Why demand for college degrees may slow
Weaker employment prospects a headwind for colleges
By Michael Taiano and Kevin Duignan
College enrollments and tuition costs have steadily grown over the past few decades, bolstered by higher employment rates and income levels for college graduates relative to those without college degrees.
Why then has the growth in college enrollments and the cost of attendance begun to moderate recently? The primary drivers of the deceleration appear to be a more challenging job market for college grads, demographic trends including a smaller pool of high school graduates, and a rising student debt burden which has exacerbated the cost of attendance.
Recent college graduates are still having difficulty finding jobs more than seven years after the financial crisis. What’s more, those that do obtain employment are increasingly working in jobs that do not require a college degree, as evidenced by the underemployment rate of recent college graduates of nearly 15%1, and is further supported by several studies conducted by the U.S. Federal Reserve.
Softening demand for higher education is also partly the result of secular demographic trends. This includes a lower number of high school graduates, which reduces prospective college enrollments. This trend has been compounded by a decline in the percentage of high school graduates going on to college, which peaked in 2012 at 60.3% but has since declined to 57.3%. Rising costs to attend college and the perception of reduced return on investment stemming from muted job prospects post-graduation have also dampened enrollments.
Colleges and universities are already starting to see the impact of reduced enrollments on their bottom lines, as evidenced by recent school closures such as Dowling College on Long Island, NY and St. Catharine College in Louisville, KY. The federal government’s crackdown on the for-profit education sector has added another headwind for enrollments.
A sustained decline in college enrollments would have negative longer-term socioeconomic implications. As such, there has been rising pressure on colleges from elected officials and government agencies to rein in college costs. Specifically, politicians have sought greater accountability on the part of schools in helping students weigh the costs of attendance in the context of historical job placement and expected incomes of graduates. The lack of accountability was one of the driving forces behind the “gainful employment” rules aimed at the for-profit education sector that went into effect in 2015. These efforts appear to have begun to bear fruit, with The College Board reporting that tuition and fees at four-year private nonprofit colleges and four-year public colleges increased 11% and 13%, respectively, during the five years ended in the 2015–16 school year, versus 14% and 24%, respectively, in the previous five year period ended in 2010–11.
Another area of rising concern for politicians has been the sharp rise in student debt, which began to accelerate during the financial crisis and ultimately rose to over $1 trillion in loans outstanding in September 2013, surpassing auto loans as the second largest consumer debt category after mortgages. Some may view the sharp growth in student debt as a potentially dangerous credit bubble. However, the vast majority of student loans are guaranteed by the federal government, limiting the direct impact to private investors if credit problems arise, thus placing the ultimate obligation on U.S. taxpayers. Nevertheless, meaningful loan defaults could create second-order economic affects including increased government/taxpayer burden and damage to borrowers’ credit profiles.
While there is a private student loan market that supplements the federal student loan program, it is relatively small (less than $10 billion in loan originations in 2015). Fitch does not expect to see a significant increase in private student loans given the availability of lower cost federal loans and federal aid. The complexity of underwriting and servicing student loans, combined with the elevated regulatory and political scrutiny of the sector, has also limited the field to a handful of lenders. There have been several online lenders that have emerged in the student loan segment in the last few years such as Social Finance (SoFi) and CommonBond. However, they have primarily focused their efforts on refinancing existing student loan debt from higher credit quality borrowers.
Demand for higher education from top-tier institutions, where there is a strong track record of student job placement, should continue to thrive. Conversely, colleges and universities that maintain elevated costs and have an uneven track record in getting their students placed in high quality jobs may experience further pressure in enrollments. To the extent that colleges are able to help students perform a cost-benefit analysis on their investment in higher education, it would likely benefit all stakeholders including not only the schools and students, but also the broader U.S. economy.
(1) Source: Economic Policy Institute as of March 31, 2015
Originally published at thewhyforum.com.