State Support of Higher Education: The Roller Coaster Plunges Downward Yet Again

Abstract

After just a few years of solid growth in state support, public higher education faced grim times in many states in late 2008. The culprit, as usual, was an economic downturn. A burst housing market bubble, long supported by historically low interest rates and too easy credit, precipitated this downward spiral. The ground trembled under the nation’s financial system when the bubble burst; banks, in turn, severely reduced access to credit by businesses, current and would be homeowners, and even students. The U.S. Treasury Department and the Federal Reserve System responded with drastic, unprecedented actions—including slashed interest rates and bank recapitalization via $250 billion in equity purchases—to prevent a financial collapse. The crisis continued through late 2008, as banks remained reluctant to lend. But policymakers continued to lubricate the lending system that fuels economic activity. By then, the economy had (unofficially) entered a recession—one likely to be severe. The credit crunch immediately affected colleges and students who would suffer more from the deepening recession.