Coronavirus bursts the US college education bubble

Bubbles are bursting everywhere and America’s most prestigious export — higher education — won’t be immune. Universities are like landlocked cruise ships: places with all-you-can-eat buffets and plenty of beer, but almost no way of social distancing.

Many colleges are considering running online classes into the autumn and beyond. But that requires additional resources that most are ill equipped to afford. Even before coronavirus, 30 per cent of colleges tracked by rating agency Moody’s were running deficits, while 15 per cent of public universities had less than 90 days of cash on hand.

Now, with colleges shuttered, revenues reduced, endowment investments plunging, and the added struggle of shifting from physical to virtual education, Moody’s has downgraded the entire sector to negative from stable. The American Council on Education believes revenues in higher education will decline by $23bn over the next academic year. In one survey this week, 57 per cent of university presidents said they planned to lay off staff. Half said they would merge or eliminate some programmes, while 64 per cent said that long-term financial viability was their most pressing issue. It’s very likely we are about to see the hollowing out of America’s university system.

US universities are world class. But the system as a whole is in trouble. Cost is a big part of the problem. I’ve written many times about the US’s dangerous $2tn student debt load. Soaring tuition fees, worthless degrees and dicey investments made by both universities and the government have become a huge headwind to economic growth and social mobility.

If you don’t believe me, take it from the New York Fed, which two years ago called out student debt and the dysfunctions of higher education as problems for the overall US economy. That’s a sad irony, given that a college degree is supposed to increase wealth and productivity. Unfortunately, the US system of higher education — like healthcare, housing, labour markets and so much else in America today — is bifurcated. Those with fancy brand-name degrees from top schools do great. So do many who attend high-quality, low-cost community and state programmes.

But millions in the middle get neither a cheap nor a useful education. Underemployed and debt laden, they were struggling even before coronavirus struck. One study by the think-tank Demos found that the average student debt burden for a married couple with two four-year degrees was $53,000, and resulted over their lifetimes in an overall wealth loss of $208,000.

Economically, young people have been hit especially hard by the crisis as they do much of the low-paid, high-touch service work that has been shut down. Some 11m college students work: almost three-quarters of them for 20 hours or more a week, and 4.4m full time. Yet few are eligible for federal bailout money.

Colleges, however, will get plenty. Many of the top recipients of federal aid are big state universities, such as the University of California, which incurred $558m of coronavirus-related costs in March alone. But a number of rich Ivy League colleges have received aid, too. Harvard, with its $40bn endowment, was given a nearly $9m CARES grant. It is returning the funds, as are many other top private schools, following public pressure.

They are right to do so. Covid-19 has put moral hazard front and centre on the national agenda. The US cannot have taxpayer-funded bailouts that put big rich companies — or colleges — ahead of those who need help more. We need to focus on the most productive use of funds and worry first about helping the most vulnerable individuals and worthy public institutions.

Still, some schools — particularly second tier private institutions — will go under, as many did in the 1930s Depression. That’s appropriate given the froth in the sector today. As the Roosevelt Institute has outlined, educational institutions have become highly financialised in recent years. Many have engaged in dicey debt deals and complex swaps arrangements that backfired, leaving institutions and students with even more costs.

In that sense, the coronavirus-induced crisis could be a welcome chance to take on some of the problems in US higher education.

As economists from Michael Spence to Joe Stiglitz have shown, a good chunk of the value of a college degree lies in market signalling rather than the acquisition of skills. Moreover, paying $75,000 a year for a private, four-year degree isn’t the only way to learn. My daughter will graduate this spring from Bard High School Early College in Manhattan, a public high school associated with Bard College, where students earn two years of college credits as well as a high-school degree in four years. It’s one of many such “6 in 4” schools, which should become a new national model for secondary education.

We might also look closely at the effects of our pandemic-induced, real-time experiment with online learning. Institutions are under pressure to drop fees for classes conducted virtually. The fees may go back up whenever business might return as usual. But, given the likely decrease in enrolment rates, some may stay down for good. If so, that would be the beginning of some much needed deflation in the price of US higher education.

rana.foroohar@ft.com

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