ITT Technical Institute announced that it was shutting the doors of its campuses earlier this month, after the Department of Education barred the company from accepting federal student aid funds.

Thousands of employees have lost their jobs and tens of thousands of students are left saddled with monstrous debt, no degree, and credits that are scarcely accepted elsewhere. This is clearly nothing short of a disaster for those involved, but could this be a glimpse into a grim future for the education sector?

The Government’s Execution Order

The Department of Education’s decision comes after a long investigation into ITT, the quality of the education they provided, and more substantially, the default rate of their students. Colleges must maintain a default rate under a specified percentage. If a college’s default rate is above 30 percent for 3 consecutive semesters or ever reaches above 40 percent, the Department of Education can ban the college from enrolling students who rely on federal funds, as they have in this case. This ban is unquestionably a death sentence for colleges, as the vast majority of students are clearly incapable of paying for their education out of pocket at today’s prices, and almost all student loans are originated by the federal government.

The Anatomy of an Education Bubble

The government seems to have decided that everybody should be able to go to college, and it has been taking action to see that this occurs. Ninety-one percent of all student loans are issued by the federal government, to the tune of $100 billion a year. Adding it all up, the federal government currently owns an astonishing $1.087 trillion in student loans. Almost anyone can obtain these loans, which are assuredly made possible in part by the Federal Reserve’s credit expansion. To the general public, they may seem heaven sent, but if the word “student” is replaced with “housing,” it should become clear where this situation is heading.

As Ludwig von Mises noted long ago, credit expansions cause distortions in prices and malinvestment in the areas of the economy that get the new money early on, generating unsustainable booms which must inevitably lead to busts. Rarely can this be seen with more clarity than in today’s education sector.

With this seemingly limitless source of money coming from Washington, colleges are able to charge prices for tuition, room and board, and textbooks which would never be possible in a real free market. These endless loans release colleges from the free market “burden” of providing education at reasonable prices. Neither students nor their parents could possibly pay out-of-pocket for college at these prices, nor would private lenders see these loans, which have no collateral, as feasible. In the absence of government created credit, colleges would be forced to charge prices that are in line with reality.

If we view the student’s role as that of an investor, malinvestment can be seen with clarity. College students, some of whom are now choosing to major in such lucrative fields as gender studies, are finding it fairly tough to find employment in their fields after graduation. Students are getting degrees in the hopes of being hired for jobs that they are often discovering don’t exist. While this is happening, people like Dirty Jobs host Mike Rowe — who recently revealed himself as a Henry Hazlitt fan — are perceiving a shortage of skilled labor in areas of the economy for which colleges don’t train. In order to help meet what he calls a skills gap, Mike started the mikeroweWORKS Foundation which help train young people in these fields.

Saddled with incredibly burdensome sums of debts which are now averaging $35,000, and questionable employment, many graduates are unable to pay for their government-financed student loans. As Jonathan Newman wrote for Mises Wire in April, 43 percent of graduates with federal student loans are either behind in their payments or received permission for postponement. Perhaps the most telling thing Newman points out is that student loan delinquency rates have now surpassed those of mortgages during the housing crisis. As time passes and the number of federal student loans increases, expect this trend to grow.

While this is clearly devastating to students, it is very ominous for colleges, in particular private for-profits like ITT. Because these schools aren’t subsidized like public colleges, students tend to face higher up-front prices, increasing the likelihood of default. In fact, according to the latest numbers that could be found, 39 percent of student defaults came from private for-profits, despite having a much lower share of total loans. At the time these numbers were collected, as many as 12 for-profit schools were in danger of crossing the Department of Education’s default threshold and losing the ability to enroll students with federal loans.

One must come to the conclusion that the United States could very well be looking at the collapse of for-profit schooling when this education bubble inevitably pops. These schools, like ITT, will not be able to survive when the boom period in student loans turns to bust. The job market will also be in need of a readjustment as these college grads will have to filter into areas of the economy other than their degree field where labor is more urgently needed. Organizations like Mike Rowe’s are well poised to help facilitate this demand now and when the market correction occurs.

When a market is distorted like the education market is, there is nothing that can or should be done to stop it. The bust is the market’s cure to the disease of misallocated resources. If what is written here is revealed as true, the only prescription for government is one of laissez-faire. If the United States is to have an education system that works, the government must stop interfering with it. It must stop its involvement in student loans and ideally leave education in its entirety to the private sector, where market forces can accurately coordinate what is taught with what employers and consumers need.

Nathan Keeble is a Mises University Graduate and helped found the Campaign to End Civil Asset Forfeiture in Tennessee.


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