Our Colleges and Universities Need a Stress Test (Opinion)

Ann McClure's picture
Wednesday, August 1, 2012

Like a thirst-stricken man in the desert, our colleges are desperate for every drop of money they receive from student loans. The government pumps out more and more loans every year, only to see its funds sink into the shifting sands of rising college costs. But factors are already at work that may sharply reduce the flow of loans, leaving colleges unable to fill the huge holes left behind.

It's no secret we're in the midst of a student loan debt crisis. The media has reported extensively on the rise of student loan debt, now totaling a staggering one trillion dollars. But the problem goes much deeper, because colleges have relied too heavily on that same trillion dollars to cover fundamental operating costs, creating an alarming level of dependency.

How dangerous is college dependence on student loans? Nationally, these loans account for more than all of the tuition and fees collected by higher education institutions. Most of our private colleges and universities are tuition-dependent and have small-to-medium endowments, a risky combination that explains their student loan dependence and vulnerability. On the opposite end of the scale, generously-endowed institutions are better positioned to survive a student loan crash, as are low-cost community colleges where students borrow less.

What could cause such a crash? Students are defaulting on college loans in record numbers. The well-publicized average student loan debt of $25,000, combined with the slow economic recovery and poor job market, has resulted in a national student loan default rate of 8.8 percent. In addition, "troubled debt" (loans in danger of default) account for another 20 percent of all student loans.

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