Has college tuition reached a bubble? Ashley Thorne’s “no comment” item from 7/20 presented a rise in tuition prices over the last 30 years that made the rise in home prices seem like the impact of a five-piece Big Red gum pack rising from $.25 to $.30.
This idea of a tuition bubble is not new. After the housing bubble burst in 2008, there were papers and articles suggesting that student loans are the next bubble in line to pop. For example, Andrew Gillen wrote a research paper for the Center for College Affordability and Productivity titled, “A Tuition Bubble? Lessons from the Housing Bubble.” More recently, the New York Times published an article in May that describes the plight of students buried in student loan debt, including some who owe $100,000 for undergraduate work.
I assert that the appropriate question to ask is not whether there is a bubble. Tuition alone is only part of the problem; college is also oversold to a degree. Taken together, enrollments have increased while tuition has skyrocketed, students borrow astronomical amounts of money without considering their ability to pay back the loans, lenders lend the equivalent of a no doc subprime loan to these students (many with no credit history), and it is doubtful whether higher education provides much education aside from 19 different versions of beer pong rules.
Rather than speculating as to whether there is a bubble, a better question to ask is whether the status quo is sustainable. If it is not sustainable, what events could trigger the equivalent of a bubble burst for higher education? Let’s consider some options:
1. The iPod Scenarios (Traditional college becomes obsolete when better options arise)
- A new credential arises that employers see as a more valid measure of job readiness than the four-year college degree
In a 2008 Wall Street Journal op-ed, Charles Murray advocated a menu of different certification exams to take the place of the one-size-fits-all BA. Murray argued that the current form of the BA is inadequate:
“Imagine that America had no system of post-secondary education, and you were a member of a task force assigned to create one from scratch. One of your colleagues submits this proposal:
First, we will set up a single goal to represent educational success, which will take four years to achieve no matter what is being taught. We will attach an economic reward to it that seldom has anything to do with what has been learned. We will urge large numbers of people who do not possess adequate ability to try to achieve the goal, wait until they have spent a lot of time and money, and then deny it to them. We will stigmatize everyone who doesn't meet the goal. We will call the goal a "BA."
You would conclude that your colleague was cruel, not to say insane. But that's the system we have in place.”
Exams such as the Collegiate Learning Assessment (CLA) can assess job aptitude and readiness; according to
While cases have been made against
The elephant in the room with this scenario is that employers would need to get on board with the use of such exams. Employers have institutionalized the college degree as a job requirement. For some organizations, the degree may be used in place of employment tests, which invite adverse impact lawsuits in today’s legal climate.
If a company such as Google supported such tests, it would send a signal to the rest of the market that a change is in the works.
- Online universities deliver a college degree at a cheaper price
Widespread online degree acceptance has the potential to generate a large exodus from traditional universities due to convenience and cost. But this has mixed results. Online programs are not renowned for increased learning. Many offer the same intellectually shallow courses as brick-and-mortar schools. Online programs also have to steer clear of the overselling phenomenon as well, as evidenced by this New York Times article.
Yet, as Ashley Thorne reported on this site this May,
2. The Barney Frank Scenario (A new financial crisis)
- The student loan default rate rises, loan interest rates rise, more defaults
With a poor job market over the last few years, this drumbeat has been getting louder. As noted by Gillen and others, the student loan market contains many similarities to the pre-bust housing market. Additionally, we have not really seen the effect of the last 10 years of soaring tuition on defaults, as much of the default data contains pre-2000 student loans. What will this graph look like in 2020?
Additionally, the debt burden has social consequences. Recent graduates move in with their parents because $500-$700 monthly student loan payments wreak havoc on their budgets. These graduates may also be less inclined to start businesses, instead preferring to seek employment that pays wages that allow them to pay those student loans.
Could these possible defaults be the scenario that pops any higher education bubble or are we to expect the government to bail out any crisis?
3. The Gatling Gun Scenario (Just blow everything up)
The government ends the direct loan business and exits the student loan industry
Without unlimited funds available for college, prospective students would have to conduct a cost-benefit analysis based on tuition and future earnings. If tuition remains unchanged, college would need to be financed through private lending or personal savings. Yet, it is more likely that colleges would have to lower tuition considerably to accommodate the desired number of new enrollments.
Of course, barring a Ron Paul presidential victory in 2012, this situation is unlikely. The government is currently taking an increasing role in student aid, which as noted on this site, just compounds the situation by giving lawmakers the ability to exert greater influence over the actions of the institutions where they foot the bill.
Maybe there is no urgent, systemic problem. Gillen even acknowledges that higher education is a unique, inefficient industry with inelastic prices that does not seek to maximize profit. It is possible that higher education will continue its bloated ways, and only wise individuals will buck the system if they determine that there is a better option.
I am not content with just sitting back. While I think there is good reason to blow up the current system and start anew, I am also a realist. There may be a bust someday, but rather than waiting for it, why not try to improve the situation whenever possible – even if it is one student at a time? I talk to finance majors who tell me that they “will worry about paying their loans back after they graduate.” These students really have no clue what they are doing to their financial futures.
While the book is a little dated, I always recommend that students read The Millionaire Next Door by Professors Thomas Stanley and William Danko. Through empirical data and anecdotes, Stanley and Danko show how many individuals worth over $1 million are not high-powered executives, but rather people in all lines of work who made smart financial decisions. Throughout the book, the reader is hit over the head time after time with the message that income does not equal wealth.
I would rather that the financial aid exit interview replace its current questions with ones about Stanley and Danko’s book, as opposed to the current practice of using questions something like:
1. Do you realize that you have to pay this money back?
2. Do you really, really realize that you have to pay this money back?
3. When you receive a student loan bill in the mail, you should:
a. Do nothing
b. Pay it
c. Show it to your parents
d. Ask for a raise
The higher education situation is not a mirror image of the housing bubble, but as Mark Twain is credited with saying, “history does not repeat itself, but sometimes it does rhyme.” Each year, thousands of student loan borrowers are overburdening themselves with 30 years of payments that they cannot afford to pay; that practice is not sustainable. Additionally, all they will get for that debt is a piece of paper of questionable worth – that is, if they graduate. Bubble or no bubble, this story sounds too familiar. As the proverb goes, “fool me once, shame on you; fool me twice, shame on me.”