Exactly a month ago I wrote a post called Are Universities Too Big To Fail?. In it, I speculated about a scenario that would lead to universities being put into a position where the government would have to take them over like General Motors. I borrowed an analogy from the military called the Death Spiral. Here’s what I wrote.
In the Department of Defense they have this common problem. When the cost to develop a new weapons system goes up (and it always does) it makes each one more expensive to purchase. This in turn raise the whole program costs. Congress then usually reduces the amount of systems to purchase to bring the total cost back down. This of course means the development costs are being spread over a smaller purchase, therefore the unit cost goes up again. Congress cuts again; costs go up again; repeat until canceled.
In our doomsday scenario for universities the amount of money available for loans has not decreased but if students don’t take out the loans it won’t get to the schools. Many universities would be in deep trouble financially. Oh sure they can raise tuition rates again but that just makes the problem worse next year.
Economics then dictates that some schools would have to go out of business.
Now that we are in the fall enrollment period I have been looking out for evidence of this starting to happen. Well this weekend I saw some. (H/T Instapundit)
Law Schools Jack Up Tuition 4%-6% Despite 14% Decline in Applicants – TaxProf Blog
To use a term very popular in certain political circles, this trend is unsustainable.