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By Dan Reynolds, senior editor of Risk & Insurance®

Parents and students have been watching in fear now for decades as tuition prices rose ever and ever higher. Graduating from a four-year university with a pile of debt has become almost a given.

What we are facing is a "tuition bubble" that must eventually break, said Robert W. Smith, a former in-house counsel at Boston University and a Boston-based partner with LeClairRyan.

Writing in the September issue of the journal of the University Risk Management and Insurance Association, Smith warns that a multitude of risks are set to come tumbling around the ears of university administrators. For too many years, he writes, college managers have sunk hundreds of millions into expensive capital projects in an effort to create institutional success by catering to the demands of American university students.

"When I went to college it was a metal bed frame bolted to a cinderblock wall with a guy maybe four feet across from me with a desk bolted to the wall," Smith said.

Now, at some major schools, public and private, we see three and four-story workout centers, private suites with views of the river Charles, if you are being educated in Boston, and dining halls that are intended to rival some of the better restaurants.

"It is absolutely crazy and the boomer parents were more than happy to pay for this," Smith said.

The risks here are broad and deep. We've seen what happened to personal savings in the past decade. Then came the housing bubble bursting as families couldn't afford to pay their mortgages and defaults battered the banks.

Now community college enrollments are increasing and Smith theorizes that parents unable to pay private college tuitions will allow their children to stay home for two years, pick up credits on the cheap at the community colleges and then transfer to the name school.

As there is an exodus of tuition revenue from the four-year schools, academic programs could be on the chopping block, and that is trouble, said Bonney Hebert, president with Boston-based brokerage and consultancy Academic Risk Resources & Insurance LLC.

"You see more and more people talking about consolidating programs, which is a very scary risk thing," said Hebert.

In the case of a closed or consolidated program, lawsuits can come from both sides. One set of complainants would be disappointed parents and students who had applied and been accepted to a school for a specific program only to see that program chopped. The other pool of petitioners could be tenured professors who find their program shut down and feel they have no other place in the university to teach.

"Shutting down a program is like shutting down a sport, it just doesn't happen very easily," Hebert said.

For now, from what Hebert can see though, the capital projects side of higher learning is on the move in 2011. Her firm, which put together one owner controlled insurance program in higher education in 2010, has already fabricated several in the first half of 2011.

"It is coming back, I see it all over, people are dusting off those construction projects that had been collecting dust since 2008," Hebert said.

Mark Turkalo, a senior vice president and national placement leader in Marsh's education and public entity practice, said he and his colleagues are seeing the same thing.

"I think there has been a slowdown in the education sector at the end of the decade but it sounds to me going forward that there is another uptick," Turkalo said.

If there is any retreat in demand for high-priced education, Turkalo said he hasn't seen it manifest itself yet. "Including the private schools even the ones that are seeing the largest increases, their application rate is still at a record pace," Turkalo said.

September 12, 2011

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