Every newspaper and magazine that I read has recently run an article about a looming student loan bubble. The topic also comes up in many articles on the Occupy Wall Street protests, where many members have student loan debt. Many of these articles make comparisons with the housing crisis, and the similarities are indeed striking. In recent years, the number of people taking out loans and the average amount they take out have skyrocketed. Prices have skyrocketed. Defaults have skyrocketed. Low interest rates and government assistance have pushed people to buy more expensive things using loans than they could afford otherwise. Even many of the players involved in the housing disaster are also involved in students loans: Fannie Mae, Freddie Mac, Citibank, Well Fargo, and so forth.
Most of the articles, such as this one, focus on the for-profit segment of the college industry. There are charges that for-profit colleges mislead students about the value of their degrees and about job prospects, gave them the hard sell or even outright lied about loan terms, and pushed to maximize enrollment of students who had little chance of graduating. I have no doubt that many of these charges are true and that closer regulation is needed to prevent such abuses. However, I think that the focus on the for-profit segment causes some people to ignore the possibility that traditional colleges and university are more generally in trouble.
Higher education in general has for decades been driven by the urge to make everything bigger, better, and more expensive. The ratings dominate everything, and to move up in the ratings a university needs to spend more on professors’ salaries, classroom buildings and labs, dorms and cafeterias, libraries, publicity campaigns, outside speakers, technology, and nearly everything else. Hence the pressure has been to spend more and pass the costs on to the customers (i.e. students). Up to now there’s been no shortage of customers willing to pay, partially because they can dodge much of the cost through aid and scholarships and delay much of it through loans.
Now, however, trends are working against big spending. The down economy means people are less willing to spend and there’s less private scholarship money. The federal government has stepped in with more aid, but given the state of the budget and political reality, it can’t continue doing so forever. Budgets at state schools have been cut in many states. Meanwhile the number of college-aged people is declining slightly, and demographic groups that traditionally attend college are declining while those less likely to attend college are increasing. Lastly, people are becoming aware that a college degree doesn’t guarantee a good career the way it used to.
Add it all up and it looks like the higher education industry may need to rethink its model. Most universities are officially not-for-profit, but they do depend heavily on lots of money coming in. If the money stops coming in and they’re not prepared for it, they could be in bad shape.