I told you so. In a Ted Talk almost two years ago I told you so. I said that while too much student debt is bad for students, it may be worse for colleges. Events in 2015 are starting to prove me right. Ordinarily I wouldn't be a scold but there still remains a huge misunderstanding of what is happening.
Remember that almost all the money from student loans ends up in the pockets of colleges. To wit, my theory is colleges have grown far too dependent on these loans which have become one of their biggest sources of income. The solvency of colleges depends on their being able to raise tuition each year confident that student's have access to student loans to pay for the increases. The government makes these loans and it has become the company store to which colleges owe their financial life. While worried about their finances, colleges are very certain that the government will always be there for them. But is this confidence warranted? What if student defaults continue to grow to a point where they loan defaults jeopardize the whole program? Or what if the feds start to cut back on financial aid in order to control the deficit?
For proof of colleges' over-dependence on student loans let's look at Sweet Briar and the stock performance of for profit Schools. Sweet Briar was just rescued from the brink and for profit stocks crashed. Why?
Sweet Briar, a small college with a considerable history in Virginia, was unable to hold the line on its tuition discount. Families demanded higher and higher discounts to enroll their children. Paradoxically, each student could have easily borrowed enough to pay Sweet Briar's tuition. But the tuition increases had become too high. Students and their families were no longer willing to borrow the amounts needed to support the increase. Building its finances on student loans instead of on more stable revenues positioned Sweet Briar to fail.
Over the past year the stocks of For Profit Schools fell on average by 60%. At the same time the S&P reached record highs, the government has been leaning on these colleges for the high loan default rates of their students. Indeed, student debt receipts make up close to 80%-90% of the total revenues of these institutions. The market clearly rejects revenue models so dependent on one source of volatile income.
Is this income volatile? It is. Tucked inside the Republican Budget proposal that has been approved by the House is a 15% decline in Pell grants. Any dollar of Pell Grant removed is another dollar to be borrowed. The short sighted policy of the Republicans will cause student loans to be topped up to unsustainable levels. It kicks the can down the road until these extra loans show up in the default column.