7 ms·

The Higher Education Bubble: It's About to Burst

47 points by ca98am79 16y ago

grhino 16y ago
"besides, for a generation, the value of what they're buying has gone up steadily." From a purely financial perspective, has the value of higher education ever risen as fast as its costs?
- hga 16y ago
  Not as I recall; the really big gains where in the post-WWII GI Bill era, which began the really big shift on the supply side. I think by sometime in the '70s or '80s a substantial degree of saturation was reached ... and of course the '80s is when the costs suddenly detached from the rest of the economy (of course, you should check this against a more reliable inflation metric than what the necessarily biased US government puts out). One would also want to look at when the 4 year college bachelor's degree replaced a high school degree. Why Johnny Can't Read was published in 1955; not too many years/decades after that it was widely recognized that a high school degree no longer signaled much of anything.
indiejade 16y ago
http://www.washingtonexaminer.com/opinion/columns/Sunday_Reflections/Higher-education_s-bubble-is-about-to-burst-95639354.html http://www.washingtonexaminer.com/opinion/columns/Sunday_Ref... Great non-linkable comment on the Examiner article discussed: "if you want a degree - go to the University. If you want an education - go to the library"
- carbocation 16y ago
  So odd. Even when I found the permalink to that comment ( http://www.washingtonexaminer.com/opinion/columns/Sunday_Reflections/Higher-education_s-bubble-is-about-to-burst-95639354.html#comment-55003614 http://www.washingtonexaminer.com/opinion/columns/Sunday_Ref... ) it still didn't take me (in Chrome dev build, at least) directly to the comment.
  - ronnoch 16y ago
    Technical explanation: The Disqus comments don't load until a second or two after the permalink's anchor jump (#comment-55003614) is attempted by the browser. So when the browser tries to jump to the comment, the comment isn't there yet.
    - carbocation 16y ago
      It's an unfortunate side-effect. I wonder if Disqus could circumvent this by using a hashchange-type trick (referencing Ben Alman's BBQ jQuery addon).
- mkramlich 16y ago
  And with the Internet the world's greatest library now has an annex in every home, office, vehicle or pocket with a sub-$500 device in it.
  - ronnoch 16y ago
    I don't know that the internet is the world's greatest library yet. In 5-10 years, when Google and Amazon have scanned every book in the world, maybe.
    - waqf 16y ago
      If Google and Amazon scan every book in the world, do you think they'll let you have the result for free? How about we properly fund the public library system to do its job of maximally disseminating knowledge, which it can most cost-effectively achieve by buying those scans from Google or Amazon?
presidentender 16y ago
Because higher education is so very strongly tied to government funding, much more so than housing, I think the end of the higher education bubble (the existence of which I do recognize) will look very different from the end of the housing bubble. We're not talking about a salable asset, here: I can't sell you my degree, after all. So we can generally agree that the higher ed bubble will burst, but I don't see exactly how, or what repercussions that will have.
- rdtsc 16y ago
  > I can't sell you my degree, after all. There is an interesting option. The degree should come with some option to force the university to buy it back at a discount. Say a person couldn't find that promised job after they got their degree, so they can force the university to buy back his diploma for 80% of the price he go it for. All that student's course credits would be expunged. If they claim they have a degree from that university from then on, they would be charged with fraud. I wonder how many people would sell back the diploma in return for the money back.
  - vyrotek 16y ago
    I'm not sure how that would work for a lot of development jobs. I know my first job looked at my degree but after that most places don't care. They want to see experience and will test you on your dev skills during the interview process. So what I'm getting at is that after 3 jobs I could sell my degree back and say "don't need this anymore, thanks!". Now you'll probably say that you can't ask for a refund after your first job. But that sounds like a lot of verification work. And can you prove that the degree GOT me the job?
    - neilk 16y ago
      If most places only care about experience, then some sort of apprenticeship or internship programs should spring up by themselves. These are now done through partnerships between universities and companies, but is there really any value added by the university here? Or, another possibility is that the degree only serves as a "necessary but not sufficient" marker. It increases the probability that you know your stuff, but only the first couple of jobs confirm that you learned anything. In which case yeah, selling your degree back to them would be bad.
CognitiveLens 16y ago
I fully agree that the cost of higher education is a little out of control, but it seems to me that you have to look at its historical value as well as its current value in order to determine whether there is a bubble. It seems to me that university educations were highly under-valued in the past, and so part of the price pressure is just coming from the realization that a university education is much more valuable than what it used to cost (and K-12 is even more valuable than that, but thankfully it's publicly supported). There is also little reason to think that higher education should be bound to CPI in any linear way - there are lots of other quasi-economic influences that are perfectly valid, although greed does seem to play its part.
- jerf 16y ago
  There's two ways to look at the issue. One is the question of value generated by the degree. If the degree adds a million dollars to your total income, it is natural for the education industry to try to capture more of that value. By that metric it all looks peachy. In a free market, the relevant metric is something more like at how low a price you can bring the service vs. your competitors. It beggars the imagination to believe that the current price charged is the actual minimum price for the services that people are actually looking for. The question of the intangibles of the college experience is incidental, first because even those intangibles can almost certainly be had for much cheaper, and secondly because it isn't necessarily the case that people want them, regardless of how much you want people to want the same intangibles you do. In addition to the fact the intangibles could probably be had for cheaper, we have this Internet thing slowly but very, very surely eroding away the physical constraints of the old system. They've been really shielded from the free market by easy subsidies and loans and the fact that the unaccredited competition was neither socially accepted nor able to be quite cheap enough to break through, but all of these things are suddenly changing. The costs to a startup or something of providing a college-quality education continues to drop, and the business scales fairly well. We're getting over the idea that college = good with the increasing evidence that it's not true, which will continue to open the door to non-traditional-college alternatives, some of which will begin to exceed their college breathren. The subsidies are likely to become harder to get and increasingly scary, as word of things like the non-dischargability of student debt in bankruptcy are increasingly well known. Every pillar propping up the current system is collapsing over the next few years at once. As the college education market gets forcibly introduced to the free market, I expect the blood of the incumbents to flow freely. Like all bubble pops I can't predict exactly when it'll happen ("the market can stay irrational longer than you can stay solvent"), but I'm pretty confident about the outcome, based on the fundamentals. (How confident? I am not planning my finances for my kids on the assumption that college is going to cost them each $50,000/yr in 2010 dollars. I computed it once and at current rates of tuition growth that's a reasonable projection for a 2-year-old and a not-yet-born. It's just physically impossible for a college-equivalent education to cost that much. So you might say I'm betting quite a lot on this analysis.)
moby_duck 16y ago
I think there's a fallacy here. The housing market is not a monopoly, but higher education largely is. Universities do compete with one another for top talent, but as a group they also have a firm grip on the number of degrees granted. Technically this may actually be an oligopoly. Until there is a viable alternative with the same reputation, how can students win the debate over prices?
- roel_v 16y ago
  Are you saying the 1000's of universities in the US, not to mention the 10's of thousands worldwide, are successfully colluding to drive up prices? That's a hard position to maintain. Universities do compete on price heavily, even if it's in the form of grants.
  - hga 16y ago
    A large group of top-tier universities and colleges were caught colluding on financial aid packages. Their thesis was they didn't want the cost to the student and his family to bias the decision of which to accept, but one can also surmise that eliminating financial competition had additional motives.
    - vecter 16y ago
      Are you implying that need-blind admissions allows universities to increase tuition? The only two ways I could see raising tuitions as justified because of this is: 1. It costs more to provide grants to poorer students. 2. More competition (demand) and fixed supply increases the price of the good. I'm unqualified to talk on the first point, and it seems kind of a stretch. On the second point, I don't see how having more poor students lets you earn more. I suppose one possibility is that the government subsidy plays a huge role and the university is trying to tap into those funds. If not, I don't see how the increased demand would drive the price up. If you're admitting richer kids, they'd have the money to fork over anyway. But I could just be missing something.
      - 16y ago
illumin8 16y ago
The thing he is missing is that the tuition bubble (as he should more accurately call it) was directly caused by the housing bubble. Need to pay $200K for your kid's tuition to an ivy league? Take a second mortgage on your house. Universities were only able to charge these outrageous prices because people were willing to pay it. Now that nobody has equity in their homes any more you can expect it to change. There are economic rules about supply and demand that come into play here. The supply of available seats in an ivy league are limited, and when credit or money is virtually unlimited, the pricing gets ridiculous. We can expect this to adjust itself in the next few years provided not enough people are willing or able to pay these outrageous tuitions.
- hga 16y ago
  Look at that second chart more closely; the education cost bubble started about a dozen years earlier than the housing bubble. And home equity wasn't and isn't the only source of funding, especially for the less wealthy.
flipbrad 16y ago
If you want in-depth analysis of why this is a completely mad bubble (hopefully with an imminent prick coming from the legislature or government rolling back the lobby-led liberalisation of the Bush years) you could do far worse than a fantastic hedge fund analyst's view; here's the summary http://www.businessweek.com/news/2010-05-27/eisman-of-big-short-says-sell-education-stocks-update2-.html http://www.businessweek.com/news/2010-05-27/eisman-of-big-sh... and here's the SUPERB presentation (on scribd) about the reasoning behind shorting certain for-profit ed stocks: http://www.marketfolly.com/2010/06/response-to-steve-eismans-short-thesis.html http://www.marketfolly.com/2010/06/response-to-steve-eismans...
RobertL 16y ago
This is an easy bubble to pop. Cut every professor's salary in half across the board and hand pink slips to half the people working in administration. Also, rent out half the classrooms as office space and do half the classes via web video. Bingo! College costs are cut in half or more. After the implementation of these great ideas becomes an acknowledged and wonderful success I'll be back with some more. Should be able to eventually get the cost of College down to less than 10% of what it is today and the students will actually be learning a lot more because the quality will be a lot higher.
hcayless 16y ago
I agree this is a bubble, and is likely headed for a crash. It's hard not to be worried about what may happen then. In the best case, higher ed. would largely be replaced by something cheaper, but maybe just as effective. In the worst case it would herald the end of the middle class, as a generation gave up on the idea of maintaining the lifestyle their parents had. Only the rich (and a lucky few talented or favored poorer students) would be able to afford college. Depending on the prevailing political situation, there might be government intervention to shore up the availability of higher ed., or not. Depends whether the Dems or Repubs are in charge when it blows.
- deleted 16y ago
  [deleted]
mikaelgramont 16y ago
As a foreigner who never had to pay for his education (provided for free by the government), I find it disheartening to see that no one (even here) brings up the issue that everyone should have access to education. Some kid whose only fault was to be born in a poor family should have access to the same opportunities as another one born in a richer family. This is destroying the fabric of society if you ask me: poor people don't get educated and are getting poorer. Maybe you'll call my point of view 'socialist', who cares. It just makes me sad that everyone takes the fact that college tuitions cost hundreds of thousands of dollars for granted.
- hga 16y ago
  That's not really how it works. The more poor, the more financial aid is available. And one of the things we're implicitly calling into question is how many people need or even can benefit from a $200K college degree. If you're just getting the new replacement for a high school degree, say the generic business degree, you can go to lower tier state colleges for quite reasonable sums of money.
  - mikaelgramont 16y ago
    "The more poor, the more financial aid is available". Why isn't everyone able to go to an ivy league school then? Your statement implies that by being poor, you get lots of free money, which is basically saying there's nothing below the middle class. I think _that_ is not how it works. Also, what if you don't want just "the new replacement for a high school degree"? My point exactly: why should you have to shoot for a lower degree because you're poor?
    - carbocation 16y ago
      Hga is right about the vast sums of financial aid being given to those with low family income by top schools. Everyone isn't going to an Ivy league school because (1) clearly there aren't enough spaces, and (2) everyone isn't admitted. We could discuss the structural features that contribute to 1 and 2 (mostly 2). But where I think we should be able to find agreement is that those who are admitted are cared for quite well. You might be surprised at how many of them did indeed qualify for, and receive, need-based aid.
Towle_ 16y ago
How this post gets written without mentioning federal student loans and grants, I have no idea. It's not a coincidence that every tuition inflation graph you see starts around 1980.
- ShabbyDoo 16y ago
  I wonder if the US Gov funding model changed to one where the universities were given money to one where the students were given/loaned money to give to the university of their choice. The difference could be compared to inner-city school choice voucher programs.
  - swaits 16y ago
    Students currently have access to "cheap money" (i.e. gov't secured loans) regardless of what school they choose. The bottom line is that cheap money injected into an industry always raises that industry's prices. Housing, healthcare, education.
  - Towle_ 16y ago
    You can certainly look at it that way, if you choose to. The thing is, this is a Pandora's Box situation. The noble goal of using federal grants/loans to make higher education more accessible results in institutions being able to charge more for it. Same number of schools (supply) + more potential students (demand) with more money in their pockets (ability to pay) = higher prices; if each student is charged more money, they need more federal aid to make up the difference. This goes on in a circle, up and up and up. But closing the box now would be too politically unpalatable for any politician to try it. The solution, if there is one, must be highly creative.
    - ShabbyDoo 16y ago
      I agree and should have been much less implicit in my argument. Perhaps state universities once (< 80's) charged very little because they (1) got lots of money from the government with the mandate of providing affordable education and (2) students didn't have access to grants/loans to pay more anyway. Now, the "price" is higher (which is used to create the graphs in the linked article), but the effective cost for the student hasn't increased quite as proportionally because he has a government voucher to use. Greatly oversimplified, I know. We understand what someone means when he talks about the average price of a gallon of gas at a gas station, but we don't have a common definition for the "price" of education. Out of pocket not counting grants/scholarships? Do we discount the cost if the loans are at a below-market rate because of government guarantees? Heck, even the gallon of gas "price" is hard to define. Marathon gives me back 5% on gas purchased with my Marathon card. What's my average price per gallon?
nbashaw 16y ago
What is college, really? It's some combination of access to three things: information, feedback, and certification. The internet totally took care of the information problem. It's no longer the role of a university to provide access, but to create new knowledge through research. The internet helps take care of the feedback problem, and I think web-apps will keep coming that match people with each other to give feedback on their efforts. So colleges are in danger there. The internet can also take care of the certification problem, because the value of the certificate (diploma) is pretty much completely tied to the brand value of the certificate-giver. I can see an online university establishing a name for themselves in the future. Colleges should focus on things that the internet can't do, like providing spaces for people to meet up and learn together.
- waqf 16y ago
  You missed "discipline". College gives you deadlines, in case you're not the kind of person who can provide their own.
- basugasubaku 16y ago
  Regarding information, not quite. One of the few things I really missed immediately upon graduation was access to expensive databases like LexisNexis, JSTOR, ACM Digital Library. You'll be at a great disadvantage trying to conduct real research without such access. I sometimes must ask a friend still in academia to download a PDF of some slightly older CS paper for me. I also miss the wonderful university libraries. The public libraries are not nearly as good especially for more specialized matters.
  - nbashaw 16y ago
    Definitely true - I didn't think about access to proprietary databases or the excellent libraries. I wonder if universities will have to go even deeper than they currently are to compete with the internet, or if the proprietary databases and large libraries will inevitably be made irrelevant by the internet.
danielnicollet 16y ago
I feel this tuition bubble is one of the primary drivers behind the healthcare mess. The still exploding cost of healthcare is so driven by the very high cost of healthcare services (office visits in the US are typically 5 to 10 times more expensive than in Europe for instance). Regardless of the role of insurance, this cost has two primary drivers: providers malpractice insurance and highly indebted doctors, nurses and other healthcare personnel who require salaries that are out of this world to stay afloat because of their student loans.
d4nt 16y ago
You can't sell your degree, so the price won't crash like it would after a normal bubble. But I expect we'll see an accelerating decline the number of people starting college over the next 10-20 years, during which time the price may drop on real terms and some schools will probably have to close.
whackedspinach 16y ago
Comment on story: "Government schools are very expensive and normal people can't bear their expenses. I suggest that government should give some relief to the students" I'm no economist, but isn't that similar to being able to get easy credit? If the government is giving out more federal aid, the schools can keep (or even raise) these high prices. I don't know the solution for this bubble, but just throwing money at it doesn't seem like the solution to me.
- chopsueyar 16y ago
  No, you've identified the problem and its symptoms.
kreek 16y ago
It's surprising that a professor of economics would state that the "The college tuition bubble makes the housing price bubble seem pretty lame by comparison". If you're looking at the numbers alone yes the graph looks pretty scary. There are explanations outside of a speculative bubble for why a degree has gone up in value so quickly. Over the time of his graph the percentage of those seeking degrees has doubled (15%-30%), while home ownership has remained relatively flat (62%-68%). Prior to 1978 a good union job meant you were solidly middle class, in the 80s that changed you had to get a degree to be middle class. In the 90s it accelerates again as even non-union manufacturing jobs were shipped overseas (and foreign students shipped in). The housing bubble was entirely speculative. It was stoked by the fed keeping rates low, later fear took over as people didn't want to be either 'priced out forever' or miss out on easy money. As others have mentioned it's apples and oranges, you can not sell nor live in a degree; defaulting on your student loan will not render you homeless. The bubble and collapse in house prices is far more signigicant to the larger economy. The housing market is measured in trillions, student loans in billions. Don't get me wrong tuition is way overpriced for what you get. A drop in tuition and house prices would do everyone good.
chopsueyar 16y ago
Let student loans be dischargeable in bankruptcy and watch prices "adjust". What other asset-backed-security is tied to someone's life until they die or become physically incapacitated?
- hga 16y ago
  The problem here is that these are not asset backed, at least in the collateral sense. A house can be foreclosed on, a car repossessed. You can't take away the education someone's gained, although I suppose you could force schools' registrars to not confirm the granting of a degree, but that could still be proven in a variety of ways. The concern is that too many would immediately declare bankruptcy after finishing their education, wait out the 7? years it takes to for that to fall off their credit report and then get on with their lives. Since few new graduates need serious credit for anything beyond cars....
  - chopsueyar 16y ago
    Please substantiate the claim "The concern is that too many would immediately declare bankruptcy after finishing their education".
  - chopsueyar 16y ago
    The loan is the asset, both in cases of student loans and mortgages.
    - hga 16y ago
      Are you talking about derivative securities built on top of loans?
      - chopsueyar 16y ago
        A pool of loans. https://www.salliemae.com/about/investors/debtasset/slmsltrusts/ https://www.salliemae.com/about/investors/debtasset/slmsltru...
blahblahblah 16y ago
There is no bubble. The return on investment for a college education may be less than what it once was, but the net present value of a bachelor's degree is still positive. That's an economic argument predicated on the proposition that an education's function is solely to develop human capital, thereby increasing productive capacity of the person and enabling that person to earn more for their services relative to what they would have earned without a degree. This, of course, ignores another significant component of economic behavior regarding education. Specifically, in addition to it's vocational value, education is a service purchased to meet the human need for self-actualization. When you see a human-interest article in the local news about a 70 year old grandmother who has just completed her bachelor's degree, you are seeing evidence of economic demand for education that has no vocational basis. I am not saying that the existing trend of the cost of tuition outpacing CPI can continue indefinitely. Clearly it can't. However, it is a mistake to label the present circumstance as a bubble.
- DrJokepu 16y ago
  You mention that the net value of a bachelor degree is positive. I'm writing this on my phone so I don't have access to any numbers but I wonder what the spread (statistical dispersion) is. More specifically, it would be interesting to know whether a large proportion of graduates enjoy some net positive gains due to their degree or only a small minority enjoys out of proportion gains while the rest is losing somewhat.
chopsueyar 16y ago
Housing bubble was caused by mortgages, not houses. Higher Ed bubble is caused by student loans, not degrees. So this whole argument about "you can't sell your degree" is BS. These educational loans are pooled together and sold as asset backed securities. So, yes, if you have student loans, your degree can be sold, but probably not by you.
melonakos 16y ago
I totally agree and wrote a similar piece a few months ago, calling it "Wallowing in Education", http://www.melonakos.com/2010/07/25/wallowing_in_education/ http://www.melonakos.com/2010/07/25/wallowing_in_education/

47 points by ca98am79 16y ago

"besides, for a generation, the value of what they're buying has gone up steadily." From a purely financial perspective, has the value of higher education ever risen as fast as its costs?

hga 16y ago
Not as I recall; the really big gains where in the post-WWII GI Bill era, which began the really big shift on the supply side. I think by sometime in the '70s or '80s a substantial degree of saturation was reached ... and of course the '80s is when the costs suddenly detached from the rest of the economy (of course, you should check this against a more reliable inflation metric than what the necessarily biased US government puts out). One would also want to look at when the 4 year college bachelor's degree replaced a high school degree. Why Johnny Can't Read was published in 1955; not too many years/decades after that it was widely recognized that a high school degree no longer signaled much of anything.

indiejade 16y ago

http://www.washingtonexaminer.com/opinion/columns/Sunday_Reflections/Higher-education_s-bubble-is-about-to-burst-95639354.html http://www.washingtonexaminer.com/opinion/columns/Sunday_Ref... Great non-linkable comment on the Examiner article discussed: "if you want a degree - go to the University. If you want an education - go to the library"

carbocation 16y ago
So odd. Even when I found the permalink to that comment ( http://www.washingtonexaminer.com/opinion/columns/Sunday_Reflections/Higher-education_s-bubble-is-about-to-burst-95639354.html#comment-55003614 http://www.washingtonexaminer.com/opinion/columns/Sunday_Ref... ) it still didn't take me (in Chrome dev build, at least) directly to the comment.
- ronnoch 16y ago
  Technical explanation: The Disqus comments don't load until a second or two after the permalink's anchor jump (#comment-55003614) is attempted by the browser. So when the browser tries to jump to the comment, the comment isn't there yet.
  - carbocation 16y ago
    It's an unfortunate side-effect. I wonder if Disqus could circumvent this by using a hashchange-type trick (referencing Ben Alman's BBQ jQuery addon).
mkramlich 16y ago
And with the Internet the world's greatest library now has an annex in every home, office, vehicle or pocket with a sub-$500 device in it.
- ronnoch 16y ago
  I don't know that the internet is the world's greatest library yet. In 5-10 years, when Google and Amazon have scanned every book in the world, maybe.
  - waqf 16y ago
    If Google and Amazon scan every book in the world, do you think they'll let you have the result for free? How about we properly fund the public library system to do its job of maximally disseminating knowledge, which it can most cost-effectively achieve by buying those scans from Google or Amazon?

presidentender 16y ago

Because higher education is so very strongly tied to government funding, much more so than housing, I think the end of the higher education bubble (the existence of which I do recognize) will look very different from the end of the housing bubble. We're not talking about a salable asset, here: I can't sell you my degree, after all. So we can generally agree that the higher ed bubble will burst, but I don't see exactly how, or what repercussions that will have.

rdtsc 16y ago
> I can't sell you my degree, after all. There is an interesting option. The degree should come with some option to force the university to buy it back at a discount. Say a person couldn't find that promised job after they got their degree, so they can force the university to buy back his diploma for 80% of the price he go it for. All that student's course credits would be expunged. If they claim they have a degree from that university from then on, they would be charged with fraud. I wonder how many people would sell back the diploma in return for the money back.
- vyrotek 16y ago
  I'm not sure how that would work for a lot of development jobs. I know my first job looked at my degree but after that most places don't care. They want to see experience and will test you on your dev skills during the interview process. So what I'm getting at is that after 3 jobs I could sell my degree back and say "don't need this anymore, thanks!". Now you'll probably say that you can't ask for a refund after your first job. But that sounds like a lot of verification work. And can you prove that the degree GOT me the job?
  - neilk 16y ago
    If most places only care about experience, then some sort of apprenticeship or internship programs should spring up by themselves. These are now done through partnerships between universities and companies, but is there really any value added by the university here? Or, another possibility is that the degree only serves as a "necessary but not sufficient" marker. It increases the probability that you know your stuff, but only the first couple of jobs confirm that you learned anything. In which case yeah, selling your degree back to them would be bad.

CognitiveLens 16y ago

I fully agree that the cost of higher education is a little out of control, but it seems to me that you have to look at its historical value as well as its current value in order to determine whether there is a bubble. It seems to me that university educations were highly under-valued in the past, and so part of the price pressure is just coming from the realization that a university education is much more valuable than what it used to cost (and K-12 is even more valuable than that, but thankfully it's publicly supported). There is also little reason to think that higher education should be bound to CPI in any linear way - there are lots of other quasi-economic influences that are perfectly valid, although greed does seem to play its part.

jerf 16y ago
There's two ways to look at the issue. One is the question of value generated by the degree. If the degree adds a million dollars to your total income, it is natural for the education industry to try to capture more of that value. By that metric it all looks peachy. In a free market, the relevant metric is something more like at how low a price you can bring the service vs. your competitors. It beggars the imagination to believe that the current price charged is the actual minimum price for the services that people are actually looking for. The question of the intangibles of the college experience is incidental, first because even those intangibles can almost certainly be had for much cheaper, and secondly because it isn't necessarily the case that people want them, regardless of how much you want people to want the same intangibles you do. In addition to the fact the intangibles could probably be had for cheaper, we have this Internet thing slowly but very, very surely eroding away the physical constraints of the old system. They've been really shielded from the free market by easy subsidies and loans and the fact that the unaccredited competition was neither socially accepted nor able to be quite cheap enough to break through, but all of these things are suddenly changing. The costs to a startup or something of providing a college-quality education continues to drop, and the business scales fairly well. We're getting over the idea that college = good with the increasing evidence that it's not true, which will continue to open the door to non-traditional-college alternatives, some of which will begin to exceed their college breathren. The subsidies are likely to become harder to get and increasingly scary, as word of things like the non-dischargability of student debt in bankruptcy are increasingly well known. Every pillar propping up the current system is collapsing over the next few years at once. As the college education market gets forcibly introduced to the free market, I expect the blood of the incumbents to flow freely. Like all bubble pops I can't predict exactly when it'll happen ("the market can stay irrational longer than you can stay solvent"), but I'm pretty confident about the outcome, based on the fundamentals. (How confident? I am not planning my finances for my kids on the assumption that college is going to cost them each $50,000/yr in 2010 dollars. I computed it once and at current rates of tuition growth that's a reasonable projection for a 2-year-old and a not-yet-born. It's just physically impossible for a college-equivalent education to cost that much. So you might say I'm betting quite a lot on this analysis.)

moby_duck 16y ago

I think there's a fallacy here. The housing market is not a monopoly, but higher education largely is. Universities do compete with one another for top talent, but as a group they also have a firm grip on the number of degrees granted. Technically this may actually be an oligopoly. Until there is a viable alternative with the same reputation, how can students win the debate over prices?

roel_v 16y ago
Are you saying the 1000's of universities in the US, not to mention the 10's of thousands worldwide, are successfully colluding to drive up prices? That's a hard position to maintain. Universities do compete on price heavily, even if it's in the form of grants.
- hga 16y ago
  A large group of top-tier universities and colleges were caught colluding on financial aid packages. Their thesis was they didn't want the cost to the student and his family to bias the decision of which to accept, but one can also surmise that eliminating financial competition had additional motives.
  - vecter 16y ago
    Are you implying that need-blind admissions allows universities to increase tuition? The only two ways I could see raising tuitions as justified because of this is: 1. It costs more to provide grants to poorer students. 2. More competition (demand) and fixed supply increases the price of the good. I'm unqualified to talk on the first point, and it seems kind of a stretch. On the second point, I don't see how having more poor students lets you earn more. I suppose one possibility is that the government subsidy plays a huge role and the university is trying to tap into those funds. If not, I don't see how the increased demand would drive the price up. If you're admitting richer kids, they'd have the money to fork over anyway. But I could just be missing something.
    - 16y ago

illumin8 16y ago

The thing he is missing is that the tuition bubble (as he should more accurately call it) was directly caused by the housing bubble. Need to pay $200K for your kid's tuition to an ivy league? Take a second mortgage on your house. Universities were only able to charge these outrageous prices because people were willing to pay it. Now that nobody has equity in their homes any more you can expect it to change. There are economic rules about supply and demand that come into play here. The supply of available seats in an ivy league are limited, and when credit or money is virtually unlimited, the pricing gets ridiculous. We can expect this to adjust itself in the next few years provided not enough people are willing or able to pay these outrageous tuitions.

hga 16y ago
Look at that second chart more closely; the education cost bubble started about a dozen years earlier than the housing bubble. And home equity wasn't and isn't the only source of funding, especially for the less wealthy.

flipbrad 16y ago

If you want in-depth analysis of why this is a completely mad bubble (hopefully with an imminent prick coming from the legislature or government rolling back the lobby-led liberalisation of the Bush years) you could do far worse than a fantastic hedge fund analyst's view; here's the summary http://www.businessweek.com/news/2010-05-27/eisman-of-big-short-says-sell-education-stocks-update2-.html http://www.businessweek.com/news/2010-05-27/eisman-of-big-sh... and here's the SUPERB presentation (on scribd) about the reasoning behind shorting certain for-profit ed stocks: http://www.marketfolly.com/2010/06/response-to-steve-eismans-short-thesis.html http://www.marketfolly.com/2010/06/response-to-steve-eismans...

RobertL 16y ago

This is an easy bubble to pop. Cut every professor's salary in half across the board and hand pink slips to half the people working in administration. Also, rent out half the classrooms as office space and do half the classes via web video. Bingo! College costs are cut in half or more. After the implementation of these great ideas becomes an acknowledged and wonderful success I'll be back with some more. Should be able to eventually get the cost of College down to less than 10% of what it is today and the students will actually be learning a lot more because the quality will be a lot higher.

hcayless 16y ago

I agree this is a bubble, and is likely headed for a crash. It's hard not to be worried about what may happen then. In the best case, higher ed. would largely be replaced by something cheaper, but maybe just as effective. In the worst case it would herald the end of the middle class, as a generation gave up on the idea of maintaining the lifestyle their parents had. Only the rich (and a lucky few talented or favored poorer students) would be able to afford college. Depending on the prevailing political situation, there might be government intervention to shore up the availability of higher ed., or not. Depends whether the Dems or Repubs are in charge when it blows.

deleted 16y ago
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mikaelgramont 16y ago

As a foreigner who never had to pay for his education (provided for free by the government), I find it disheartening to see that no one (even here) brings up the issue that everyone should have access to education. Some kid whose only fault was to be born in a poor family should have access to the same opportunities as another one born in a richer family. This is destroying the fabric of society if you ask me: poor people don't get educated and are getting poorer. Maybe you'll call my point of view 'socialist', who cares. It just makes me sad that everyone takes the fact that college tuitions cost hundreds of thousands of dollars for granted.

hga 16y ago
That's not really how it works. The more poor, the more financial aid is available. And one of the things we're implicitly calling into question is how many people need or even can benefit from a $200K college degree. If you're just getting the new replacement for a high school degree, say the generic business degree, you can go to lower tier state colleges for quite reasonable sums of money.
- mikaelgramont 16y ago
  "The more poor, the more financial aid is available". Why isn't everyone able to go to an ivy league school then? Your statement implies that by being poor, you get lots of free money, which is basically saying there's nothing below the middle class. I think _that_ is not how it works. Also, what if you don't want just "the new replacement for a high school degree"? My point exactly: why should you have to shoot for a lower degree because you're poor?
  - carbocation 16y ago
    Hga is right about the vast sums of financial aid being given to those with low family income by top schools. Everyone isn't going to an Ivy league school because (1) clearly there aren't enough spaces, and (2) everyone isn't admitted. We could discuss the structural features that contribute to 1 and 2 (mostly 2). But where I think we should be able to find agreement is that those who are admitted are cared for quite well. You might be surprised at how many of them did indeed qualify for, and receive, need-based aid.

Towle_ 16y ago

How this post gets written without mentioning federal student loans and grants, I have no idea. It's not a coincidence that every tuition inflation graph you see starts around 1980.

ShabbyDoo 16y ago
I wonder if the US Gov funding model changed to one where the universities were given money to one where the students were given/loaned money to give to the university of their choice. The difference could be compared to inner-city school choice voucher programs.
- swaits 16y ago
  Students currently have access to "cheap money" (i.e. gov't secured loans) regardless of what school they choose. The bottom line is that cheap money injected into an industry always raises that industry's prices. Housing, healthcare, education.
- Towle_ 16y ago
  You can certainly look at it that way, if you choose to. The thing is, this is a Pandora's Box situation. The noble goal of using federal grants/loans to make higher education more accessible results in institutions being able to charge more for it. Same number of schools (supply) + more potential students (demand) with more money in their pockets (ability to pay) = higher prices; if each student is charged more money, they need more federal aid to make up the difference. This goes on in a circle, up and up and up. But closing the box now would be too politically unpalatable for any politician to try it. The solution, if there is one, must be highly creative.
  - ShabbyDoo 16y ago
    I agree and should have been much less implicit in my argument. Perhaps state universities once (< 80's) charged very little because they (1) got lots of money from the government with the mandate of providing affordable education and (2) students didn't have access to grants/loans to pay more anyway. Now, the "price" is higher (which is used to create the graphs in the linked article), but the effective cost for the student hasn't increased quite as proportionally because he has a government voucher to use. Greatly oversimplified, I know. We understand what someone means when he talks about the average price of a gallon of gas at a gas station, but we don't have a common definition for the "price" of education. Out of pocket not counting grants/scholarships? Do we discount the cost if the loans are at a below-market rate because of government guarantees? Heck, even the gallon of gas "price" is hard to define. Marathon gives me back 5% on gas purchased with my Marathon card. What's my average price per gallon?

nbashaw 16y ago

What is college, really? It's some combination of access to three things: information, feedback, and certification. The internet totally took care of the information problem. It's no longer the role of a university to provide access, but to create new knowledge through research. The internet helps take care of the feedback problem, and I think web-apps will keep coming that match people with each other to give feedback on their efforts. So colleges are in danger there. The internet can also take care of the certification problem, because the value of the certificate (diploma) is pretty much completely tied to the brand value of the certificate-giver. I can see an online university establishing a name for themselves in the future. Colleges should focus on things that the internet can't do, like providing spaces for people to meet up and learn together.

waqf 16y ago
You missed "discipline". College gives you deadlines, in case you're not the kind of person who can provide their own.
basugasubaku 16y ago
Regarding information, not quite. One of the few things I really missed immediately upon graduation was access to expensive databases like LexisNexis, JSTOR, ACM Digital Library. You'll be at a great disadvantage trying to conduct real research without such access. I sometimes must ask a friend still in academia to download a PDF of some slightly older CS paper for me. I also miss the wonderful university libraries. The public libraries are not nearly as good especially for more specialized matters.
- nbashaw 16y ago
  Definitely true - I didn't think about access to proprietary databases or the excellent libraries. I wonder if universities will have to go even deeper than they currently are to compete with the internet, or if the proprietary databases and large libraries will inevitably be made irrelevant by the internet.

danielnicollet 16y ago

I feel this tuition bubble is one of the primary drivers behind the healthcare mess. The still exploding cost of healthcare is so driven by the very high cost of healthcare services (office visits in the US are typically 5 to 10 times more expensive than in Europe for instance). Regardless of the role of insurance, this cost has two primary drivers: providers malpractice insurance and highly indebted doctors, nurses and other healthcare personnel who require salaries that are out of this world to stay afloat because of their student loans.

d4nt 16y ago

You can't sell your degree, so the price won't crash like it would after a normal bubble. But I expect we'll see an accelerating decline the number of people starting college over the next 10-20 years, during which time the price may drop on real terms and some schools will probably have to close.

whackedspinach 16y ago

Comment on story: "Government schools are very expensive and normal people can't bear their expenses. I suggest that government should give some relief to the students" I'm no economist, but isn't that similar to being able to get easy credit? If the government is giving out more federal aid, the schools can keep (or even raise) these high prices. I don't know the solution for this bubble, but just throwing money at it doesn't seem like the solution to me.

chopsueyar 16y ago
No, you've identified the problem and its symptoms.

kreek 16y ago

It's surprising that a professor of economics would state that the "The college tuition bubble makes the housing price bubble seem pretty lame by comparison". If you're looking at the numbers alone yes the graph looks pretty scary. There are explanations outside of a speculative bubble for why a degree has gone up in value so quickly. Over the time of his graph the percentage of those seeking degrees has doubled (15%-30%), while home ownership has remained relatively flat (62%-68%). Prior to 1978 a good union job meant you were solidly middle class, in the 80s that changed you had to get a degree to be middle class. In the 90s it accelerates again as even non-union manufacturing jobs were shipped overseas (and foreign students shipped in). The housing bubble was entirely speculative. It was stoked by the fed keeping rates low, later fear took over as people didn't want to be either 'priced out forever' or miss out on easy money. As others have mentioned it's apples and oranges, you can not sell nor live in a degree; defaulting on your student loan will not render you homeless. The bubble and collapse in house prices is far more signigicant to the larger economy. The housing market is measured in trillions, student loans in billions. Don't get me wrong tuition is way overpriced for what you get. A drop in tuition and house prices would do everyone good.

chopsueyar 16y ago

Let student loans be dischargeable in bankruptcy and watch prices "adjust". What other asset-backed-security is tied to someone's life until they die or become physically incapacitated?

hga 16y ago
The problem here is that these are not asset backed, at least in the collateral sense. A house can be foreclosed on, a car repossessed. You can't take away the education someone's gained, although I suppose you could force schools' registrars to not confirm the granting of a degree, but that could still be proven in a variety of ways. The concern is that too many would immediately declare bankruptcy after finishing their education, wait out the 7? years it takes to for that to fall off their credit report and then get on with their lives. Since few new graduates need serious credit for anything beyond cars....
- chopsueyar 16y ago
  Please substantiate the claim "The concern is that too many would immediately declare bankruptcy after finishing their education".
- chopsueyar 16y ago
  The loan is the asset, both in cases of student loans and mortgages.
  - hga 16y ago
    Are you talking about derivative securities built on top of loans?
    - chopsueyar 16y ago
      A pool of loans. https://www.salliemae.com/about/investors/debtasset/slmsltrusts/ https://www.salliemae.com/about/investors/debtasset/slmsltru...

blahblahblah 16y ago

There is no bubble. The return on investment for a college education may be less than what it once was, but the net present value of a bachelor's degree is still positive. That's an economic argument predicated on the proposition that an education's function is solely to develop human capital, thereby increasing productive capacity of the person and enabling that person to earn more for their services relative to what they would have earned without a degree. This, of course, ignores another significant component of economic behavior regarding education. Specifically, in addition to it's vocational value, education is a service purchased to meet the human need for self-actualization. When you see a human-interest article in the local news about a 70 year old grandmother who has just completed her bachelor's degree, you are seeing evidence of economic demand for education that has no vocational basis. I am not saying that the existing trend of the cost of tuition outpacing CPI can continue indefinitely. Clearly it can't. However, it is a mistake to label the present circumstance as a bubble.

DrJokepu 16y ago
You mention that the net value of a bachelor degree is positive. I'm writing this on my phone so I don't have access to any numbers but I wonder what the spread (statistical dispersion) is. More specifically, it would be interesting to know whether a large proportion of graduates enjoy some net positive gains due to their degree or only a small minority enjoys out of proportion gains while the rest is losing somewhat.

chopsueyar 16y ago

Housing bubble was caused by mortgages, not houses. Higher Ed bubble is caused by student loans, not degrees. So this whole argument about "you can't sell your degree" is BS. These educational loans are pooled together and sold as asset backed securities. So, yes, if you have student loans, your degree can be sold, but probably not by you.

melonakos 16y ago

I totally agree and wrote a similar piece a few months ago, calling it "Wallowing in Education", http://www.melonakos.com/2010/07/25/wallowing_in_education/ http://www.melonakos.com/2010/07/25/wallowing_in_education/