The Higher Education Bubble (Part 3)
Why Business Owners Should Care About the Dangers of Student Loan Defaults
Part 3: Rising tuition caused by easy access to student loans is hurting for-profit schools and small private colleges.
Financially, the "right to college" means the federal government paying tuition to colleges, students signing loan documents promising to pay back the government after they graduate.
We believe that the first place to look for signs of the popping of the higher education bubble will be failures of expensive private colleges in areas with a high cost of living.
Which is, in fact, already happening.
"Students are shopping for a less expensive education as the cost of college has increased and the job market worsened."
Private colleges rely more on tuition income than public colleges. And typically private is more expensive than public as a result (but not always). Most private colleges do not have endowments like Harvard or Emory or Vanderbilt. If enrollment falls, finances get worse, servicing debt is more difficult, and access to credit is more restricted. Cutting tuition and staff layoffs can only go so far before the quality of education and physical plant declines, which then causes further negative effects on enrollment and income.
In the 21st Century, we hear many politicians praise the student loan system because everyone should have a "right" to a college education. This seems like a great idea so long as somebody else is paying for it, yes? The first problem (not discussed here) is that if everyone has something, its value necessarily declines, which has already shown up in the world of higher education.
As we have argued previously, the endgame for the student loan bubble is that when the default rate becomes unacceptably high, the government will make student debt dischargeable in bankruptcy to some extent. And because the federal government makes 85% of all student loans, you, dear taxpayer, will take the hit. The private-label student loan lenders, primarily the big banks such as Wells Fargo, PNC, et al., have around $150 Billion in exposure but a far lower default rate because of, you know, underwriting better than the federal government because they are lending their own money and stuff.
