Election Spotlight: Education Sector
By IBISWorld Senior Analysts Kevin Culbert and Nikoleta Panteva
In April of 2012, Presidential-hopeful Mitt Romney backed President Barack Obama’s education platform – a portion of it, anyway. The rivals both supported the extension of low interest rates on student loans, which were scheduled to increase from 3.4% to 6.8% on July 1, 2012. With some compromise, Congress approved the interest rate extension on June 29, 2012. However, the candidates’ overlapping views mostly end there. Education in the United States has always been a widely debated topic, with each side of the political spectrum favoring their own plans for enhancing the nation’s K-12 and higher education systems.
Regarding higher education, President Obama stands by the Democratic Party’s belief that access is best granted by the federal government providing student loans. On the other hand, former Massachusetts governor Mitt Romney, a Republican, proposes that private lending institutions take on student loan responsibilities to reduce defaults and increase efficiency while also protecting the government from losing money on student loans. On the other side of the political spectrum, President Obama has implemented the “Pay As You Earn” plan, which is designed to make managing debt from higher education easier. With this program, college graduates are only required to dedicate 10.0% of their disposable incomes to paying off their student loans. Moreover, the American Recovery and Reinvestment Act has dedicated federal funds to a variety of programs, including early education, primary and secondary reforms and college affordability changes. These appropriations are set to increase federal funding for both primary and secondary education and for colleges and universities.
Another platform plank on which Romney stands is centered on a student and their family’s choice of which primary and secondary school to attend. His proposal, which resembles a voucher system, would allow Americans to use federal government funds to attend any school – public or private – they want. His plan is aimed at improving the current kindergarten through twelfth grade education system by creating market-like scenarios among schools and teachers: theoretically, underperforming schools would experience a decline in enrollment and would have to compete for students by offering improved programs. Romney also argues that his system would allow children in disadvantaged schools to obtain a better education by channeling their government-granted funds to attending a top-tier establishment instead. President Obama, on the other hand, is working on allowing individual states to alter their education standards to better meet requirements and improve teaching standards. The Obama administration holds that the previously implemented No Child Left Behind program places rigid goals and standards that do not accurately reflect each state’s educational performance. As of May 2012, 24 states have been granted waivers to pursue their own educational reforms.
How exactly would these proposed policies alter US industries? Who would benefit and who would lose under each presidential hopeful? IBISWorld has outlined two scenarios on the education front that highlight industries’ performance under each candidate’s platform. Under President Obama, public schools would continue to receive the federal government grants that they do today; under a Romney presidency, private schools would experience an increase in enrollment and, as a result, tuition money. In the case of higher education, Romney’s proposed reduction of government-provided loans would result in these institutions’ loss of readily available funding, which would increase students’ tuition costs. As a result, an increasing portion of student loans would be channeled through private lenders such as commercial banks and credit cards. Universities, junior colleges and related industries would experience a rise in overall risk over the next 18 months while lenders would experience a drop in risk as their revenue streams expand.
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During his time in office, President Obama has dedicated significant resources to higher education. Federal money funneled to institutions is aimed at achieving Obama’s goal to once again have the United States be a leader in higher education. The President’s current target is to have a higher proportion of students graduating from college than in any other country in the world by 2020. The American Recovery and Reinvestment Act of 2009 (ARRA), for example, earmarked more than $30.0 billion to improve access to higher education.
Obama’s education policy changes and resources have not ended with ARRA. In October 2011, Obama announced the “Pay As You Earn” plan. The initiative is aimed at allowing graduates to manage student loans more easily by limiting debt payments to 10 percent of personal discretionary income in 2012. Furthermore, borrowers’ debt will be forgiven after 20 years of payments. These factors are relatively important for students facing increasing tuition costs. Many schools have been forced to increase tuition costs as a result of declining state budgets. The move came on the heels of the Health Care and Education Reconciliation Act of 2010, which added some $40.0 billion of investment in the Pell Grant program and provided about $2.0 billion to junior colleges, which primarily provide two-year associate degrees. Such financial support is much-needed for the Colleges and Universities industry because its revenue is expected to decline 3.5% annually to $363.2 billion in the five years to 2012 as a result of declining state budgets and the recession’s impact on endowments. While the Junior Colleges industry has performed relatively well, growing 1.9% to $61.6 billion in the five years to 2012, cash-strapped schools have been forced to cut back on the number of classes offered to students. Additional funding, however, has mitigated cutbacks to some extent.
One of the primary changes ushered in by Obama’s Health Care and Education Reconciliation Act was the end of government subsidies given to banks that made guaranteed federal student loans. In effect, federal student loans are now direct loans that are delivered and collected by private companies contracted with the Department of Education, eliminating fees paid to private banks. However, under Romney’s plan, this change would be largely reversed and allow private lenders to make federally insured loans once again. Consequently, some industries would benefit from this plan as they are able to get back into educational lending. For example, more individuals would get loans from the Commercial Banking industry, which is expected to generate total revenue of $613.5 billion in 2012. Similarly, the $12.6 billion Debt Collection Agencies industry and the $45.6 billion Credit Counselors, Surveyors & Appraisers industry would benefit as students and parents take on additional debt. Ultimately, Romney’s plan would make these industries relatively less risky.
On the other hand, Romney is against increasing funding for Pell grants, which could limit students’ ability to pay for college and increase risk for higher education industries. Similarly, the $17.3-billion Trade and Technical Schools industry also heavily relies on federal government grants while the $16.0-billion Testing and Educational Support industry relies on college affordability for success. As such, a decline in federal support for Pell grants would make these industries relatively riskier.
In February 2012, President Obama’s federal budget cut funding for the Opportunity Scholarship Program through 2013, stating that the program has enough money in 2012 to continue operating over the next two years. Future funding for the Program has not yet been established. The Opportunity Scholarship Program provides low-income students with vouchers to attend a school of their choice, including private and charter schools. Without additional funding, some underprivileged children would have to face the often poor performance of their school programs. The Public Schools industry, which is expected to generate a total of $628.1 billion in revenue in 2012, relies on the federal government for about 90.0% of its revenue. With a moderate annualized growth rate of 0.9% between 2007 and 2012, any diversion of that money away from the public school system could adversely affect industry performance.
Romney has a different stance on the education voucher issue and holds that market-like competition – created by allowing federal funding to be used for any accredited school – would benefit both students and underperforming schools. His voucher program seeks to replace the 2002 George W. Bush “No Child Left Behind” law, which prescribes specific strategies for failing schools. By contrast, the voucher system creates accountability for schools by allowing students to choose their institution based on its performance. Because private primary schools do not receive funding from the government (they charge parents tuition to generate revenue), Romney’s proposed program would create a new revenue stream for these schools. In 2012, this industry is expected to generate $76.6 billion, an average annual increase of 0.1% from 2007. New funds via transfer students would decrease the Private Schools industry’s overall risk score because its competing industry – Public Schools – would potentially receive fewer government dollars. By the same token, public schools would become riskier, losing some of their revenue streams to private and charter schools. This could also result in the closure of underperforming establishments, which would further stifle Public School industry growth over the next two years.
Conclusion
The fate of the education sector lies in the outcome of November’s Presidential election. If President Obama is reelected for a second term, then public schools, junior colleges, universities and other higher education establishments would continue to receive federal funding as they have over the past five years. Private schools would remain unaltered, receiving their revenue from attendees’ tuition payments. If Romney replaces Obama in the White House, the situation would be quite different for public and private schools than for higher education institutions. Private schools’ performance would be bolstered by the expansion of revenue streams under the voucher system while underperforming public schools stand to lose attendance and funding. Higher education establishments may also lose out on federal funds, while private lending providers experience a boost in loans. The higher education sector, the primary education sector and the private lending sector, which combined are expected to generate more than $6.6 trillion in revenue in 2012, all face potential changes this election year.
To download full research reports for the industries discussed in this article, click on the report titles below.
Colleges and Universities, Private Schools, Public Schools, Junior Colleges, Testing and Educational Support, Credit Counselors, Surveyors & Appraisers, Debt Collection Agencies, Commercial Banks, Credit Card Issuing
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