Unsustainable universities will all come crashing down

By Noah Ellison
March 2, 2017

This is referring to higher education as an institution.. It is, most likely, going to fall. I would venture to guess it would be after most of the current students graduate, but, particularly at our own institution, the system is already beginning to show cracks. This school is already suffering from dramatically decreased revenue. It is not entirely the fault of the students, but more the fault of reckless federal policy. This is a problem that has been growing for the past 59 years, and it does not appear that it can continue indefinitely.

The first thing that must be understood is that education is a commodity. This is a somewhat controversial fact, although that term seems to be a contradiction. It is, however, self-evident. Education, higher education especially, costs money. This, inherently, makes it a commodity to be bought and sold. The professors employed at any institution have acquired a set of skills from costly training, and they intend to sell that service. Similarly, the organization itself intends to pay them for that service, and then sell it to the students. This makes education an economic enterprise, which subjects it to fundamental trends in economics. A problem arises when a governmental agency begins to supplement the industry.

Now, student loans were first made a federal business when the National Defense Education Act was passed in 1958. Among other provisions, the NDEA established federally-backed student loans. Relative to the modern day, this was small in scale, since it was mostly meant to strengthen the math and science fields. However, this was changed in 1965 by the Higher Education Act. This act greatly increased the applicable field for student loans. This remained rather stagnant for quite a while. In 2010, the Student Aid and Fiscal Responsibility Act was passed. This ended loans that were guaranteed by the government and funded by private investors, and converted them to loans that were solely funded by the Department of Education. In all this time, the cost of college was rising. It had gotten to be, inflation adjusted, over twice as costly as it was in 1980.

Theoretically, this does not seem like a problem. The idea is that with an increased access to higher education, the economy will inevitably grow. However, one must look as this situation from a different lens. For that, it would be useful to look at the 2008 economic crisis.

The Federal Reserve had kept the target federal funds rate low for most of the 2000’s. This means they were pumping liquidity into the banks in the expectation that they would loan out the money. This was technically meant to lower the average interest rate at which banks lend to each other to meet reserve requirements, but it was focused on the hope that it would create economic growth. It did for a short while, but it had an unfortunate side effect. The banks were being incentivized to loan out money at an incredible rate. This means that they were making out loans that they would not make under normal circumstances. The diminished risk of lending was effectively lowering the bar. This led to the bank lending to some private citizens who could never pay the loans back. Eventually, the collection has to come. When the debtors couldn’t pay, the banks were cut off from revenue. This wasn’t helped by the spiking federal funds target rate, which was cutting off the flow of new currency. Inevitably, many banks went under.

The debt problem in higher education is similar. Federal student loans account for the vast majority of student debt. The government is, effectively, subsidizing higher education. The entire system is built on accounts receivable. This would not be so much of a problem if the debts were being paid, but they are rapidly increasing. Many graduates have simply given up on ever paying them. This is due, in no small manner, to the rapidly increasing cost of higher education. This is a direct result of the subsidizing. The prices of a commodity are a component of marketing and accounting. It is determined by what will be affordable to the customer, and how much the company needs to profit. It is determined by risk. The business cannot overprice the commodity because it needs to sell the product at a great enough quantity. It requires all the money it can get, so it is priced to balance profit and affordability. This balance is thrown off when guaranteed money enters the picture. If the affordability, relative to the customer, is no longer an issue, then the risk of overpricing is significantly diminished. The organization is receiving the money anyway.

As the costs grow larger, and the insurmountable nature of incurred debts worsens, there appears a breaking point. At some juncture, the bubble bursts. Compounding this problem, federal student loans cannot be discharged simply through bankruptcy. Even in the event of bankruptcy, the financial shackles will continue. Should there come a point at which graduates default in large numbers, the federal government will be faced with a large loss of revenue. This will ultimately fall on the colleges, as the federal government will likely shrink the program, and college will be seen as a unfavorable venture. Decreased revenue will, most likely, create a drop in prices. However, the expansions these institutions made during the last 58 years will no longer be sustainable. Many colleges will close under the weight. It will all come crashing down. It will become another cautionary tale about creating an industry built on risky, bad, government funded loans.

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