Friday, October 10, 2008

Is the meltdown going to cause better access to higher education in the long run? (Yes, I'm trying to look on the bright side)

Last week, I wrote about how Citi had cancelled the CitiAssist loans on MIT Sloan (and Harvard, for that matter) and how the student loan industry is going to pieces. It's especially crazy since a year or so ago, these same companies were being criticized, fired or regulated for spending absurd amounts of money buttering up college loan administrators to win this business. In other irony, this has also somehow been the path to Democrats finally getting more money from the government to subsidize higher education. In the long run, I doubt the increase in the Perkins and other subsidized loan limits will fall, so that is a good thing for American students on finanial aid. I emphasize in the long run. Because this assume things like "credit will still exist" and "the end of days is not upon us".

So what's the impact for schools? Here's a back of the envelope calculation for MIT Sloan. Let's say Sloan just wants to get international students back to the table - the CitiAssist loan has typically been good for this purpose - it was variable rate pegged to prime, so this was far less onerous than lending rates in developing and emerging world countries.

Assuming there's 400 students, and 35% are international. That's 140 students. Let's assume 100 international students out of these 140 need loans, and that the liquidity crisis will just last one year. One would need to borrow around $70,000 a year to cover tuition, housing, a snazzy new Lenovo tablet, drinks at the BHP and maintenance on your BMW (just kidding, for the most part). That's around $7 million, that would eventually be repaid. I think Sloan could handle that. The problem is that this is the loan for MANY other schools as well.

And Sloan is tiny and wealthy compared to most of those institutions (albeit expensive). And like I said before in the previous post, I worked as a consultant to a lot of institutional funds, including endowments. Let's just in the search for Alpha, they had some very risky configurations of private equity, hedge funds and derivatives. At least one substantial endowment (let's say over $500 million) is going to come out year end when they mark-to-market and be completely embarrassed. And that will mean a well-respected institution's operating budget will have to be severely cut. If the market keeps going down like this, it might be a lot of institutions.

Another huge impact will be on the Perkins Loan. They've already increased the limit by $1,000. This isn't a bad thing for students. The Perkins Loan is a federal, subsidized loan at 5%. But this means every student in America who is on financial aid will probably take this loan! Stafford and Pell grants are also going up. What does this mean? Well, due to the financial meltdown, we may finally get what a lot of liberals have been calling for - the government facilitating greater access to higher education. Well, except that no one can afford to quit a decent job and cover living expenses to do anything other than part-time communiy college or an online degree. I'm scared to calculate this number. It has to be in the tens of billions.

No comments: