What Happens to Higher Education if the Government Defaults?

Very, very bad things, apparently.

If Congress doesn’t agree to raise the debt limit by August 2 and the federal government goes into default, this could have a pretty significant impact on higher education. According to an article by Eric Kelderman in the Chronicle of Higher Education:

The vast majority of colleges rated by Moody’s Investors Service could see their credit ratings downgraded if Congressional leaders and President Obama fail to strike a deal by August 2 to raise the federal government’s ability to borrow money, according to a report issued on Thursday by the credit-rating agency.

The Moody’s report warns that any such government default would probably force the agency to downgrade its rating of federal debts such as U.S. bonds, which have traditionally been considered the safest investments. The negative effects of lowering the rating of those bonds would ripple through the economy, putting other traditionally highly rated bonds at risk of a downgrade as well, Moody’s said.

This won’t matter much to the 25 American universities with the agency’s highest bond rating since they have significant assets to withstand the downgrading. The rest of higher education, of course, will likely face additional problems if there’s a federal default.

According to the article:

The rest of higher education is at a greater risk of a rating downgrade, not to mention a rough fiscal patch, in the event of a federal-government default, said John Nelson, an analyst for Moody’s, because a higher proportion of their income comes from the government, in particular Pell Grants for low-income students.

Then again, if there’s a federal default, a lot of things are going to go wrong. As Ryan Witt wrote for The Examiner back in January, if the federal government defaults on its debts:

Many of the world’s largest banks, which are still hardly on solid footing after the 2008 financial crisis, would go bankrupt due to their exposure to the United States. Credit for simple things like houses and car loans may become unavailable as a result. Most large companies use short-term credit to make their payrolls. That credit would disappear, and as a result, many workers would have to start going without a paycheck. There is a very real possibility that people would go to their local bank or ATM and not be able to withdraw cash from their account. Hyperinflation could very likely ensue as the United States dollar becomes basically worthless.

In response to the crisis, businesses would once more lay off workers, only worsening matters and creating a downward economic cycle, which results in a depression. The stock market would plummet as well, negatively affecting the 401(k) accounts of millions of Americans. The price of oil would skyrocket, and with it likely the price of gasoline.

Higher education is only one thing to worry about.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer