In a Sharp Downturn, College Can Be a Shock Absorber

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.

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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).



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