The Bubble: Higher Education's Precarious Hold on Consumer Confidence

Peter Wood

Is American higher education caught in the 21st 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 multi-colored 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.  The outlines are simple.  The price of attaining a college degree has skyrocketed while the rewards of attaining a college degree 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—daisies instead of tulips—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 counter-arguments.  There are many in higher ed who see no bubble and who read the tulip leaves differently.

1. 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 on many campuses 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.  The “support services” on the typical college campus have grown from barebones to a whole 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, the 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—such as luxury residence halls and recreational facilities, the college that fails to offer them is at a competitive disadvantage.

Response:   The added amenities, services, and proliferation of academic programs are indeed important factors in driving up underlying costs, and yes, colleges and universities in the last thirty years or so have tended to compete with one another less on the real quality of their academic programs than on the lifestyles they offer and the ambiance of their campuses.  This doesn’t mean there is no bubble.  It just means that to understand the psychology of the bubble, we have to keep in focus 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 of course price.  Students who are genuinely concerned about the quality of academic programs typically have to rely on proxies for actual quality, which includes factors such as selectivity, reputation, and rankings in publications such as U.S. News & World Report.  

Those proxies aren’t entirely worthless but they end up being way too vague for students and their parents to make well-informed judgments about most colleges. The arena of competition thus shifts to the things people can see and judge for themselves such as residence halls and sports complexes, and colleges focus their recruitment strategies on selling their mystiques.  Some students, of course, know exactly what they want in an academic program and can find out with fair reliability which college or university can provide it.  The great majority of students, 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 for colleges 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, “The 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.

2.       2. 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 grad’s average life-time earnings are nearly $1 million higher than the high school grad who didn’t attain 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.  That leaves open the questions of “Which college?  At what price?” 

Response:  A college degree does mean that, on average, the individual gains a premium in life-time 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 as about $400,000 over 30 years. Mark Schneider, a vice president of the American Institutes for Research, puts the figure at $279,000.  In any case, it is an average, and for many students who have graduated from ordinary colleges and universities, there is no premium at all.  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 17 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 500 other schools in the survey was “less—sometimes far less.”

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.  The New York Times for example last week devoted a front page story to student debt as an obstacle to marriage.  Second, the opportunity cost of attending college can be very high.  Four or five years spent attending college perhaps 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 in the graduate 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 too likely to achieve that famous premium in lifetime earnings—though I suppose we should allow for the Ben & Jerry’s exception.

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.  The undergraduate college degree in the years to come may simply not command any premium at all, except as a gateway to more advanced degrees. 

The idea that ambitious high school graduates have no practical alternative to a traditional college as a way of starting their careers also appears to be crumbling. Two alternatives are quickly gaining ground.  More and more students are enrolling in lower-priced community colleges either to take a terminal associate’s degree or to transfer as juniors to a senior college.  And online education is 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.

3. National Interest Requires We Maintain the System

This is an argument that I hear mostly from higher education’s official advocacy organizations and the Obama administrationour 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.  

The “bubble” from this point of view is simply an irresponsible way to portray the nation’s failure to invest more public resources in higher education. Tuition and expenses are high and getting higher because individuals and families are being asked to carry to large a share of the true costs of higher education.  Those costs should to a much greater degree be borne by the government.  To the extent that colleges and universities are being plunged into financial crisis by the current situation, the answer is that they must be bailed out with public funds. 

This argument subsumes several other points:  that a nation’s productivity really does correlate closely with the percentage of the population holding college degrees; that the knowledge and skills cultivated by our current system of higher education generally match the developing and future needs of the marketplace; and that the American public would prefer a system of higher education underwritten to a much greater degree by the taxpayer. 

Response:  The view that higher education can thrive by growing still larger and that the costs can be shifted away from the tuition-paying student to the “government” is unrealistic, and all the underlying premises of this argument are doubtful.  The nation that currently has the highest percentage of college graduates, at 45 percent, is Russia—which is nobody’s model of economic prosperity and competitiveness.  The American public has little confidence in the overall quality of our higher education system.  It has simply viewed itself as lacking attractive alternatives.  The public is not inclined to pay more and more into a system that has proven to be ineffectual. 

The public policy counsel that we have to keep the present system afloat for fear of some economic catastrophe relies on fear of the unknown.  The reality is that Americans will continue to seek both practical knowledge and cultural achievement even if the system of higher education that has grown up largely since the Higher Education Act of 1965 begins to unravel.  New institutions will arise to meet the 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.

4. 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 way too accustomed to easy money.  But, say, the advocates of this view, 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.  It is absorbing online teaching innovations and e-textbooks; and it is adjusting the curriculum to the needs of the time.  Talk of a “bubble” is just a wild exaggeration for a period of financial stress.  After all, enrollments are way up this year and many colleges and universities succeeded in raising their tuition without losing students.  The demand is still there.  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.

Response:  A sector of the economy as large and complex as higher education doesn’t collapse overnight.   Investment banking, housing, and the automobile industry also had numerous warning signs and plenty of opportunity to change their ways before they faced a real reckoning.   But those who foresee a story of adaptation and transition within the existing institutional framework of higher education might be right.  Weighing against this view, however, are several stubborn facts.  A college degree just isn’t worth that much anymore.  The public has begun to realize it.  Colleges and universities are profoundly complacent about their own importance.  The leaders see their institutions as indispensable.  Whatever willingness they have to change is in the form of adding to the 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 they try to compete with new institutions that have no such legacy costs. 

Higher education also has expensive ideological commitments that it can’t easily shrug off, including diversity, feminism, and sustainability.  Each of these is a major cost driver that, worse, is 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 colleges and universities, of course, have the resources to continue these forms of profligacy for a long time to come.  But most don’t.  The financial crunch has already begun, forcing administrators to make choices they would rather not.  Their pain will increase as public skepticism about the value of a college degree grows.   The key question is whether colleges will prove sufficiently nimble as to cut costs, jettison supernumerary programs, and re-launch themselves in time to keep their doors open.   There isn’t much evidence right now that higher education has either the will or the talent to do this.  

The Prospects

I am not sure if the economist Andrew Gillen is the first to use the term “bubble” in this context, or even the first to cast it as a question, but his research report, “A Tuition Bubble? Lessons from the Housing Bubble” in April 2008 is the foundational document on this topic.  He built the comparison to the housing bubble slowly and methodically, allowing for the differences in context as well as pressing the 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.” 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.”  

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 any government incentives aimed at expanding supply have long since been consumed without effect.  Stimulate demand without increasing supply and as night follows day, prices go up. 

Gillen’s article has to be read carefully.  The case for there being an actual bubble in higher education is primarily his.  But he is far from alone is discussing the idea.

Journalists have been writing about the possibility of a higher education bubble for the last two years.   Forbes continues Gillen’s practice of casting the title as a question in “The Coming College Bubble?” in October 2008.  It cited the closing of AntiochCollege and 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.  One consultant is quoted predicting that a wave of consolidations will follow this period of overexpansion.

The Chronicle of Higher Education weighed in with another question mark in the title, “Will Higher Education Be the Next Bubble to Burst?” in May 2009. 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 25 years.  The Chronicle’s alarm was deepened by the disarray in the private student loan market, which had become the key for many students in paying their gargantuan tuition bills.  The Chronicle also noted the demographic reality that the number of college-aged students had peaked in 2009 and would decline over the next decade.  The article concludes with a survey of things colleges can do to “keep the bubble from bursting.”  Cut costs, offer more online courses, and break away from the “medieval guild tradition of one faculty member controlling all forms of communication.”  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 that is better known for its relentless optimism about American higher education.

Hard on its heels came a blog in the New York Times from Mark Taylor, chairman of the religion department at ColumbiaUniversity, who flatly declared, “The next bubble to burst will be the education bubble.”  Taylor has now written a book expanding on this idea.  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.

Taylor, who could hardly be thought of as a hostile critic of higher education, attracted considerable attention, most of it adverse, from fellow academics.

The Times returned to the topic a year later (May 2010) with an 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.”

Glenn Reynolds, the University of Tennessee law professor who writes the popular blog Instapundit, warned in June of this year in The Examiner that “Higher Education’s Bubble Is about to Burst.”  Reynolds has continued to track media discussions of the situation.  He emphasizes the role of “cheap and readily available credit” that encouraged people to borrow imprudently, coupled with a foolish faith that “a college education is a necessary ticket to future prosperity.”

By Reynolds’ account, bubbles burst when we run out of credulous (“optimistic and ignorant”) folks to keep them going.  He sees the supply of dupes dwindling; expects higher ed 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.”

Reynolds followed up in August with some Further thoughts on the topic.  He noted people who are “jumping the tracks” by skipping college and going into 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.”

Reynolds also spotlighted the role played by public policy in encouraging higher education’s profligacy.  The great expansion was, “made possible by an ocean of money borrowed by students.”  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.

This month, Michael Barone has weighed in, writing, “Higher Education Bubble Poised to Burst.”  He too sees a strong parallel to the housing bubble.  As with housing, higher education has been able to continue to inflate its prices thanks to its lack of “transparency.”

Blogger Mark Perry writing under the title “If You Thought the Housing Bubble Was Bad…” offers charts comparing the discrepancy between the U.S. home prices and the Consumer Price Index with the much larger discrepancy between college tuition and the CPI.

And Mike Riggs in the Daily Caller returns to the interrogatory title with “Higher Debt: Is the Student Loan Industry Headed for a Meltdown?”  Riggs summarizes three scenarios for what happens “after the bubble bursts.”  One scenario is that the real crunch will come only when current college grads themselves have college age-children while they are still trying to pay off their own student loans.  Another scenario is that the bubble has already burst and proven to be harmless.  Higher education has rebounded and the danger is past.  The third view is that the bubble is real and its bursting is imminent.  That is, of course, the position of Glenn Reynolds.

Mediating Factors

Students in high school who are preparing for college are probably not tuning in to the anxious essays on either side of this debate or reading blogs such as  Nor are their parents on the whole ready to draw the line.  We know this because the nation’s most expensive colleges and universities filled up their classes this fall without undue strain.  So before we leave the question of if and when the bubble will burst, it is worth one more glance at the factors that have kept it going.  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, Sir Baldwin Spencer and Francis Gillen (different Gillen) writing their tome on The Native Tribes of Central Australia, 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 seem at first glance a dead-end explanation—little more than ‘they do things that way because that’s how they do them.’  But it is important to recognize that a great deal of human behavior is like that. We stick to our accustomed grooves unless something powerful knocks us loose.

The current system of higher education 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 get out of the house and achieve some independence from mom and dad.  They also figure that, though 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 available.  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 off to college, or that the parents themselves will be judged miserly if they fail to foot the expensive tuition bills.  And many worry that not sending their children to college really does amount to bad parenting.  Colleges have gotten that far inside the heads of American parents.  At the same time, a good many parents are as eager as their teenage children to achieve some separation.  Getting the kids out of the house after 17 years is a relief, even if it is 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 do not 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 (e.g. prestigious programs in trades such as cooking; online programs).  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 were to 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.  Faculty members could find themselves in large numbers 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, a college degree is a good investment; that national competitiveness requires that we keep—and expand—the present system; and that 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 excessive federal subsidy in the forms of student loans; by a buyer psychology that led many families to think that college was a virtually risk-free investment; by colleges and universities that chose to compete with each other in expensive amenities atmospherics rather than academic substance; and by a spirit of grandiosity.

We ought to be concerned about national competitiveness, and to that end we need good ways to educate the workforce we need.  We also need sophisticated, culturally informed thinkers who love the country and who 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 by and large inculcates disdain for the nation 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 not lacking in proposals for what to do next, nor are we lacking in entrepreneurs who are 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.  Likewise, when the American higher education bubble bursts, we will still have an abundance of smart students, good books, and capable teachers. All we will need is a better way to put them together.

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