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Winter for Higher-Ed
College Debt Woes Point to Grim Future

Bad news for higher ed: The turmoil affecting the industry has those in the bond market wary of buying from certain kinds of colleges. The WSJ reports:

Moody’s Investors Service Inc. in September warned investors to expect closures at public and not-for-profit colleges to triple by 2017 from an average of five a year over the past decade, concentrated among the smallest schools. Some small schools have experienced several years of shrinking class sizes, which leaves fewer students paying for their relatively high fixed costs, and have lost market share to larger universities, Moody’s said.

Yet as many colleges and universities are eager to tap the bond market to take advantage of low interest rates, bond investors have grown wary of their debt […]

“You can’t just buy bonds from your alma mater anymore, because you might end up getting the short end of the stick,” said Hugh McGuirk, head of the municipal bond team at T. Rowe Price Group Inc. He said his firm is generally avoiding small liberal-arts colleges and is sticking with schools that have national brands and strong student demand, either public or private.

The problems detailed in this article are real and important, but there’s a big one that’s not mentioned: Sooner or later, interest rates will go up generally, and that’s likely to price some colleges out of the bond market completely.

This should remind us that America is locked into an educational model, that, like our health care system, rests on foundations that drive prices up faster than inflation year by year by year. Education is important to Americans, and we do what we can to keep up, but ultimately we need to figure out how to deliver the education we need at a price we can actually pay. Sadly, it remains the case that the people who know the system best are, for the most part, less interested in helping think through and implement creative reform than in perpetuating the privileges that come with their jobs in the current, outdated system.

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  • Jacksonian_Libertarian

    “The problems detailed in this article are real and important, but there’s a big one that’s not mentioned: Sooner or later, interest rates will go up generally, and that’s likely to price some colleges out of the bond market completely.”

    As long as private debt remains so large, the economy will remain in deflation and interest rates can’t rise without cutting off what little lending activity (mostly only turnover to the most creditworthy) remains. Most people don’t realize that debt represents the major part of the Money Supply in our Fractionated Banking System, and that inflation and deflation in the economy are controlled by the “Law of Supply and Demand”. This means we don’t get inflation (falling value of the currency) until the supply exceeds the demand of the economy. And the M3 money supply (which includes debt) hasn’t risen despite the Fed’s increasing the “base money supply” by about $1 Trillion per year for the past 6 years with its program of “Quantitative Easing”. This means that none of that money was used by the economy to increase lending and expand the money supply, and without an increase in supply beyond the demands of the economy there can’t be any inflation. The economy has been trapped in deflationary “Great Depression 2.0” for the last 7 years with no end in sight. It would take a huge forgiveness or default of debts, as happened during and after WWII, to dig American’s out from under this burden.
    Economies naturally rollover into deflation when debts become unsustainable during a period of low inflation. This means the Fed is to blame for our present deflationary economy. Had they prioritized that an annoying inflation which makes debts easier to pay over time, is far preferable to a destructive deflation, which causes business bankruptcies, unemployment, and foreclosures, we would not be suffering now.

  • Dusty Thompson

    The champions of socialism call themselves progressives, but they recommend a system which is characterized by rigid observance of routine and by a resistance to every kind of improvement. They call themselves liberals, but they are intent upon abolishing liberty. They call themselves democrats, but they yearn for dictatorship. They call themselves revolutionaries, but they want to make the government omnipotent. They promise the blessings of the Garden of Eden, but they plan to transform the world into a gigantic post office. Every man but one a subordinate clerk in a bureau.

    “The more the plans fail, the more the planners plan”

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