The Rise of the Luxury College Town

Democrats and Republicans agreed on a deal last week to raise the debt ceiling and avoid a default. The agreement comes with a condition that the student loan payment pause end after August 30, 2023. Around 45 million Americans will be making their first payment on their student loans in three years since the Covid pause. Student loans have grown tremendously and are not a small number anymore.

In 2022, the federal student loan portfolio totals more than $1.7 trillion. That’s more than GDP of Spain and half of the GDP of the United Kingdom.

During the past 20 years tuition has skyrocketed. The reason is simple, the federal government guarantees student loans. That means Universities can raise prices and students will automatically receive loans from the federal government to pay for those increased prices. It’s a subsidy without any type of price regulation.

The same thing is happening now in Florida. Governor DeSantis and the legislature passed a law allowing any student to attend a non-public school of their choice and the government will pay for tuition for the school. After the state the law was passed, private schools raised prices.

Prosperity in the Middle of the Country

Whenever you see a list of top towns or cities in America you’ll notice a certain trend. There are huge universities located in these towns that shape the local economy: Boulder, Knoxville, Madison, Ann-Arbor, Princeton, Colorado Springs, Tucson, Austin, Charlottesville, Bloomington, Columbus.

I grew up in Chicago. I remember driving down to visit my friend who attended the University of Illinois at Urbana-Champaign. It’s about a 3 hour drive. I spent most of it traveling through just nothingness or down and out towns. And then all of a sudden a thriving, wealthy small town suddenly appears. I’ve reached the University of Illinois. An oasis.

The British writer Tony Judt had a similar reaction when driving to midwestern universities. This was 2010, there has been a lot of development since then as well in these towns.

I saw the same thing happen in the actual city. The south side of Chicago has poverty rates between 40-60% and crime is very high. It’s one of those areas in America that resemble a third world country than a first world country. However, if you travel to one south side neighborhood called Hyde Park, you’ll find a peaceful, beautiful and wealthy area that rivals the nicest neighborhoods in any American city. Not so Coincidentally, this neighborhood is where the world renowned University of Chicago is located.

A similar pattern is playing out across the country. College towns tend to be “nice” places relative to their surroundings. Sometimes they’re even the nicest small town in the entire state. What do I mean by nice? A place that has a low crime rate, plenty of good jobs, growing, dining options, all the upsides of cities without the downsides with small town charm. These places happen to be a little expensive, although not NYC or California expensive.

This is all new. America has had thriving small towns with industrial bases before. But the college town as wealthy enclave in sea of decline is a new phenomenon. In the 1980s and 1990s, college towns were not generally characterized as particularly wealthy.

The old American economy collapsed amid deindustrialization and the collapse of well-paying blue-collar jobs. In 1975, the percentage of high school graduates enrolled in college was only 51 percent. America shifted to a service economy. Colleges found themselves in the lucky position of being the only places legally allowed to sell credentials that unlocked the gateway to a stable, prosperous life.

How Did They Get so Nice?

A university is now the largest employer in two-thirds of America’s 100 largest cities, and more than a few states. It’s best to think of Universities like the old coal mining or steel plants of previous years. They are large businesses that dominate their region or state.

1) Money. Traditionally, universities in Europe were always inside major cities. In contrast, many American universities settled outside of major cities. Today, a large amount of money is flowing into these universities in remote areas while much of rural America is in decline.

2) The Company Town The college town is essentially a luxury company town that competes with other luxury company towns around the US for customers. This allows them to shape their local environment in a way no other private party or governing body can.

3) What is the future of college towns? What will happen to them when the student loan bubble pops? What about demographic change or if people decide to stop caring about college degrees?

American Towns and Money

For some reason it is easy to see when a town in America is in decline but it’s much harder in Western Europe.

I spent a few years in France and drove around a bunch of small towns in Normandy, but I couldn’t tell if the town was in decline or thriving. It all looked fine to me. Part of it is the public amenities are well maintained, the roads were paved and any crime was rare. Take the town of Lisieux for example, the median salary is around $20,000 and the population isn’t growing. Essentially no growing industries or people moving in. But you wouldn’t know that if you walked around.

In America, if there is no money continuously coming, things just seem to decay. We all know the examples of rust belt towns across the midwest that once housed industry like Gary, Indiana, Harrisburg, Pennsylvania, East St. Louis, Illinois, or Toledo, Ohio. During the last 10 years wide swaths of the Midwest, the Rust Belt and Appalachia lost population

Danville is a city in Illinois only 30 minutes from the University of Illinois. It’s population, and the region around it declined by 10 percent during the last 10 years. It has problems that include no jobs, high crime rate and drug use. Recently the governor congratulated the new casino built in the town. Meanwhile, the only town that grew in southern Illinois is the one where the University of Illinois sits in. A big university is much more lucrative than a casino. Or look at Ithaca, NY. An oasis of wealthy urbanism in the rural, undeveloped, impoverished Southern Tier of NY state. Ithaca is home to Cornell University and Ithaca College.

Sources of Cash Flow

1) Tuition. I already discussed the $1.7 trillion dollars in tuition tied to student loans that is combined with those who pay the full tuition.

2) Grants. Academics and institutions receive grants, usually from the federal government to do research. These grants pay the school, pay the academic salary and also pays for the research itself. Grants at universities totaled $41 billion from the federal government in 2018. Federal agencies themselves gave grant money depending on the topic.

3) Hospitals. In many ways, the modern university system has overtaken the role of the Catholic Church in modern life. The church used to be the repository of knowledge with priests also administering education which the University has taken over in modern life.

The church also built and ran hospitals for centuries. Today, some of the biggest hospital systems in the country are connected to universities. Medical care is an extremely lucrative business in the United States and it provides a lot of jobs. The University of Iowa Hospitals and Clinics (UIHC) in Iowa City is one of the largest employers in the Iowa City area and plays a crucial role in the local economy.

4) Endowments. are another revenue source. Colleges play the stock market and invest in businesses as well. A college endowment refers to an investment portfolio owned by a college or university. The median endowment of public colleges and universities is $35.4 million. Some endowments can be in the billions.

5) Donors. Rich people do all kinds of stuff with their money these days.

One thing they don’t do anymore is become patron of their towns or cities. This is an ancient tradition that went all the way up to the renaissance and even early America with Carnegie. Why do you think Italian towns like Florence look so nice?

Rich people competed with other rich people who lived in cities to see who

could build the most beautiful amenities for the citizens. This includes Artwork. Stadiums. Statues. Gardens. Churches.

They do not give to the beautification toward their cities anymore, unfortunately. But they do give to their alma mater. The rich see their university as an identity marker, not their city.

$500 million to Stony Brook, $100 million to Vanderbilt, $300 million to Harvard, $20 million to Xavier and HBCUs. The list goes on and on.

6) Being a Landlord. Universities own a lot of land, housing, buildings, and real estate. Since college towns are thriving, the value of their real estate portfolio keeps going up.

7) Sports. Sports can be a big moneymaker. Every Saturday thousands of people pack in stadiums to watch college football games. There are television rights and sponsors. Collectively, college sports bring in some $14 billion in revenue for schools annually.

Look at all this funding. How is any other town in America supposed to compete with that?

Competition Between Luxury Company Towns

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