07/30/2012 12:54 pm ET | Updated Sep 29, 2012

Our Colleges and Universities Need a Stress Test

Like a thirst-stricken man in the desert, our colleges are desperate for every drop of money they receive from student loans. The government pumps out more and more loans every year, only to see its funds sink into the shifting sands of rising college costs. But factors are already at work that may sharply reduce the flow of loans, leaving colleges unable to fill the huge holes left behind.

It's no secret we're in the midst of a student loan debt crisis. The media has reported extensively on the rise of student loan debt, now totaling a staggering one trillion dollars. But the problem goes much deeper, because colleges have relied too heavily on that same trillion dollars to cover fundamental operating costs, creating an alarming level of dependency.

How dangerous is college dependence on student loans? Nationally, these loans account for more than all of the tuition and fees collected by higher education institutions. Most of our private colleges and universities are tuition-dependent and have small-to-medium endowments, a risky combination that explains their student loan dependence and vulnerability. On the opposite end of the scale, generously-endowed institutions are better positioned to survive a student loan crash, as are low-cost community colleges where students borrow less.

What could cause such a crash? Students are defaulting on college loans in record numbers. The well-publicized average student loan debt of $25,000, combined with the slow economic recovery and poor job market, has resulted in a national student loan default rate of 8.8 percent. In addition, "troubled debt" (loans in danger of default) account for another 20 percent of all student loans.

If this trend of rising debt and default continues, taxpayers will lose billions of dollars, creating a politically unsustainable scenario analogous to the mortgage crisis when the housing bubble burst. The federal government would, no doubt, work diligently to save the student loan program. But the almost inevitable result would be fewer dollars available for student loans, lower loan amounts and/or establishing tighter financial or academic qualifications for loan eligibility. In any case, I believe the crash would result in a sharp decline in college access and enrollment, followed by an equally sharp decline in higher education revenues.

Given the importance of a viable higher education system to our nation's economy and future, how can we avert this potential disaster?

First, we need consensus that a real problem exists. College administrators must recognize the student loan debt crisis is not exclusively the government's problem.

Second, states should stress test each college and assess how it would fare in a student loan meltdown. What resources could a college muster during a sharp reduction in student loan income? How much would enrollment shrink if lending dried up? How much would a college's institutional debt increase? What programs could be cut? Where could it save money?

College and university administrators must admit their financial model is broken. Then, they must trim budgets and reduce costs, the primary drivers of the need for student loans.

Congress must pass financial aid reform that helps colleges find a fiscally-responsible and feasible way forward. Institutions that substantially reduce costs should be rewarded with the ability to award additional financial aid. Those who resist should enjoy less student loan funding. If colleges reduce costs and government increases grant aid, we can squeeze student debt down to sensible levels.

If we recognize and address the serious threat of a potential student loan meltdown, we can protect student enrollment from a crisis that could leave our colleges looking like our foreclosed neighborhoods, a sad legacy of the recent mortgage crisis.