Higher Education’s Precarious Hold on Consumer Confidence

Peter Wood

Is American higher education caught in the twenty-first century equivalent of the Dutch tulip mania? On February 3, 1636, the contract price of tulip bulbs traded in Haarlem collapsed. The prices for the fancier multicolored varieties had been driven up to crazy heights by futures speculators. The reckoning that followed has, of course, become everyone’s favorite metaphor for subsequent “bubbles”—those aberrations of the market in which people vastly overvalue a good because they believe its price will only continue to soar. We have had in recent memory a tech bubble and a real estate bubble, both on a scale to make seventeenth-century Dutch tulips blush for shame.

Could American higher education be in the same fix? In the last few years an increasing number of observers speaking from distinct perspectives have converged on this idea. Recently the idea of a “college bubble” has been connected to the name of PayPal co-founder, Facebook investor, and hedge fund billionaire Peter Thiel, who backed up his doubts about higher education by awarding twenty college students $100,000 each to leave college for two years and devote their time to entrepreneurship.1 The Thiel Foundation’s provocation has been answered indignantly by many in higher education. In the online culture and current affairs magazine Slate, Jacob Weisberg attacked the Thiel Fellowships as “an appalling plan,” and spoke of Thiel’s “contempt for American universities.”2 Sarah Lacy posted an interview with Thiel about the higher education bubble on Tech Crunch in which she described him as having “a special talent for making people furious.”3 Lacy summarized Thiel’s view of college education as another instance of “consumption masquerading as investment.” Thiel’s accurate and timely predictions of the high tech bubble and the real estate bubble give his warning some heft. But Lacy was half-right about the response: hundreds of readers piled on, but roughly half endorsed Thiel’s view.

Amanda Fairbanks writing for The Huffington Post weighed in with an article that proclaimed, “Thiel’s Bubble Theory Gains Few Believers.”4 Posted comments to the piece, however, contradicted the headline. The National Review ran a more sympathetic interview with Thiel in which he says “Education is a bubble in a classic sense,” and proceeds:

People are not getting their money’s worth, objectively, when you do the math. And at the same time it is something that is incredibly intensively believed; there’s this sort of psycho-social component to people taking on these enormous debts when they go to college simply because that’s what everybody’s doing.

It is, to my mind, in some ways worse than the housing bubble. There are a few things that make it worse. One is that when people make a mistake in taking on an education loan, they’re legally much more difficult to get out of than housing loans. With housing, typically they’re non-recourse—you can just walk out of the house. With education, they’re recourse, and they typically survive bankruptcy. If you borrowed money and went to a college where the education didn’t create any value, that is potentially a really big mistake.5

Thiel’s views are so widely reported and discussed that it is tempting to treat the higher education bubble hypothesis as primarily his, but this is far from the case. A body of scholarship and intellectual debate on the idea has been building for several years. Thiel’s main contribution has been to vault the idea to broader public attention.6

But Thiel aside, what is “the bubble”? The outlines are simple. The price of attaining a college degree has skyrocketed while the rewards have slumped. Sooner or later, people will notice that they are being asked to spend a great deal of money for a meager result. If enough people notice this and consequently decide not to spend at comparable levels and to seek lower-priced alternatives the bubble will burst.

Defenders of the current system point to reasons why this won’t happen. My own view is that we are indeed facing a bubble, but before turning to that prognosis, it helps to start with the counterarguments. There are many in higher education who see no bubble and who read the tulip leaves differently.

The High Prices Are Warranted

No one denies that prices have skyrocketed, but it is possible to argue that the price increases reflect real increases in the quality of the service. Those price increases, for example, reflect the transformation of campus living facilities. Spartan dorms have been replaced with apartment-style accommodations. Campus recreational facilities often set a standard far above high-end private fitness centers. College faculties now typically include a few name-brand novelists or celebrity artists—who are paid premium salaries. Typical college campus “support services” have grown from barebones to a galaxy of therapeutic and assistive alternatives. The price of tuition reflects the typical college’s army of professionals who staff the women’s center; the writing center; the undergraduate research center; the internship program; all the racial, ethnic, and sexual orientation identity-group programs; the community service initiatives; the tutoring programs; the crisis intervention center(s); the hate-speech reporting system; and so on.

The escalation in the price of college also reflects the proliferation of academic programs. All those boutique majors cost something, and every time a college creates a new one—say “critical globalization studies”—it initiates a new cycle of faculty hiring. Each academic center aspires to be a department, and each department scrambles to win new “lines” for hiring full-time faculty members who will share the teaching and expand the sense of intellectual excitement.

When it is pointed out that the public does not need or even necessarily want all these cost-driving amenities and services, apologists for the academy have a ready reply: the public has thus far been ready and willing to buy them, and indeed in some cases the college that fails to offer them is at a competitive disadvantage.


The added amenities, services, and proliferation of academic programs are important factors in driving up underlying costs, and colleges and universities in the last thirty years have tended to compete with one another more on the campus lifestyles they offer than on the quality of their academic programs. This doesn’t mean there is no bubble. It just means that to understand the psychology of the bubble, we have to focus on what colleges have actually been selling.

At some level, of course, they are “selling” higher education, most pertinently symbolized by the undergraduate college degree. But it has become extraordinarily difficult for most colleges and universities to explain what is distinctive and good about their academic programs and just as difficult for the public to make informed judgments about what makes one academic program better than another. Academically, colleges these days look much alike. They differ most conspicuously in size, location, prestige, and price. Students genuinely concerned about the quality of academic programs typically have to rely on proxies for actual quality, such as selectivity, reputation, and U.S. News & World Report rankings.

Those proxies aren’t worthless, but they end up being too vague for students and parents to make well-informed judgments. The arena of competition thus shifts to the things people can evaluate for themselves—residence halls and sports complexes—and colleges focus recruitment strategies on selling these mystiques. Some students, of course, know exactly what they want academically and can find out with fair reliability which college or university can provide it. The great majority, however, are not so goal-directed, and higher education has generally marketed itself to these impressionable seekers.

The high price of college is not warranted by the increased amenities and services or the need to compete in offering such add-ons. Rather, the add-ons are the product of a system that has grown estranged from its basic mission of educating students. American higher education is currently a form of mass-marketing focused on getting poorly-informed consumers to choose on the basis of packaging. To justify the prices by saying, “consumers like the packaging,” is to miss the point. The bubble bursts when a substantial percentage of consumers realize they are paying extraordinary sums for an education that is more show than substance—and that even the show no longer fools the larger marketplace.

A College Degree Is Still the Best Investment

Some dismiss the idea of a higher education bubble by arguing that despite the high price of a college degree, having one is still financially advantageous to an individual graduate. The oft-cited (and oft-refuted) key statistic is that a college graduate’s average lifetime earnings are nearly $1 million higher than the high school graduate without a college degree.

Another strand of this argument is the seemingly unanswerable question, “Where else will the ambitious American high school graduate go?” From this perspective, college is the inevitable choice for many. But which college and at what price?

Perhaps the most eloquent advocate of the view that the bubble is nonsense and a college degree is still worth its weigh in lifetime earnings is Kevin Carey, policy director of the Washington, D.C., think tank Education Sector. In a widely noted June 2011 article in The New Republic, Carey compared the current talk of a higher education bubble to a cycle of pessimism in the 1970s and 1980s about the value of college degrees.7 Richard Freeman’s The Overeducated American (Academic Press, 1976) turned out to be a false prophecy that “college-educated Americans are losing their economic advantage.” To the contrary, writes Carey, “The inflation-adjusted median wage of bachelor’s degree holders increased 34 percent from 1983 to 2008.” He adds that inflation adjusted earnings for high school dropouts fell 2 percent during this time, and the “the biggest gains came at the high end of the income spectrum.”8 Bachelor’s degree holders were 37 percent of the top three deciles of income in 1970, 48 percent in 2007.

Carey also suggests some of the reasons why college graduates fared better during this period. Routine repetitive jobs have been automated or fled abroad; the jobs that remain “require increasingly sophisticated skills”; the labor market prizes workers who can “take advantage of complex technologies and manipulate flows of information”; and companies “have to manage increasingly complex supply chains,” which takes “high-value professional services.”9

He rounds out the picture with some stories of people who struggled when they were fresh out of college in the 1980s and are now doing just fine. Smith College French and Arabic major Sally Cameron had to tend bar when she finished her master’s degree at Yale in 1980; now she is “a senior manager at an international development consulting company” helping French-speaking Madagascar build railroad lines.

Carey is far from alone in dismissing talk of a higher education bubble. In “What Bubble?” Robert Archibald and David Feldman, economics professors at the College of William and Mary, recently explained on Inside Higher Ed that the surge in the price of college is more apparent than real.10 Using College Board data, they argue that net tuition and fees have actually fallen over the last years when grants and tuition tax credits are taken into account. But Archibald and Feldman also offer a version of the argument that college is still a good investment for the individual. A typical college graduate, they say, catches up in cumulative earnings with the typical high school graduate by age 33. And while “median real earnings of individuals aged 25–40 with a B.A. or higher have indeed shown scant increases in recent years,” median real earnings of those with “less than a B.A.” have “fallen significantly.” They also calculate that in 1980, “28 percent of college graduates between the ages of 25 and 40 earned less than the median income of people in the same age range whose education stopped with a high school degree.”11 In 2010, that percentage fell to 18.

Those who argue that a college degree remains a valuable investment to the individual degree-seeker (and to the country as a whole) gained a major statement of support in June 2011, when the Georgetown University Center on Education and the Workforce released a forty-four-page report by Anthony Carnevale and Stephen Rose: The Undereducated American. The title neatly inverts Richard Freeman’s 1976 book, and so does the argument. Carnevale and Rose claim that the widening gap in earnings between college graduates and others shows that the demand for college-educated workers outstrips the supply and in that light, “The United States has been underproducing college-going workers since 1980.”12

They urge that to fix this problem, the nation should “add 20 million postsecondary-educated workers to the workforce.” Doing so would not only benefit those workers through enhanced income but lower “income inequality” overall.13 The goal of adding twenty million new “post-secondary educated workers,” in the next fifteen years is, not coincidentally, the main objective of the Lumina Foundation, which along with the Bill and Melinda Gates Foundation, sponsored Carnevale and Rose’s research. The Undereducated American was released simultaneously with a high-profile Sunday New York Times article, “Even for Cashiers, College Pays Off,” by David Leonhardt, that included a chart drawing from the report’s data showing that the median salary of college-educated dishwashers, hairdressers, and cashiers is much higher than the median salary of people who fill those positions with only a high school education.14


A college degree does mean that, on average, the individual gains a premium in lifetime earnings, but the size of this premium is strongly disputed. One recent study performed by PayScale for Bloomberg Businessweek calculated the value of the premium at about $400,000 over thirty years.15 Mark Schneider, a vice president of the American Institutes for Research, puts the figure at $279,000.16 In any case, it is an average, and for many graduates from ordinary colleges and universities there is no premium. The PayScale study found “the number of schools that actually make good on the estimates of the earlier research is vanishingly small.” The researchers found only seventeen schools “whose graduates can expect to recoup the cost of their education and out-earn a high school graduate by $1.2 million.” The return on investment at five hundred other schools in the survey was “less—sometimes far less.”17

Moreover, the increase in lifetime earnings ought to be weighed against at least three other factors. First, many students graduate with large debt in the form of student loans and their choices of career and family are constrained by these debts. Second, the opportunity cost of attending college can be very high. Four or five years spent attending college with stints of part-time and summer employment do not offset the career advantages that would come with steady employment during that period in a young person’s life. Third, college all too often has the effect of fostering a sense of entitlement and other attitudes that are dysfunctional in the workplace. Graduates who emerge from their studies equipped with a withering disdain for capitalism, for example, are not likely to achieve that famous premium in lifetime earnings.

The premium itself, however, may be a casualty of deeper changes in the economy. The current recession has left many college-educated workers unemployed and many more under-employed. In coming years, the undergraduate college degree may simply not command any premium, except as a gateway to more advanced degrees.

The idea that ambitious high school graduates have no practical alternative to a traditional college to begin their careers also appears to be crumbling. More and more students are enrolling in lower-priced community colleges, either to earn an associate’s degree or to transfer as juniors to a senior college. Online education is also luring more and more students to the idea of gaining college credentials through part-time study while working full-time. All it would take for higher education’s bubble to pop would be a significant increase in the percent of students defecting to community colleges or online programs. Perhaps as little as a ten-percent shift would pose dramatic problems for the expensive second-tier private colleges.

Kevin Carey’s argument, however, deserves closer attention. He reminds us to be wary of drawing dire conclusions from a foreshortened perspective. Liberal arts graduates of every generation have often had to struggle to get their footing in the workaday world. Most eventually do—or at least most eventually have. But in my view, Carey’s own perspective is foreshortened. The period he focuses on—1983 to 2008—as one of substantial growth in the median income of college graduates and substantial improvement in earning relative to non-college graduates is the historic era of transition to a high-tech economy and ballooning service sector. Fortunes were made in the world of Microsoft, Intel, Apple, Google, and the myriad lesser known corporate contributors to this transition. Can we expect more of the same?

Part of the economic reality we face now is the off-shoring of many of these high-tech jobs. Globalization has arrived in a way that would seem destined to cut against Carey’s optimistic picture. Those sophisticated workers who can “take advantage of complex technologies and manipulate flows of information” can be found many places besides the U.S.18 Moreover, only a small fraction of American college graduates come close to fitting that description. Carey’s optimism seems to be founded on the assumption that the recent past is prologue to the future. That could be true for the Sally Camerons of the class of 2011 who enter the workforce with elite academic pedigrees. They may have to tend bar or make do for a few years, but their long-term prospects remain bright. But Carey’s account says nothing about the scaling up of higher education enrollments during his chosen historical timeframe.

About twelve million students were enrolled in college in 1980 (7.098 million full-time); by 2007, there were over eighteen million (11.27 million full-time).19 This fifty-percent increase doesn’t match any conceivable increase in demand for the sorts of skills associated even in principle with the college degree. What it matches is the combination of fear and hope among families faced with extraordinary uncertainty about how to prepare their sons and daughters for a changing world. The fear was that without a college degree, their children would be left behind. The hope was that the college degree as a credential would somehow distinguish the graduate in the competition to come.

Of course, the more and more students enrolled in college, the less a college degree could serve as a distinguishing signal. Not only were there millions more with similar credentials, the credential itself stood for less and less. To accommodate that fifty-percent increase, colleges loaded up with remedial courses and lowered their academic standards.

This is where Carey’s explanation why there is no college bubble falters. He has much to say about the history of college degrees augmenting personal income, but is silent on the dilution of what the degree stands for. A fast-expanding economy presumably can absorb a large number of college graduates whose actual educational attainment is marginal. It is not clear that the slow-growth era we have entered will be that forgiving.

It should be added that comparisons between college graduates and those who hold solely a high school diploma are somewhat misleading. Many members of the relevant age of cohorts pursue college courses without earning a degree or pursue other kinds of post-secondary training. This makes comparisons more complicated, but the general effect is to reduce the relative gap in earnings.

As to the challenge laid down by Carnevale and Ross, who purport to show that even dishwashers and cashiers benefit financially from earning college degrees, the most compelling answer so far is a reply by George Leef. He observes that since college isn’t actually teaching dishwashing and cashier skills, the premium that college graduates earn when they end up doing this kind of labor is most likely evidence that the college-degreed workers possessed “natural advantages” that they would have had regardless of whether they had gone to college.20 I suppose we should think of the difference between those who are and are not capable of showing up regularly and on time and following through on the boss’s instructions.

National Interest Requires We Maintain the System

This argument comes mostly from higher education’s official advocacy organizations and the Obama administration: our competitiveness as a nation is at risk if the United States fails to build on the “excellence” already established in our system of colleges and universities. What we need is a major expansion of higher education, supported by substantial increases in state and federal aid to students and to institutions directly.

From this standpoint, the “bubble” is simply an irresponsible way to portray America’s failure to invest more public resources in higher education. Tuition and expenses are high and increasing because individuals and families are being asked to carry too large a share of the true costs of higher education. Those costs should to a much greater degree be borne by the government. Colleges and universities plunged into financial crisis by the current situation must be bailed out with public funds.

This argument subsumes several other points, that (1) a nation’s productivity does correlate closely with the percentage of the population holding college degrees, (2) the knowledge and skills cultivated by our current higher education system generally matches the developing and future needs of the marketplace, and (3) the American public would prefer a system underwritten to a much greater degree by the taxpayer. These arguments can be found in many places but are usefully summarized in the Carnevale and Ross report cited above.


The view that higher education can thrive by growing still larger and that the costs can be shifted to the “government” is unrealistic, and all underlying premises of this argument are doubtful. The nation today with the highest percentage of college graduates (45 percent) is Russia—nobody’s model of economic prosperity and competitiveness. The American public has little confidence in the overall quality of our higher education system. We see ourselves as lacking attractive alternatives and are not inclined to pay more into a system that has proven to be ineffectual.

The public policy counsel that we must keep the present system afloat for fear of economic catastrophe relies on fear of the unknown. The reality is that Americans will continue to seek practical knowledge and cultural achievement even if the system that has grown up largely since the Higher Education Act of 1965 begins to unravel. New institutions will arise to meet actual needs. The best parts of the old institutions will survive. We won’t face economic catastrophe or an uneducated mass. There are more ways to educate people than the advocates of our current system realize.

This Is a Temporary Situation; Higher Ed Will Adjust

One line of argument acknowledges a looming crisis—public funds are scarce, students are weighing alternatives to expensive four-year degree programs, some students are already priced out of college, and higher education has grown too accustomed to easy money—but we can work our way out of this corner. The right kinds of budget austerity combined with an improved financial outlook will enable all but a handful of colleges and universities to weather the storm. And higher education is already adapting to the changing technological landscape, absorbing online teaching innovations and e-textbooks, and adjusting the curriculum to contemporary needs. Talk of a “bubble” is a wild exaggeration for a period of financial stress. After all, enrollments are way up and many schools are raising tuition without losing students. And the switch at the federal level from guaranteed student loans handled by banks to direct lending run by the Department of Education means that the financial lynchpin of the current system is secure.21


A sector of the economy as large and complex as higher education doesn’t collapse overnight. Investment banking, housing, and the automobile industry had numerous warning signs and plenty of opportunity to change their ways before facing a real reckoning. But those who foresee a story of adaptation and transition within higher education’s existing institutional framework might be right.

Weighing against this view are several stubborn facts. A college degree just isn’t worth that much anymore, and the public has begun to realize it. Colleges and universities are profoundly complacent about their own importance. Leaders see their institutions as indispensable; any willingness to change comes in the form of adding to existing structures. New programs proliferate but the old ones remain. Campuses have enormous sunk costs and debts. Changing their ways now will not wipe out those burdens, even as established institutions try to compete with new ones without such legacy costs.

Higher education also has expensive ideological commitments that it can’t easily shrug off, including diversity, feminism, and sustainability. These are major cost drivers that, worse, are diffused throughout the budget and kept obscure. Colleges don’t want their trustees or anyone else trying to calculate what they spend annually to engage in the exercises of identity politics. A cost that can’t be tracked is a cost that can’t be controlled.

Some institutions have the resources to continue these forms of profligacy for a long time, but most don’t. The financial crunch has begun to force administrators to make unwelcome choices. Their pain will increase as public skepticism about a college degree’s value grows. Will colleges prove nimble enough to cut costs, jettison supernumerary programs, and re-launch themselves in time to keep students enrolled? There isn’t much evidence that higher education has the will or the talent to do this.

I say colleges are complacent, but that doesn’t apply to all of them. In June 2011 I talked with a senior official of Middle States Commission on Higher Education, one of the regional accrediting bodies, who told me that their “watch list” of financially troubled institutions had risen from an average of two or three a year to more than two dozen—a historic high.

Proponents of the Bubble Thesis Overstate the Costs of College

Finally, proponents of expanding college enrollments have begun to argue that, though college tuition has significantly increased, for most students the magnitude of the increases is much less than it initially appears and college remains affordable. The idea is that formal increases in tuition and fees are offset by large increases in grants, scholarships, and tax benefits, especially to lower-income families. Carnevale and Rose, for example, include a short appendix to The Undereducated American that argues this case. They conclude, “Adding up all the direct and indirect costs of choosing to get a four-year degree (which often takes longer than four years) amount to under $150,000 for most students. Measured against added earnings of over $25,000 a years for 40 years and it’s clear that the investment in a Bachelor’s degree is a sound one.”22


The basic problem with this argument is its reliance on averages. Colleges do discount their stated prices by offering “grants” to selected students, but this still leaves a great number of students facing very high bills and acquiring huge levels of debt from student loans. Even if Carnevale and Rose’s estimate of $150,000 as the average cost of a four-year degree is accurate, the actual cost for many must be much higher. Likewise, the assertion that the degree will increment the earnings of graduates by $25,000 per year for forty years leaves aside the large number for whom that won’t actually happen. The bubble hypothesis doesn’t depend on the cost/benefit ratio sliding into the negative for all students. The housing bubble didn’t put all home-owning Americans into foreclosure, and the high tech bubble didn’t wipe out the whole computer industry. A higher education bubble exists if the economic calculus of going to college turns out to work against a significant percentage of those now in the queue—and they act on this knowledge.

The Prospects

I’m uncertain whether the economist Andrew Gillen was the first to use the term “bubble” in this context, but his April 2008 research report, A Tuition Bubble? Lessons from the Housing Bubble, is the foundational document on this topic.23 Gillen built the comparison to the housing bubble methodically, allowing for differences in context and pressing underlying commonalities. Gillen’s “main argument” is that “lax lending standards and artificially low interest rates for student loans exacerbate tuition increases because they increase the ability of too many students to pay.”24 He deals with the seeming paradox that while government subsidies succeed in lowering consumer prices for some goods, they do the opposite in higher education by enabling colleges and universities to raise their prices. Technically, “the supply of higher education may be inelastic.”25

Anyone who has tried to open a new college recently has a good idea why. The legal and financial barriers to entry are formidable. It can take a decade or more simply to acquire the requisite authorizations, by which time government incentives aimed at expanding supply have long since been consumed without effect. Stimulate demand without increasing supply and prices go up.

Gillen’s report must be read carefully. The case for a bubble in higher education is primarily his—but he is far from alone in discussing the idea.

Journalists have been writing about the possibility of a higher education bubble for the last three years. In October 2008 Forbes followed Gillen’s interrogatory lead with “The Coming College Bubble?” citing the closing of Antioch College, the rise of college tuition at “more than three times the rate of inflation for the last 20 years,” and the low level of college endowments.26 One consultant quoted predicted a wave of consolidations following this period of overexpansion.

In May 2009 the Chronicle of Higher Education weighed in, asking “Will Higher Education Be the Next Bubble to Burst?” It offered a sobering statistic from the National Center for Public Policy and Higher Education: tuition and fees had climbed more than 440 percent in the preceding twenty-five years.27 The Chronicle’s alarm was deepened by the disarray in the private student loan market, which had become the key for many in paying gargantuan tuition bills. The Chronicle also noted the demographic reality that the number of college-age students peaked in 2009 and would decline over the next decade. The article concluded with a survey of things colleges can do to “keep the bubble from bursting”: cut costs, offer more online courses, break away from the “medieval guild tradition of one faculty member controlling all forms of communication.”28 The Chronicle saw some hope in American universities attracting more international students and enrolling government-funded veterans, but this was an unmistakably chilly report from a publication better known for its relentless optimism about American higher education.

Hard on the Chronicle’s heels came a blog posting in the New York Times by Mark Taylor, chairman of Columbia University’s religion department, who declared, “The next bubble to burst will be the education bubble.”29 Taylor expanded on this idea in Crisis on Campus: A Bold Plan for Reforming Our Colleges and Universities (Knopf, 2010). Back in May 2009 he explained:

Make no mistake about it, education is big business and, like other big businesses, it is in big trouble. What people outside the education bubble don’t realize and people inside won’t admit is that many colleges and universities are in the same position that major banks and financial institutions are: their assets (endowments down 30–40 percent this year) are plummeting, their liabilities (debts) are growing, most of their costs are fixed and rising, and their income (return on investments, support from government and private donations, etc.) is falling.30

Taylor, hardly considered a hostile critic of higher education, attracted considerable attention, mostly adverse, from fellow academics.

The Times returned to the topic with a May 2010 article on the plight of graduates burdened with student loans, described as “an eerie echo of the mortgage crisis” and faulting borrowers for making decisions “based more on emotion than reason, much as subprime borrowers assumed the value of their houses would always go up.” Scary statistic: “10 percent of people who graduated in 2007–8 with student loans had borrowed $40,000 or more. The median debt for bachelor’s degree recipients who borrowed while attending private, nonprofit colleges was $22,380.”31

Glenn Reynolds, the University of Tennessee law professor who writes the popular blog Instapundit, warned in a June 2010 Washington Examiner op-ed that “Higher Education’s Bubble Is about to Burst.” He emphasized the role of “cheap and readily available credit” that encourages people to borrow imprudently, coupled with a foolish faith that “a college education is a necessary ticket to future prosperity.”32

By Reynolds’s account, bubbles burst when we run out of “optimistic and ignorant” folks to keep them going. He sees the supply of dupes dwindling, expects higher education not to adapt, but sees hope in a rising cohort of “‘edupunks’ who are more interested in finding new ways of teaching and learning than in protecting existing interests.”33

In August 2010 Reynolds published “Further Thoughts” on the topic, noting that people are “already jumping the tracks” by skipping college and entering well-paying fields as skilled manual laborers. “And the Bureau of Labor Statistics predicts that seven of the ten fastest-growing jobs in the next decade will be based on on-the-job training rather than higher education.”34

Reynolds also spotlighted the role public policy played in encouraging higher education’s profligacy—a great expansion “made possible by an ocean of money borrowed by students.”35 That borrowing, of course, was itself made possible and encouraged by the federal policy on student loans. From the standpoint of colleges and universities, this was a sweet deal. They financed their gigantic expansion with borrowed money—but got someone else (e.g., students) to do the borrowing and to pay back the principal and the interest.

In September 2010 Michael Barone, senior policy analyst at the Washington Examiner, weighed in with “Higher Education Bubble Poised to Burst.” Barone also saw a strong parallel to the housing bubble in that higher education has been able to continue to inflate its prices thanks to its lack of “transparency.”36 In “If You Thought the Housing Bubble Was Bad…” blogger Mark Perry offered charts comparing the discrepancy between U.S. home prices and the Consumer Price Index (CPI) with the much larger discrepancy between college tuition and the CPI.37 And Mike Riggs on the Daily Caller website asked, “Higher Debt: Is the Student Loan Industry Headed for a Meltdown?”

Riggs summarized three scenarios for what happens “after the bubble bursts”: (1) that the real crunch will come only when current college graduates have college-age children while they are still trying to pay off their own student loans; (2) that the bubble has already burst and proven to be harmless—and higher education rebounds; and (3) that the bubble is real and about to burst.38 That is, of course, the position of Glenn Reynolds.

Mediating Factors

College-bound high school students probably aren’t tuning into the anxious essays on either side of this debate or reading blogs such as eduBubble.com. Nor are their parents on the whole ready to draw the line. We know this because America’s most expensive colleges and universities filled up their classes this fall without undue strain. But before we leave behind asking whether and when the higher education bubble will burst, let’s glance again at the factors that have kept it inflated.

What persuades so many students and their parents that college is the best destination after high school? The technical term we anthropologists have for this phenomenon is “custom.” A century ago, while writing their tome on The Native Tribes of Central Australia, Sir Baldwin Spencer and Francis Gillen could make no sense of the natives’ determination to keep to the old ways other than to observe that they were “bound hand and foot by custom.” This may at first seem a dead-end explanation, but it’s important to recognize that much of human behavior is like that. We stick to our accustomed grooves unless something powerful knocks us loose.

The current higher education system has its own groove in the lives of American families. Students want to go to college because their friends are going and it would be embarrassing to say to them, “No, I’m going to skip college and go to work.” Students want to go to college because it seems like a good opportunity to achieve some independence from mom and dad. They also figure, although I may not know what I want to do with my life, college is a good place to find out. Students are sensitive, moreover, to friends and family looking down on them if they settle for the wrong college—the inexpensive local one—if a pricier, more prestigious institution is an option. Status competition kicks in with custom. It did with Australian aborigines too. Getting initiated in the right totemic ceremony means a lot, whether you are in the Emu clan of the Arunta tribe, or a candidate for an eating club at Princeton.

Parents subtly or not so subtly reinforce these anxieties. They worry that people will look down on their children who don’t go to college, or that they themselves will be judged miserly if they fail to foot expensive tuition bills. Many worry that not sending their children to college really does amount to bad parenting. Colleges have gotten that far inside parents’ heads. At the same time, many parents are as eager as their teenage children to achieve some separation. Getting the kids out of the house after eighteen years is a relief, albeit an expensive one.

Can the power of custom, the desire for status, and the fear of ridicule keep the vast majority of Americans on the treadmill, paying lofty sums for an education that typically is more fantasy than fact? Let’s not underestimate the docility of the tribe. They may like to complain about the institution, but they don’t want to risk walking away from it.

The bubble bursts only when students and parents believe they have found a legitimate alternative to the current model of a four-year undergraduate degree program. It isn’t hard to see that legitimate alternatives are emerging. But it is very hard to predict the tipping point: that moment when enough students opt out of traditional college to shake the system.


If the higher education bubble burst, there would be unpleasant short-term consequences. Students would be displaced from existing colleges. Whole academic disciplines, surviving on inertia, could disappear or be returned to the category of amateur pursuits. Large numbers of faculty members could find themselves seeking alternative careers.

It is not a situation anyone would welcome, but it may be one we cannot avoid.

I have aimed here at a measured account of the problem. We have listened to the arguments of those who say the price of a college degree is warranted, that despite its cost (1) a college degree is a good investment; (2) national competitiveness requires that we keep, and expand, the present system; and (3) colleges and universities will innovate themselves out of the crisis. These are serious views, but they rest on mistaken premises. The cost-spiral in higher education over the last several decades has not been warranted by improvements in the quality of actual education. It has been driven by (a) excessive federal subsidy in the forms of student loans, (b) a buyer psychology that led many families to think that college was a virtually risk-free investment, (c) colleges and universities that chose to compete with each other in expensive amenities and atmospherics rather than in academic substance, and (d) a spirit of grandiosity.

We ought to be concerned about national competitiveness, and therefore require good ways to educate the workforce we need. We also need sophisticated, culturally informed thinkers who love America and are committed to its values and its political freedom. What we have instead is a system that loses roughly half of the students who initially enroll, that awards a nearly empty credential to many who do graduate, that burdens many graduates in deep debt in the form of student loans, and that in general inculcates disdain for America and its political traditions.

In that sense, national competiveness would almost certainly be better served by transitioning to new models of higher education and alternatives to the four-year undergraduate degree program. We are lacking neither in proposals for what to do next, nor in entrepreneurs attempting to get some of these ideas off the ground. Let’s remove the institutional obstacles and see what works.

When the Dutch tulip bubble burst, the world had no fewer flowers. Some merchants were ruined. Some schemes turned to dust. But the Dutch still had tulips. When the American higher education bubble bursts, we will still have an abundance of smart students, good books, and capable teachers. All we’ll need is a better way to put them together.

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