Thursday, October 30, 2008

Do We Need an Education Bailout?

A new Forbes article "The Coming College Bubble?" details the struggles Universities are suffering:

According to a September 2008 study by the National Association of Independent Colleges and Universities, of the 504 member institutions surveyed, one-third said the credit crunch had hurt enrollment, and about a fifth of respondents said they had fewer returning students than expected. Roughly the same number said they had a smaller incoming freshman class than expected.

As can be seen above, the credit turmoil has caused AAA rated securitized student loans to spike 400 bps from historic levels. For students seen as a greater credit threat (i.e. parents have a less income / they go to a less prestigious school), rates are significantly higher. This threatens to turn college into a luxury item.
But while head counts slide, needs rise. Demand for student aid is up, but charitable donations from foundations and individuals will fall during a downturn. Ditto for investment returns. And thanks to tanking tax revenue, federal aid may take a hit, too. Taken together, many independent institutions start to look vulnerable.
Can we really justify 9%+ student loan rates, while we spend trillions bailing out the financial and manufacturing sectors? Increasing the attractiveness of a higher education (i.e. making it more affordable) when our workforce is expected to shrink over the near term from the slowing economy, may be just what the doctor ordered. In other words, why not subsidize college expenses vs. paying out unemployment?


  1. The problem is not affordable loans, the problem is that easy loans caused a spike in college attendance and allowed colleges to raise prices and borrow cheaply to expand their campuses. NONE of this was based on incomes and affordability. Cheap loans are not the answer. Smaller, more cost effective and CHEAPER TUITIONS are what needs to occur. People need to stop thinking that cheap loans equals more affordable assets. Artificially low interest rates just increasess inflation and causes malinvestment towards non-productive enterprises. This is turn creates an artificial environment that fosters expenses to rise without a subsequent increase in incomes which is required to service the debt.

  2. I can't agree with you more. I never defined my bailout as cheap financing (though it couldn't hurt). I agree that higher education should be an affordable opportunity for all to share in.

  3. Broadening an extending unemployment insurance would serve as an important automatic economic stabilizer, not least because the multiplier is very high. (The same is true for infrastructure spending.) Unemployment insurance has been greatly weakened over the past couple of decades.

    Better to force debt to equity conversions on bank bondholders. Costs nothing to the taxpayer, and means the treasury does not have to go about buying toxic assets to restore bank balance sheets. So far we have seen a lot of bank bondholders bailed out, with the exception of LEH.

    The recent asset bubbles led to the misallocation of capital, and the bailout is just worsening the problem.