Student Loan Debt Crisis and the Higher Education Bubble

My partner mentioned to me the other day that U.S. Student Loan debt recently exceeded our Credit Card debt in this country!  This is no small piece of news.  Take a look at this chart (and click on it to go to its source):

This is going to be the first in a series of posts on this issue of the so called “Education Bubble.”   My focus is not going to be on the challenges facing recent graduates with large student loan debt or any national economic impact that could be forthcoming from this next potential bubble burst.

What caught my attention is the confluence of several factors that could lead to the financial collapse of many higher education institutions (or at least going through serious financial convulsions) if the student loan spigot is closed or even tightened.  The criteria for Pell Grants was just tinkered with and hundreds of thousands no longer qualify for that aid – and ultimately colleges that rely on Pell Grant students will lose out on quite a bit of revenue.

Imagine if the government is forced to tighten student loan criteria?  Similar to the current difficulties in obtaining a home mortgage.

Apparently, the soaring of college tuitions in America was at least partially fueled by the government’s willingness to dole out loans.  No wonder institutions ran up the price – you had willing buyers (whether or not the cost of the education will ever be justified) and willing lenders (the government).  Sounds eerily similar to the factors that lead to the home mortgage crisis a few years ago.

If you want to look at some hard numbers and research on the topic, check out this blog post entitled: “Student Loan Crisis: Why So Many Colleges May Fail?:

http://www.senseoncents.com/2012/05/student-loan-crisis-why-so-many-colleges-may-fail/

Much of the underlying research quoted in the post was done in 2009 during the crash.  What the author of the quoted research (Richard Kneedler, a former President of Franklin & Marshall College) examined was the potential weaknesses of the financial make-up of many private colleges at a time period that could have seen widespread collapsing of institutions. While most (if not all) colleges survived the 2009 market turmoil, I suspect that student loan turmoil might hit colleges even harder than the market crash.  Tuition is the life blood of colleges, student loans pay much of it.

Why is a planned giving blog addressing higher education financial stability (of which I know little)?  Endowments is one of the key ingredients for financial stability of this institutions.  While during-life endowment giving does exist, especially through scholarship funds, the vast majority of endowment funds come from bequests.  Therefore, it’s a planned giving issue – as well as national one, too.

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