Supporting that notion, the researchers found that HBCUs in the Deep South — where racial bias is strong and historically engrained — paid significantly higher markups than non-HBCUs there.
HBCUs, which were built after the Civil War to educate blacks who were barred from entering other universities, have lacked proper funding since their inception. Today, most of their funding comes from state and federal sources, which have been cutting back on higher education spending. How those dwindling funds have been allocated have been cause for concern.
Earlier this year, Maryland’s four HBCUs were offered $100 million to settle a lawsuit over unequal public funding. Critics have argued that the figure was below what other states have offered in similar circumstances and not enough to repay the damage done by unjust state policies that depressed enrollment numbers.
Taking on debt is one way many HBCUs are addressing the problem of shrinking funding sources in higher education. Yet as this and other studies have suggested, HBCUs face difficulty doing so. Other contributing factors include their dwindling enrollment, smaller endowments relative to their non-HBCU peers and high delinquency rates on federal loan repayment.
The Government Accountability Office recently reported that almost 30% of payments toward the HBCU Capital Financing Program were delinquent last year. Three of the 46 institutions in the program have defaulted. The program had a target delinquency rate of 14%, but its actual delinquency rate was 19% in fiscal years 2012 and 36% in 2013.
The Journal of Financial Economics’ study makes several recommendations to help HBCUs reduce their debt, one of which involves a change in legislation that would eliminate the incentive of investors to hold bonds of local issuers. States could allow interest from out-of-state issuers to be tax-exempt. This would let HBCUs target investors in other states who could purchase HBCU bonds without sacrificing the tax benefit that otherwise only accrue to purchasing home-state university bonds.
- Journal of Financial Economics What's in a (School) Name? Racial Discrimination in Higher Education Bond Markets
- The Atlantic Black Colleges Have to Pay More for Loans Than Other Schools