Default Likely to Negatively Impact Country’s Economy, Higher Ed

The United States is heading toward defaulting on its debt—a move that could lead to “economic calamity” unless Congress acts soon, experts and lobbyists warn. Negotiations to avert a default are ongoing.

A default would likely have vast implications for the nation’s economy and the ability of the federal government to operate, though it’s unclear what would actually happen. Higher education experts and lobbyists are unsure what a default would mean for colleges and universities and the financial aid that students rely on, but they agree institutions will be affected by the resulting economic turmoil. The immediate and more far-reaching consequences of the default will likely depend on how long it persists.

“We’ve experienced many federal government shutdowns; we’ve never experienced a default,” said Craig Lindwarm, vice president of governmental affairs at the Association of Public and Land-grant Universities. “So there’s a lot of unknowns. One would assume the federal government remains open but without sufficient revenues to meet its obligations.”

The Treasury Department has said the federal government could likely default by June 1 unless Congress acts to lift the debt ceiling. President Biden is negotiating with House Republicans, and both sides recently shook up the negotiating team—a step that observers saw as the administration getting serious about debt-limit talks. House Republicans, led by Speaker Kevin McCarthy, have proposed raising the debt ceiling in exchange for deep spending cuts.

"I’m confident that we’ll get the agreement on the budget and America will not default,” Biden said Wednesday.

McCarthy told reporters Thursday that he saw a path for an agreement to come together.

Jared Bass, senior director of higher education policy at the left-leaning think tank the Center for American Progress, said a prolonged default could affect federal financial aid processing and disbursements, the Education Department’s contracts with loan servicers, and those working for the agency.

Even a short-term default, he said, would negatively impact the country’s economic growth. In 2011, when the government last flirted with a default, the country’s debt was downgraded and stock prices dropped as investors lost confidence in the economy.

“A pinch of poison is still poison,” he said. “At a time where we’re trying to have economic recovery and make a lot of progress after the global pandemic, default is not good economic policy.”

Moody’s Analytics said in January that a default of even a few weeks would deal a “cataclysmic” blow to the economy.

Treasury Secretary Janet Yellen wrote in a letter to Congress this week that waiting until the last minute to increase the debt ceiling can cause serious harm to business and consumer confidence and make it more expensive to borrow money.

“If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interest,” Yellen wrote.

Lindwarm said APLU has “grave concerns” that a default could bring government-funded research at colleges and universities to halt if the government can’t keep paying for grants.

“We’re very concerned about even short-term defaults having some pretty catastrophic implications for the research enterprise,” he said. “We can’t afford to lose any time in conducting groundbreaking research.”

Lindwarm added that a default also could disrupt federal agencies’ competitive grant processes. The government might also not have the money to pay federal employees, which would also hinder operations.

“There would clearly be broader economic effects, not just in terms of what the federal government is paying, but the economic calamity that could result from the federal government defaulting would send shock waves through the economy—including to state governments—which of course are critical, specifically to public universities in their support of public higher education,” Lindwarm said.

He later added, “As a country, we should never be in a place in which the full faith and credit is in question, and we just have to hope and urge that this will get settled before the unthinkable happens.”

Unlike a shutdown, the government can spend obligated money, said Jon Fansmith, senior vice president for government relations at the American Council on Education. Pell Grants, loans and research grants won’t change.

“The government still owes you money,” he said. “The only difference is they may not simply have the cash on hand to make those payments.”

Fansmith said the Treasury Department plans to use the revenue available to issue new bonds as other bonds come due but in the same amount, so the country isn’t taking on more debt. Then, the administration will pay interest on the debt to ensure interest or penalties don’t increase the debt load.

After that, the administration will use the remaining cash on hand to fulfill the government’s obligations. So far, no guidance has been issued on how the administration will prioritize those obligations.

“There’s no clear chart of how you prioritize all the various thousands of federal programs, but Social Security and certainly national security are always kind of at the top of the list,” Fansmith said.

Fansmith said it’s difficult to say how the department would prioritize the different higher education programs. A short-term default in early June likely wouldn’t threaten federal financial aid disbursements, which are typically done before the start of the fall and spring semesters.

“If we get into a longer-term default, where it starts rolling into weeks, especially if it starts rolling into month, then we have a much bigger problem,” he said. “The longer default goes on, the harder it is to get out of it.”

Fansmith said college and university leaders should be more worried about the negative economic impacts that could make it much more expensive to operate their institutions and harder for students to afford their education.

“It would be such a stupid self-inflicted wound to default, and the implications for the broader economy will absolutely have an enormous impact on higher education,” he said.