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Friday, December 26, 2008

Yeshivas/Day Schools as Lenders: Yay or Nay?

In a previous post, a commentor asked about the idea of floating a bond to pay for Yeshiva Education, an idea brought up in a shiur. I've heard this idea forwarded before. I believe that under this plan, the Orthodox public would pour money into schools in the present through some type of bond, and be repaid a higher amount years in the future. I can say I would never make such an investment. There are plenty of cities, with large tax bases, already talking about defaulting on bonds because the money just isn't there. I can't even begin to imagine "investing" in a system that is less than transparent. I'll give a donation than you very much.

In a recent post, ProfK forwards a similar idea that she believes could help make Yeshiva Education more affordable, while giving schools a steady stream of income. The idea is for Yeshivas to go into contract with the yeshiva as lender over a longer time period, allowing parents to pay their obligations with far fewer discounts.

I don't quite have articulate thoughts, but I don't care for the idea at all. So, I will just list some of my thoughts and you can articulate your own:

*No Expertise: On top of the fact that I don't see schools as having the expertise and know-how to become a lender [insert bad joke about actual banks who have recently failed this role], more than a few parents have already mortgaged and remortgaged their homes, in addition to running up credit card bills to pay for Yeshiva Tuition. At least the burden of collection is on the bank, rather than the yeshiva, which probably has little ability to enforce payment.

*Credit is Being Used. . . and that is part of the problem: It isn't as if good number of parents are already using credit to pay for Yeshiva Education, via home equity lines of credit and credit cards, as well as personal loans. The overuse of credit has surely done damage to the Orthodox community, by weakening the financial foundations of too many people. And, despite ProfK's statement that "maybe if some parents knew that they were endangering their ownership they might rein in the type of spending that is making it impossible for some of them to meet their tuition bills," the overuse of credit has done nothing of the sort. On the contrary, the overuse of credit has caused hyper consumption as families "put it on the house." My opinion: credit does NOT slow consumption, it speeds it up.

Balance Sheets Stacked with Collectibles: As it stands now, many organizations already have a balance sheet packed with receivables, many of which will never be collected. Giving loans will just pack the balance sheet with even more collectibles (extremely long term collectives, backed by no collateral), many of which will ultimately go uncollected, yet will make many a finance committee member feel that the picture looks reasonable, when it is in fact not.

ProfK writes "Maybe we will have learned something from the sub-prime mortgage lending mess out in the secular world. Schools really cannot afford to be giving away something for nothing. . . . . " I am learning a different lesson: banks, credit card companies, retail stores offering credit, etc, are taking a huge hit and many are no longer going concerns because they lent money to consumers that had no business taking such loans. The overzealous consumers consumed, and the entire country, from the irresponsible to the responsible are taking a hit that will take decades to recover from.

Meanwhile, business expanded their operations (read: spend more and more money) as credit fueled over consumption. But eventually it became obvious that an overextended public could no longer keep spending because there was nothing left to spend, hence a collapse of many large stores. Like I said before, credit is more likely to speed up consumption, rather than slow consumption.

Lessens the Emergency that the Community should be Feeling: I'm not sure we want to make schools feel as if cash will keep pouring in for 30 years, when that is likely the case. I'd rather schools feel the "tuition crisis" IS the emergency that many believe it is and act accordingly. I'm not being particularly articulate, but I do NOT believe that trading in scholarships for loans due years later will help schools face reality head on. Public schools are currently under their own "credit crunch" as voters are no longer passing bond measures for schools. An education system that got overloaded is finally starting to look for real cost savings, rather than ask for more credit.

What I do Support: Minimum Tuitions, Bill for the Future(but don't stick it on the balance sheet as a receivable), Having an outside tzedakah organization deal with scholarships (an idea presented in the comments) as it would likely force greater transparency as an outside organization will have an interest in making sure they are getting bang for their buck.

What I do Not Support: Introducing more avenues to "put it on the house" in the Orthodox community. Frankly, we need to end this obsession with credit and get people to start operating mostly on a cash basis.

Let the comments fly.
In the previous few posts, I've had the opportunity to forward an idea, rather than say why it will never work. So I hope ProfK will forgive me for playing the opposite card today.

19 comments:

JLan said...

I do like most of your suggestions, though I'm not sure that "billing parents for all past scholarships" is quite the way to go. On the other hand, contacting parents, reminding them of the scholarships they received, and asking for donations- which, people should be reminded, are tax deductible- is perfectly reasonable.

ProfK said...

SL,
I've no problem with your disagreeing with me. Perhaps I need to clarify a few points though. The "tuition mortgage" plan might not work for all parents, although it would for some. I did not suggest that the yeshivas themselves become the "mortgage lenders." Clearly a bonafide financial institution would need to be the middleman in the package, and clearly parents would need to qualify for those tuition mortgages. Anyone whose home is already under financial attack because of overusing equity loans would either not qualify or would qualify for a lesser amount towards tuition. I would not be in favor of a tzedaka group being the middle man because far too many of those tzedakas are themselves very poorly run and with no idea of what fiscal responsibility means.

There is also this: having a tuition mortgage program does not mean that no parents will ever qualify for tuition reduction/assistance. In my posting I leave room for parents with catastrophic situations.

Again, the tuition mortgage suggestion was not floated as a "one size fits all" solution to tuition. It may not be possible to find one solution that will cover all the bases, which is what we seem to be trying to find.

Dave said...

I think it's a bad idea, for a number of reasons.

First, I think it masks potential mismanagement. If the pain is spread out over time, there is plenty of room for financial mismanagement in the school to not meet the "pain" threshold for change. Previous comments about tens of thousands of dollars in avoidable bank fees per year come to mind.

Second, I think it is a matter of poor policy to encourage this kind of long term debt. I'll go more into why later.

Third, I don't think the schools will pursue bad debts. Will they go to a Bais Din for an unpaid debt? Will they, if that fails, go to civil courts? Will people with the right yichus be able to skip payments, while others are pursued? Absent a uniform policy on debt, and one that isn't "let it slide", I don't see it being viable.

Debt is a significant issue, in part because people treat debt and spending differently. We have the advantage of modern research, and can see that the human brain reacts differently to increasing debt than it does to spending assets. It is much easier to do the former than the latter, because spending assets actually triggers "pain" activity.

Outside of the field MRI research, I'm able to confirm this in my personal experience. Back when we carried consumer debt, it was easy to add a few things here or there, and just put them on the card. After all, the monthly extra for a few hundred here or a few hundred there really isn't that much.

Now that a purchase on a credit card is invariably followed by a direct payment to the credit card company, out of either the normal budget, or, for something not planned, out of savings, it is a far less easy decision.

One of the signs of communal financial health is the transfer of wealth from generation to generation. If each generation is consuming all of its income (and any inherited wealth), or worse, exceeding its income, then the community gets poorer over time. Encouraging even more debt is not the way to build a stable and financially healthy community.

SephardiLady said...

JLan-I updated the part you are commenting on with links to past posts. You will see eve then I wasn't totally comfortable with the idea of billing for years to come and thought there could be some halachic issues when a bill for $100K show up in the mail. On the other hand, a nice letter reminding parents that they received something of value and that their donation can allow others to continue to receive something of value could be a positive.

I don't have all the answers. But I do feel strongly more and more credit will ultimately hurt, rather than help.

Dave said...

There is a scholarship in memory of a friend of mine who passed away years back.

Each year, we tell the recipient two things.

First, we expect you to take advantage of the opportunity afforded you.

Second, a number of people contributed money to make this possible for you. At some point in the future, we expect your name to be on a contributors list, somewhere, for someone else.

Child Ish Behavior said...

Instead of schools being lenders, have the schools become billboards for advertising. One teacher already has put advertising on his tests to raise money. Imagine how much more money can be made if the school walls were plastered with advertising for all sorts of wonderful corporations.

aml said...

Child Ish- I hope that is a joke?

I mentioned this before in the original posting of this idea... I think this is bad on so many levels and the ones sure to lose out is the school- they'd never collect the debt. But as a general rule, I think we should be encouraging folks to live within their means.

Child Ish Behavior said...

The guy really did it, he sold advertising on his tests that he gave to students. The money made up for the budget cut that took place.

rachel in israel said...

there is an idea that I haven't seen discussed, which is to tie a school (non-profit) with a profit organization. The profit would basically go to the school to make up for what's missing. For example in NY you could open a wedding hall. Logistically you would need of course transparency, a bussinesman in charge of running the for-profit who is completely separate from the school administration. I don't know legally how it would work. I know the Yishuv where I live has a hotel which belongs to the yishuv and the profits go back directly to the yishuv or to the school. I know of another yeshiva here in israel (private) that has a similar arrengment.

SephardiLady said...

ProfK-I was under the impression that you were suggesting the Yeshiva act as the lender. As it stands currently, any parent can go to the bank and seek a personal loan or a home equity line of credit. A parent can also find low rate credit cards and juggle, or look for a loan on prosper to cover their children's private education (I've seen parents doing this).

I can't imagine any bank in today's economy coming in and acting as the middle man between yeshivot and parents for a loan specifically designed to bridge the gap. And as it stands, plenty of parents have already mortgaged the home, ran up the credit cards, and/or taken a personal loan, and it hasn't slowed consumption, nor have we seen the price of education slow.

Personally, I think the Jewish community needs to learn to live on a cash only budget because credit is doing a lot of damage.

SephardiLady said...

rachel-Bais Faiga, the school featured in a recent post, that didn't pay its teachers had a wedding hall that is regularly used. In NY, I believe many schools have wedding halls. Out of town, there aren't as many events requiring a hall.

Many schools already have pre-schools and pre-school should be profitable.

I'm not sure what other businesses can be attached to make up for the budget gaps. Any ideas?

anon426 said...

credit does NOT slow consumption, it speeds it up.

SL you hit the nail on the head with that comment.

Moreover, there is this presumption by borrowers that they will NOT BE LENT money they can't pay back. Even if they feel in their hearts they are being lent money they can't afford to pay back, when an institution lends money they are sending a vote of confidence to the borrower. Even if the borrower knows it is unjustified there is a part of them that can't help feeling "well, they wouldn't lend it to me if they really thought I couldn't pay it back."

It would be no different for borrowers borrowing for their kids' education. The thought makes me shudder.

The "tuition crisis" will continue until

1) Schools cost less (presumably through better management, oversight, etc.)
2) Communities become wealthier (presumably via a plethora of well-paying jobs)

Knowing nothing about how schools run, I really have no clue about how or whether they could be made to run more cheaply.

But it is obvious that there needs to be more money in the community in the form of well-paying jobs. They key to the latter, of course, is good elementary and secondary school education leading to higher education.

It is *astonishing* to me that schools that give short shrift to good secular education don't seem to realize this.

Proud MO said...

One idea I saw for schools is a life insurance policy (a small one) with the school being the beneficiary.
How much does a $50,000 policy cost per month? Not much. Well, every parent takes out a policy for $50,000 with the school being the beneficiary. Down the road, the school starts having an income of hundreds of thousands of dollars per year.
Yes, it's morbid, but it's a good idea!

Dave said...

That is highly unlikely to work.

First, you'd have to make sure that they kept the policy up until they died. So we have a 25 year old couple buying life insurance, and the payoff is (hopefully) 50 or more years away. What happens if they decide, long after their children have finished school, that they need that extra money?

And the cost isn't as cheap as you think. The term life rates would go up as they had to renew when the terms expired, and whole life is more expensive anyway.

Finally, the insurance companies are in the business of making money. The amount of money of all the payees exceeds the expected amount of payouts for the number who will die during that period.

For individuals, life insurance makes excellent sense. You are paying money to mitigate the financial impact to your family of your death (especially your death before you have had the time to build up assets that could support them). But to build a systemic communal "revenue stream" based on life insurance payments isn't going to work -- by definition you'd be better off capturing the revenue stream yourself, unless you think you can outgame the insurance company actuaries.

Anonymous said...

Dave is right. If everyone is buying life insurance and putting the school as the beneficiary, then the only way to win that game would be to take the payment that WOULD have gone to the life insurance company, and instead, send it to the school. You won't beat the actuaries.... some of these folks who work for the mortgage companies can pinpoint the first month you will miss a payment when you sign your loan documents....

SephardiLady said...

I have heard a rumor that Catholic schools have been helped by holding life insurance plans. I wrote about the idea ages ago and found Yeshivat Rambam in Balitmore has some type of program.

anon426-thank you. I have worked with personal budgets both as a friend and as an employee and the more I see, the more I understand the damage that credit does.

Dave said...

There is certainly a place for life insurance in education planning.

For example, parents of a school aged children who want to provide them with a private school education should carry enough life insurance to guarantee that the education will be covered should one parent die (in addition to the insurance to provide for housing, food, etc in the same case).

Thinking said...

Before solutions can be put forth, the problem itself must be identified. Why is there a tuition crisis? Lack of paying parents? Overspending? A combination of the two?
Why is it that if I wanted to open an accounting firm Des Moines, Iowa that could serve 500 clients, I could easily identify the costs in setting up and running the business? Real estate, employees, insurance etc. are all numbers that can be gauged and budgeted appropriately. However, no one could ever tell you what it actually costs to run a school. Sure, schools will tell you what their budget is, but will they provide line by line detail as to how the money is allocated?
So, if we don't know if the issue is lack of revenue or overspending, we can't really say that a "tuition mortgage" is a solution, perhaps it would only further fuel the problem by providing another source of income that can be spent without oversight.

Personally, I am a firm believer in "minimum tuition". After all, everyone is required to educate their children. 25 students x $5K minimum per student = $125,000 per class. Raise another $50,000 through whatever fund raising method works for you and you have $175,000 to run your class. If you can't figure out how to run a class, not a school just one class, for $175,000 find someone who can. 10 periods x $10k per teacher per period = $100K. The other $75K goes to admin, building etc.

Ezzie said...

Agree very much with the post; one thing that seems to have been left out is the serious difficulty schools would have in collecting the money. Unlike most loans, this would presumably not affect one's credit rating or really affect them in any other way; once a parent's child is out of school, they would have no reason to feel obligated to pay it back in the face of other debts. Obviously, this would also be a major issue with parents who are upset with a school for one reason or another.