Time to Get the Debt Under Control

For many independent schools, debt service and reduction/elimination of debt are among the greatest challenges, going forward. Many years of seeming prosperity coincided with many years of lending, usually via a bond issue. Schools whose debt relies on a low variable rate of interest are about to find themselves managing far higher costs of debt service, unless they renegotiate the bond issue at a fixed rate. It's a waiting game for the moment: the variable rate is lower than a fixed rate, but at some point in the near future, that variable rate will increase. The key will be to recognize that upward trend, and to move quickly to lock in a fixed rate, if the lender is willing to consider it. Letters of credit that support credit default swaps will also need to be renewed, and that's yet another fee for schools. If credit markets continue to be tight, a number of schools may find themselves in tight spots for years to come.

Debt reduction and elimination will be of capital (pun intended) importance, moving forward. Some schools may find themselves in a position of having to reduce costs everywhere else simply in order to support an aggressive debt reduction strategy. If faculties are seeing their salary increases shrink as a result, you can bet that the Head will be hearing about it! This pressure will necessitate a new degree of "salesmanship" on the part of the Head, who will have to do much more internal marketing than in the past in order to keep the troops happy.

Banks/lenders who tell you that you should simply follow your lengthy amortization schedule are to be ignored. Instead, work with your Finance Committee and Board to implement an aggressive approach that allows you to eliminate your school's debt. As such, you will be able to regain a robust financial life that allows you to focus on the heart of your school's mission: the human element.