The Higher Education Bubble (Part 4)
Why Business Owners Should Care About the Dangers of Student Loan Defaults
Part 4: If institutions fail, the economic impact spreads into many seemingly unaffected areas.
Most student loan defaults occur at for-profit colleges.
A high default rate can affect the for-profit college's students ability to obtain student loans. Many for-profit colleges exist solely because of the easy availability of student loans.
"If an individual school's default rate is higher than 30 percent for three consecutive years, or higher than 40 percent in the latest year, it loses eligibility to participate in certain federal student aid programs."
Most of the defaults are at for-profit colleges, 44%, although for-profit colleges make up only 22% of the total number of colleges. These are primarily community colleges. Here is one example of a college on the brink because of student loan defaults. If significant numbers of students have student loans, such a school would be toast. As would their creditors. And so forth.
Why should business owners care about dangers to the higher education system? Companies in construction, retail, real estate, banking, and any company that derives significant business from education or state and local government should be monitoring closely. As should those who rely on such companies for business.
Consider the construction industry. What happens when construction spending in education declines significantly? Or construction of the apartments, shopping centers, and other projects that cater to the university community, as well as the associated infrastructure.
Consider public and private college administrative employees and teachers. What happens if these people are laid off and no longer contribute to the local economy? Businesses that cater to the student population will not be the only ones affected.
Consider retail goods and services, particularly in the local economy. What happens to local businesses, e.g., banks, apartment owners, grocers, convenience stores, furniture stores, etc.? Declining enrollment won't only hurt pizza joints.
Consider the effect on state and local governments. If public universities have pension or benefit funding shortfalls? The state and taxpayers pick up the tab. The property tax base of the local community, sales tax revenue, etc., could decline, which affects the local government?s ability to provide services and also meet its own pension and benefit (i.e., health insurance) costs.
Consider the effect on banks and bondholders. What happens when banks are saddled with bad loans related to higher education? Particularly local banks who have loaned to local businesses, construction companies, and university employees who have lost their jobs?. Bondholders may suddenly see their supposedly "safe" investments decline in value due to credit downgrades. As the colleges and universities financial health erodes, a credit quality downgrade can cause some institutional investors to sell their bonds solely on account of fund requirements, which may oddly turn the credit downgrade into a self-fulfilling prophecy.
In addition to the damage to the economy from a wave of student loan defaults, the government simply adds the losses from the defaults to the national debt, which further increases the amount of interest paid on the national debt by the taxpayers every year. So if the student defaults, the taxpayers are on the hook. This is similar to Fannie Mae in the housing market but without the facade that FNMA is a separate, private entity.
You should be preparing for the end of the higher education bubble, and contact us if you have any questions or comments.
