In a Sharp Downturn, College Can Be a Shock Absorber

If we don’t prepare now, higher education is likely to endure another big shock whenever the next recession comes.

Expect overflowing public colleges and universities, students fleeing to for-profit colleges, a huge wave of student borrowing, and a spike in loan defaults — unless policy shifts now.

Here’s the problem, in a nutshell.

Public schools rely on government funding to keep the doors open and classes in session. But tuition paid by students doesn’t come close to covering the cost of public colleges and universities, which educate 80 percent of undergraduates. Taxpayers have always footed much of that bill.

But state support for public colleges has not recovered from the last recession, which decimated state budgets. For each student they enroll today, public colleges get 13 percent less in taxpayer funding than they did in 2008, a loss of nearly $7 billion in inflation-adjusted dollars.

The next economic downturn most likely won’t be as harsh as the last one, which was so bad we often call it the Great Recession. But all signs indicate that the next one will hit college students, especially those who borrow, just as hard, because we haven’t repaired the faults it revealed in how the United States finances colleges.

During downturns, colleges traditionally act as economic shock absorbers: As the supply of jobs shrinks, college enrollments expand.

That’s because scarce jobs and low wages reduce the “opportunity cost” of college. During a boom, students have to give up strong wages to go to college. During a bust, the cost of losing those earnings is lower and so more people go to school.

A recession is the right time for many adult workers to retool their skills, and for young people to stay in class rather than begin their careers in a stormy labor market. Research shows that young people who start their careers during a recession take a hit to their starting salaries.

Those low entry salaries then translate into smaller annual increases once the economy recovers. What’s worse, the effects persist for decades, penalizing a generation of wage earners. Getting more people into college during a recession helps to reduce the downward pressure on earnings that all of these people would create if they were instead searching for jobs.

Recognizing this dynamic, the federal government poured billions of dollars into subsidizing college enrollment during the last recession, which started in December 2007 and ended in June 2009.

Congress expanded the federal Pell Grant program, which subsidizes college for those with lower incomes, and it also increased the availability of tax credits for education. In economic terms, these price subsidies spurred demand for education, which was exactly the intended response.

Yet something went very wrong. With tax revenues plunging, states slashed funding to colleges just as millions were seeking to enroll. Public colleges could not adequately educate the influx of students. As their state subsidies shrank, public colleges either restricted enrollment, spent less on educating each student, or raised tuition. Sometimes, they did all three.

As public colleges burst at the seams, students unable to enroll in the classes they needed flooded into for-profit institutions, which welcomed them with open arms. Enrollment in for-profits hit a high in 2011, with 13 percent of undergraduates attending a for-profit college.

In hindsight, we can see this was driven by reduced funding for public institutions. Stephanie Cellini, an economist at George Washington University, has published research showing that for-profit enrollment tends to rise when funding for public colleges falls.

Almost all students who attend for-profits take out large loans to cover the high tuition, so debt surged along with enrollment. Millions of these borrowers entered a weak labor market when they left school, and many had trouble paying their loans. Thirty percent of those who borrowed for for-profit schools wound up defaulting on their student loans.

At community colleges borrowing went up as well, though the debts were not nearly as common, or as large, as at the for-profit schools. Traditionally, students at community college have rarely needed to borrow for school; those who do typically take out small loans (evidence suggests that some would benefit if they were to borrow a bit more).

Community colleges serve as a place for building career skills, and as an entry point to postsecondary education for many disadvantaged people. College will pay off for many of them, and encouraging students to try it out makes sense. But by keeping tuition very low at community colleges, we can minimize the riskiness of the gamble.

The lessons of the last recession were harsh but clear. We need to adequately support public colleges during economic downturns.

This will require federal action, because many states have balanced-budget provisions in their constitutions that ban them from running a deficit. All tax revenue drops in a recession, but the federal government can offset this with deficit spending while the states’ hands are tied.