Reason to Worry

The Chronicle of Higher Education's Paul Basken reports today that student loan providers are worrying about the economic health of colleges. Private colleges that don't have a large endowment and are heavily dependent on tuition for revenue could face problems balancing their budgets in light of the recent tightening in the private student loan market. Students are having a harder time taking out the private student loans needed to pay tuition, meaning that they are likely to move to a lower cost public college, a 2-year institution, or just stop attending altogether. And if small private colleges can't meet their enrollment goals, they may be facing a serious financial problem.

But this situation isn't just the result of another credit crunch in need of a bailout. In fact, private loan debt was too easy to get for a while, meaning that many students who could not afford large, high-priced student loans were getting them anyway. In that sense, the recent restriction of private lending is a correction to the market (much like the reduction in subprime home loans). And, during the time of easy credit, many colleges engaged in some convoluted tuition pricing - raising the sticker price while providing lots of merit aid to recruit high scoring students.

Basken quotes Daniel Meyers, president of First Marblehead, a leading private loan company, as saying that "colleges are experiencing 'this very strange effect' where more than 1,000 institutions are 'all trying to charge $45,000 or $46,000 a year, most very unsuccessfully...and consumers have woken up to be much more discerning people'." More discerning consumers are not a bad thing - before the credit crunch, many students were able to take on a lot of debt for a degree that wasn't worth the price tag.

When we return to more normal credit markets, hopefully both lenders and students will have become more discerning consumers, with lenders doing a better job of assessing student risk factors and the value of degrees, and with students thinking critically about whether a particular college is really worth a $45,000 price tag.