Higher Debt: Is the student loan industry headed for a meltdown?

View: The optimist

A year ago, Howard Horton co-authored a piece in the Chronicle of Higher Education that sent shivers down the spines of that magazine’s academic readership: “Will Higher Education Be the Next Bubble to Burst?” In the piece Horton and Joseph Marr Cronin, both college administrators, wrote that “with tuitions, fees, and room and board at dozens of colleges now reaching $50,000 a year, the ability to sustain private higher education for all but the very well-heeled is questionable.”

A year later, Horton’s outlook is rosier.

“Looking at how schools have weathered this economic downturn, what I’ve noticed is how resilient they’ve been as an industry vertical,” he says.

“The demand is just there. The tuitions at private colleges have exceeded inflation. The state colleges are bursting at the seams. The need for training and retraining is getting people to go back to school. More people are seeing the college degree as a necessity.”

Horton thought that a recession would be the ultimate test of the higher education industry’s supply-dependent economy. “In the housing market you had less people out there buying. That’s not a parallel in higher education. More people are buying education.”

Horton is the president of the New England College of Business and Finance and an early proponent of online education. Like any other college administrator, he has a fondness for education subsidies, which have only increased during the economic crisis thanks to the efforts of congressional Democrats and President Obama.

“Colleges have found a way to be resilient. They’re still getting a lot of cash from students,” Horton says. “Maximum loan values are up. PLUS loans are up. For the bubble to break the supply of those kinds of dollars would have to diminish.”

This is where Horton deviates from his arguments of a year ago. Higher education isn’t the sub prime industry anymore. Now it’s Detroit. “These subsidies are kind of like propping up the auto industry with cash for clunkers, or the housing industry with cash for first-time buyers. We have this financial aid system that is keeping the system alive,” Horton says.

Horton isn’t moved by the data that says this life support is actually killing us. According to a report published by the Chronicle of Higher Education in July, “one in every five government loans that entered repayment in 1995 has gone into default. The default rate is higher for loans made to students from two-year colleges, and higher still, reaching 40 percent, for those who attended for-profit institutions.”

Defaults, as we saw in the mortgage crisis, are a sure sign that a good is overvalued. Unless, of course, you’re Horton. In which case, there’s a sunny explanation for the record high number of students defaulting on their loans.

“One thing that has to be remembered about the default rate is that it’s demographically sensitive. You’re always going to have a higher default rate at an inner city school than at an Ivy League school,” Horton says. “Does that mean the school isn’t run well? No, it means the student is more at-risk for defaulting but that’s because they’re coming from a more impoverished background. There’s a great need for people to acquire skill and education, and the obstacles associated with that shouldn’t be an automatic reflection on the school.”

Like many online educators, Horton says the easiest way to cut costs is to move away from brick-and-mortar institutions, or for the brick-and-mortar institutions to move online.

“That is a huge cost-savings,” Horton says. “You can accommodate a lot of growth because you don’t have to build infrastructure. That’s a technological way you can adapt.”

And the supply? It’s not going away, even if Gen Y is a little smaller than the previous generation.

“Education is becoming more lifelong. You’re going to see more people doing stuff online. You’re going to see changes in how the academy functions. There’s been talk of three-year degrees and of eliminating 12th grade,” he says.

Those changes wouldn’t mean just asking the academy to adapt to a changing economy, but also asking future students to alter their expectations of college.

“There are colleges that students are competing to get into, and there are colleges that are competing for students. If you’re at that level of the former, you’re going to be fine,” Horton says.  The others, he says, will have to move quickly towards a cheaper model to keep from going under.

“I don’t know that the bubble is going to burst. But definitely it’s going to morph,” Horton adds. “You’re going to see more changes in how colleges deliver their product.”

And little change in how it’s paid for.

NEXT: The Pessismist