Higher education braces for the worst in debt ceiling fight

Higher education is biting its nails watching the debt ceiling timer tick down in Washington.

Colleges and universities are working in the background on contingency plans if the U.S. defaults, a scenario that would lead to consequences experts say even they can’t fully comprehend.

While the schools won’t immediately shut down when the debt limit is reached, they will lose significant funding from the federal government, and students will not receive the aid they need, in some cases, to stay in class.

“Unfortunately, in the last several years, colleges and universities and financial aid offices have gotten used to a political game of chicken in Washington, D.C., and the potential for federal shutdowns, but this one is just a little bit different,” said Justin Draeger, president of the National Association of Student Financial Aid Administrators.

“We use the word unprecedented a lot in Washington, D.C., but this truly is one of those unprecedented times, and we would expect major disruptions to federal student aid if we hit the debt ceiling,” he added. 

Republicans and President Biden have been in negotiations for weeks over the debt ceiling, with Speaker Kevin McCarthy (R-Calif.) calling their most recent sit-down “productive” but not yet enough to produce an agreement.

“Don’t give up on us,” McCarthy told reporters on Monday evening.

It’s estimated that without a deal, the U.S. will default by the beginning of June, sending the markets into a tailspin and potentially causing a global recession. 

Colleges are hopeful any potential default would last only a short while, limiting the impact on the number of students it would affect because a majority of their aid is distributed in the fall or winter sessions. 

However, there are still some students who receive aid in the summer or use it for other expenses — a spigot that would be cut off.

“For individual students who don’t receive their student aid disbursements, the difference between a couple of days and a couple of weeks can be huge because federal student aid just doesn’t cover tuition fees at an institution. It also covers things like rent and other costs of living, like insurance or transportation and food,” Draeger said. 

A longer-term default has more dire consequences for higher education because the federal financial aid year starts July 1. 

And on the list of priorities of items to be funded amid a longer-term default, experts aren’t confident higher education will make it.

“We know basically how we think the Treasury will respond to a default. They will prioritize making interest payments first and then trying to make payments to really high-priority issues like national security and Social Security and the large entitlement programs. And after you fund those things, there really won’t be a lot of additional revenue available to allocate,” said Jon Fansmith, senior vice president of government relations for the American Council on Education. 

While colleges and universities are keeping a close eye on negotiations, it is hard for them to prep for something as catastrophic as a default, especially when success in higher education is closely linked with the economy. 

During the 2008 Great Recession, “the federal government stepped up with expanded aid. They made the loans. They provided the Pell Grants,” Fansmith said. “If we are in a default situation, the federal government can’t. They won’t have the authority to spend more.”

There are certain steps universities can take, particularly bigger ones, such as shifting resources to help low-income students stay in school. 

“If you were planning to expand your science lab or build new facilities, things that require sort of capital investment, you would likely delay or cancel those kinds of projects,” Fansmith said. 

Draeger said his organization would push schools to put a pause on tuition payments to assist students. 

“Given that the ramifications of a United States default are just so large, I think they find themselves in the same boat as everyone else, which is what do you do if the United States can’t pay its bills? The level of contingency plans that you can make around that just becomes very narrow,” Draeger said. 

The situation in higher education is potentially more difficult than it is for K-12 public schools, which receive a lot more support from state governments. 

“There’s very little sort of direct federal funding that goes right to institutions from the federal government, which means that institutions are much more susceptible to changes in the economy than K-12,” Fansmith said. 

He added those schools don’t experience the pinch in funding as much during an economic recession at the state level. States will pull back on higher education funding during an economic downturn in a way they won’t apply to K-12 schools. The only way colleges can make up that loss in cash is to raise tuition for students already experiencing financial hardship. 

However, Randi Weingarten, president of the American Federation of Teachers said a long-term default could threaten the jobs of teachers at a time when some states are having trouble finding educators for their schools. 

“What if it goes on for a long time, and all of a sudden there’s no Title I funding? That could be 100,000 teachers that get laid off,” she said. 

But a more immediate concern is some of the concessions Republicans are looking for from the president to raise the debt ceiling. 

“If you just look at the Republican demands, you see the cutting of access to Head Start for 200,000 children and access to child care for 100,000 children. You see the reduction of Pell Grants that could affect about 6.6 million kids,” Weingarten said.