How Defaulting on the National Debt Could Affect Higher Education
May 22, 2023

President Biden and House Republican leader Kevin McCarthy (R-CA) were set to resume negotiations on raising the debt ceiling this week, with less than two weeks for lawmakers to pass a bill to avoid an unprecedented default.

The president cut short his trip the G-7 summit in Japan so he could be back in Washington for a Monday meeting with McCarthy.

While this is uncharted territory, a default would likely create a great deal of chaos, uncertainty, and harm for institutions and students. ACE has prepared a brief memo exploring how a default might play out on campuses.

One crucial consideration is the connection between higher education and the overall economy. A default most certainly would lead to job losses and strained financial circumstances for students and their families. There might be reductions in support from local, state, and federal sources for higher education, as well as significantly higher borrowing costs and debt burdens for students, staff, and institutions.

Timing is another crucial factor. If a default is resolved swiftly, the disbursement of federal student aid for the fall and spring semesters should not be severely disrupted. However, a prolonged default could cause issues with aid disbursement for at least the fall 2023 semester. As students think through their options, there is some concern that students planning to enroll this fall will drop out because they’re worried their financial aid won’t come through, the so-called summer melt. As ACE President Ted Mitchell told The Wall Street Journal last week, there is a possibility this melt would become a flood because students are making decisions now, not in August.

How the government will handle a default if it happens depends on how it prioritizes the thousands of programs it administers. It’s unlikely that disbursements of federal financial aid, institutional support programs, scientific research grants, and other forms of federal support would be given as high a priority as large entitlement programs like Social Security or Medicare. Moreover, certain types of federal student loans that are expected to yield positive returns for the government (mainly PLUS loans) may still be offered, while loans that result in losses (mainly Stafford loans) may not be available.

The Biden administration hasn’t given clear instructions at either the agency or whole-government level. The closest thing is how the Federal Reserve prepared in 2011 when it was dealing with a potential default. Institutions should start thinking through how they can support students if a default occurs—providing increased institutional aid, offering greater flexibility regarding payment deadlines, or exploring alternative options.

​Higher Education and a Debt Ceiling Default

download the memo