Ultimate consequence of education bubble taking shape as LSU prepares for bankruptcy

Like the bond bubbles, housing bubbles, and credit crisis of the last seven years, anytime economics are manipulated beyond the normal scope of market reactions, the results are the consequences that ultimately lead to a collapse or popping of that bubble.  And now the same can be said for education as on April 26, the first major victim of the debt fueled bubble that started with President Obama taking over the functions of Sallie Mae in 2010 is occurring in the state of Louisiana, and with football powerhouse LSU as the university announced they were preparing bankruptcy documents in light of the state’s planning to cut the sector’s education budget by nearly 87%.

Louisiana State University will draw up a financial exigency plan, equivalent to college bankruptcy, as budget cuts proposed by Governor Bobby Jindal threaten to cripple the higher-education system.

Exigency, declared when schools face insolvency, would allow the state’s flagship institution to restructure and fire tenured faculty.

“We know the worst-case scenario, we know the timeframe, and we know what’s at stake,” President F. King Alexander said in a statement. He said he wants legislators to “mitigate the devastation these budget cuts promise.”

State cuts to higher education have sent tuition soaring across the U.S., adding to the more than $1.2 trillion in student-loan debt. While public subsidies covered almost three-quarters of operating costs in the 1980s, the share is now closer to half and falling every year, according to the State Higher Education Executive Officers Association.

Louisiana faces a $1.6 billion budget shortfall in the coming fiscal year, a result of both plunging oil-tax revenue and the state’s failure to enact adequate tax increases or spending cuts after the economic downturn in 2009…

The latest plans would mean an 82 percent cut to the state’s public colleges and universities. Per-student funding would plummet from $3,500 to $660, according to the New Orleans Times-Picayune, causing concern at Baton Rouge-based LSU. The school may be running out of time to find a solution, as the state’s legislative session ends June 11. - Bloomberg

In February, Louisiana Governor Bobby Jindal announced that the state was completely out of ways to cut the budget further, and faced a $1.6 billion shortfall.  This is forcing the Governor’s office little choice but to cut funding for public universities, and guarantee a massive price increase for students within the state that already borrow for tuition’s that have enslaved millions of students with over $1 trillion in student loan debt.

Sadly for anyone who isn’t an Austrian economist, the basic understanding that when you increase a money supply in an industry or market, price inflation is the inevitable outcome.  And as so much free money has been provided to universities in recent years through Federal monies and a loosening of student borrowing guidelines, these institutions have found it very easy to increase their own budgets believing that the government would always be there to foot the bill.

Like the growing deficiency in state pensions across the U.S., we are now seeing the beginning of the Student Loan and Education bubble collapse.  And while it is highly unlikely that a power conference school like LSU would divert any of its football revenues back towards general education funds to make up for the losses they will soon incur from state revenues, the bottom line is that they are not the first school this year to find themselves in a financial bind, as the Univerity of Alabama-Birmingham (UAB) did in late December when they eliminated their football program due to budgetary constraints.

Kenneth Schortgen Jr is a writer for Secretsofthefed.comExaminer.com, Roguemoney.net, and To the Death Media, and hosts the popular web blog, The Daily Economist. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.