The college bubble is starting to burst

Dependency on student loans is the cause of the problem

This op-ed has been updated with a revision to the initial reference to Hampshire College.

THE FOURTH SHOE has dropped. Hampshire College just joined Wheelock, Mt. Ida, and Newbury College in throwing in the towel, with the school’s announcement that it is seeking a long-term partners to keep it afloat financially and may choose to not enross a first-year class this fall. Closures and mergers are starting to overtake our student loan crisis as the hottest story in higher education. The Massachusetts Board of Higher Education is seeking power to compel all colleges to report their financial condition on a regular basis.

Politicians and policy makers who now see college closures as inevitable are mystified as to why they get little or no warning when a college folds. Yet, Moody’s has downgraded its ratings of the higher education sector two years in a row. Forbes has rated 56 percent of 900 colleges at a C or lower, defining C as a barely passing grade in factors key to financial health.

 

Much of the long-term financial decay of our colleges can be attributed to their dependency on student loans. Most of the $3 trillion in loans issued to students so far has gone to colleges as free money. What became a burden for students became a bubble for colleges. Free money caused the number of colleges to double, enrollment to triple, and tuitions to soar  — but not graduation rates.

Colleges thought that with free money covering a large portion of their tuition increases they could keep raising prices. They were wrong, and after a decade of discounting tuition sharply to attract students, colleges find their net tuitions have remained flat. The definition of a bubble is when an industry cannot sustain exorbitant increases in pricing.

Perhaps unsurprising given our many colleges, Massachusetts has suffered the greatest number of closures and mergers. Higher education is our state’s second largest employment sector. If this trend of college closures continues it will cause deep economic disruption in our state. And what of our reputation after years  claiming that we are number one in the country in educating our young people?

Knowing which colleges are in danger is important. But most important is what we do with that information. We need a state College Financial Review Board that can issue emergency loans – not to save basket cases, but to ensure orderly closures that give students time to find other paths. The board should also play a role in directing healthy mergers or other combinations. By virtue of directing hundreds of millions of dollars in grants and loans to colleges, keeping them afloat, Massachusetts has earned the right and leverage to insert itself into their operations.

Meet the Author
This College Financial Review Board should also join with other states and the federal government to address the student loan crisis that is crushing families nationwide. If the board is constituted now it will benefit from many colleges still in good financial shape, allowing it to focus on those that are struggling. But the longer we wait, the more colleges will fall off the edge.

Bob Hildreth is the founder of the Hildreth Institute, Inversant, and La Vida Scholar – three non-profit organizations with complementary missions to get low-income students to college.