The Higher Education Bubble (Part 1)
Why Business Owners Should Care About the Dangers of Student Loan Defaults
Part 1: the student loan system results in colleges and universities taking on more debt.
Each college in the higher education system in the USA operates under the presumption that enrollment will always go up and never go down. What happens when that is no longer the case?
From the National Center for Policy Analysis, Issue Briefs on Education:
"The open spigot of federal money continues to flow, mostly in the form of guaranteed student loans. These institutions are charging higher tuition rates because they can rely on receiving guaranteed money from the government. Because of these practices, student debt has reached [well over] $1 trillion, surpassing credit cards and car loans as the largest source of debt in the country."
Most colleges and universities have surging enrollment and have spent huge sums building new facilities to attract students. All of it was financed by bank and bond debt. Covering this debt required higher tuition costs.
Along comes the federal government, who essentially nationalized student loan financing. College enrollment has increased drastically due to easy access to loans, a stagnant job market, and the belief among many that a college degree is a must. We hear this constantly from politicians and the media, that everyone should have the "right" to a college education.
As demand rises, the colleges are able to raise tuition, and rather than hiring more professors, paying off debt, and increasing scholarships, the exact opposite has happened: more administrative staff, fewer professors, more debt to fund additional capital projects, and fewer scholarships because of the easy access to credit.
"Many universities have experienced a spike in luxury dorms, apartments and condominiums surrounding the campus, as well as restaurants and bars. As a result, the cost of living in college towns has become inflated."
Furthermore, the large expansion of administrative staff means more pension and benefit plans to fund Basically as the amount of money coming into universities via tuition hikes and easy credit is more than offset by long-term obligations for bonds and pensions.
So is declining enrollment truly a concern? We will discuss the current situation with student loan defaults in the next article.
