Podcast: Muni Moments: Troubling Outlook on Higher Ed Debt

Nick Venditti: Hi, I'm Nick Venditti, and welcome to this edition of SpringTalk. I'm the head of the municipal bond desk here at Allspring Global Investments, and I want to talk to you today about kind of an interesting sector that we're seeing play out in muni finance right now. And that's higher education. Higher education is a sector that, for the first time in a while, is starting to show signs of distress. I think there are a couple of secular trends that are pushing against the sector holistically. Some of these things you know in your heart, even if you don't know them in your head—they're things like the fact that higher education is expensive. It's very, very expensive to send a kid to college in the current market environment. In addition to that, you are in a system where graduation rates are now not being quoted at the four-year timeline. The baseline assumption is that it's going to take five years to finish college at an inflated price. That gets awfully onerous. In addition to that, they have a gigantic demographic problem. There are essentially more colleges and universities than there have ever been, and we have reached peak high school student. From here until the distant, distant future, there are going to be fewer and fewer high school students every year and more and more supply for them to try and meet. That is a difficult mathematical equation to solve. Lastly, imagine yourself as a 17-year-old junior. If you're a 17-year-old junior today and you are thinking about college, the prospects for college, likely your parents are in their mid-40s. My guess is that you've grown up hearing the horror stories of the burden your parents’ student loans have put on their backs for the last several decades. It made it impossible for them to buy a home. It made it impossible for them to get financing to buy a new car. If you're a 17-year-old student and that's the only narrative you have ever heard, how excited are you to go out and borrow $250,000 to go to college for five, not four, years? Maybe less so than in the past? I think on top of that, you are facing some exogenous risks that are perhaps pretty material—namely, that we have a political administration that is not overly favorable to the higher education sector and, maybe more importantly than that, an administration that is actively trying to cut expenses. Almost every college and university in the country receives federal disbursements, either directly or indirectly, via grants from the Department of Education, the National Science Foundation, the National Institute of Health, etc., etc. To the extent that any of those disbursements are cut or eliminated completely, you have pretty significant pressure on income statements and balance sheets. So, look, I'm not saying that higher ed is a sector you have to avoid completely, but I am saying be careful. Right bond, right price, right time. Security selection is going to matter in volatile markets. It's going to matter in volatile sectors. Thank you so much for joining me here on SpringTalk. Have a wonderful rest of your day.