Higher Education: The Next Big, Bad Bubble

Tuition is rising because loans are heavily-subsidized by the government, and universities (especially for-profit universities) are taking advantage.

It's a simple business model - spend a ton on ROI-positive marketing (especially online CPA marketing), get people who can't really afford it to take out huge student loans which they only qualify for thanks to Title IV, get the vast majority of your revenue directly from the government. Saddled with massive debt and useless degrees, the students increasingly default, but that's not the universities' problem - the risk lies solely with the students and the government.

If you want to short education, you could short companies like Apollo Group and ITT Educational Services, as well as the online marketing companies that service them, like Quinstreet. But this is risky, because the bubble's only going to burst when the government gets around to changing policies.

> 1. The price of college is continuing to rise faster than the rate of inflation.

Then maybe inflation isn't taking everything into account? My health insurance cost is rising faster than inflation too. So is health care cost and nearly every service that requires labor and cannot be imported/outsourced. Doesn't that tell you that the true rate of inflation could be much higher than the publicized rate? Rate of inflation includes lots of goods that can be cheaply imported. But you cannot import enough cheap labor with PhD degrees. And these are not included in calculating the rate of inflation.

This argument is increasingly common, but it misses the actual truth. Sure the difference in salary shrinking will increase the amount of time it takes to pay off the degree, but that is not the whole story.

1) Unemployment rates are inversly propertional to education level. The worst hit by the recession were those without college degrees. Who is going to bet that trend reverses in the near future? If anything the college grads are just going to suck up high school grad jobs they are overqualified for.

2) Type of job/ceiling. A lot of times you can get the same job with or without a college degree (see: Sales Representative), but the college degree usually means a better compensation structure and pathways up in the organization, even if the salary is not a huge difference for the first 10 years eventually the HS degree will reach a ceiling. I've even seen this in accounting between those that are CPAs and those that just have accounting degrees, or at upper level executives who have MBAs vs those that don't.

3) The cost numbers in these articles are invariably screwed up. $200,000 for a college degree? If you are actually price sensative go to a county college for 2 years and then a state school for 2 years. Total cost would be <$60,000 for the whole thing. In most states you would even have your choice of multiple schools.

My theory was that you should go cheap on the undergrad, if the name of the school matters so much, just go there for graduate school. I'd hire a guy with a grad degree and a state school over a really top shelf undergrad

(hence, state school for me and I just got hired at my job along with a bunch of guys who paid 4x or more for private engineering schools)

Better returns might come from ensuring that everyone gets a good kindergarten education.

I hate to sound callous, but this is just an effect of more people going to college today than in decades before. Yes, obviously I want everyone to succeed in life and have a college degree and do well, but obviously this can't be the case. In decades past income disparity (since we're speaking in terms of ROI) existed partly because of the availability and accessibility of the college degree.

Back when degrees were scarce, they were rewarded. Now that everyone and their dog is getting one, it doesn't mean very much. Friends of mine are graduating college and going straight back home to live with their parents. And this is happening in droves. The degree is no longer a differentiating element of their resume.

Don't get me wrong, I'm glad that on a whole, are becoming more educated (let's ignore the fact that this statement has no evidence behind it, and is purely an assumption). That is a good thing. But inflation rarely goes unpunished.

Disclosure: I'm a college dropout, and happily so.

Personally I think looking at higher ed is looking at the wrong side of the equation. We're not in an education bubble, but a "bunge"[1] if you will - the opposite of a bubble - with regard to labor prices.

In other words, people aren't overpaying for education, businesses are underpaying for human talent.

[1] http://www.johnkay.com/2008/07/02/metaphors-in-free-fall-the...

This article make some very interesting points, but I think it speaks a little too broadly at points. It does not sound like there is an overall education bubble, but rather a bubble in liberal arts education and particularly liberal arts education from lower tiered schools.

Even the article points out that engineering majors, especially those from highly ranked schools are doing quite well and that does not appear to be changing. Even on his point in signalling, it may be that having "a degree" will come to mean less and less, but it is unlikely that having "a degree from Harvard (or other prestigious school)" will mean less anytime soon.

"But what we can change are the policies that subsidize college. Student loans should be drastically curtailed, especially for the "at-risk" groups (which are also the fastest-growing). Loans to students at for-profit schools have an appalling 40% default rate. While I can't find data for degrees, I suspect that hard science graduates default more rarely than social science graduates (except for education, where the compensation is nothing if not reliable)."

Are you really suggesting that we take away this opportunity from the dis-advantaged?

I may not be willing to give 99% of bumbs money, even for food, but i am completely willing to give money to the government no-matter the cost to make sure that everyone has a chance to seek knowledge. I am almost of the opinion that there is no greater thing a country can do, than to provide a proper education to everyone within it's boarders. ( regardless of race, creed, gender, nationality, or citizenship ) let the world come here to learn, let the world compete to come here to get an education.

yes, we need to make hard decisions in the coming years, but limiting access to knowledge is not one of them.

What’s the purpose of an education?

I ask this because it’s central to the topic. Is it to get a job or is it just to learn? If it’s the former, then we can have an ROI conversation, but if it’s the later then ROI doesn’t really apply.

FWIW, I worked in higher education for over 10 years, and I can assure you that universities don’t think it’s their mission to train students for the workplace.

Universities certainly seem to employ a lot more people outside of the businesses of education and research than they used to. Correct me if I'm wrong, but I don't think college used to have "diversity programs coordinators," "counseling and psychological services," and a paid intramural sports infrastructure, to say nothing of steadily larger dorm rooms and increasingly common private bathrooms. My parents teach at a small liberal arts school, and they say that landscaping has skyrocketed out of nowhere into a pretty expensive part of their budget. They also say that they are under constant pressure to hire more "diversity professionals" from regulatory bodies.

A university is a meal ticket for a lot of people, not necessarily just professors, and once some people find a meal ticket, especially one as intertwined with the public sector as higher education, good luck getting them out.

Everytime someone talks about college being a bubble, people get offended because they think the thesis says their degree is not as valuable.

That is not the point-- you've got 3 different angles: the opportunity cost vs future income, the actual market price of college debt (think mortgages), and uni tuition vs. overall demand.

I know this because I talked about this last year and caught a lot of flak for the argument. My thesis can be seen here: http://bit.ly/bUCfec

Fewer and fewer people have been going to school for the money for a while now. My sister has a degree in fine art. I don't think anyone rationally expected that to raise her earning power.

So long as sciences and social sciences are lumped together as 'a college degree', the advantage and profit associated with a science degree will prop up the expectations of a social sciences degree.

It really does make sense for an experimental physicist to go to college. No matter how bubble-y it may be right now, there aren't many with just a high school degree.

I thought that this was going to be about a slightly different topic.

"Though students at for-profit schools accounted for less than 10 percent of U.S. higher education students overall, they soaked up almost 25 percent of federal student aid in 2008-2009 and contributed 44 percent of the federal loan defaults, according to both Eisman and an independent report by Senator Tom Harkin, Chairman of the Health, Education, Labor and Pensions Committee."

"The Apollo Group, for instance, parent company of the familiar University of Phoenix and the largest for-profit education company, received $1.1 billion in federal loans and grants in 2009, Eisman said in his written testimony to the committee. However, of that total, only 99 million -- or, about 10 cents on the dollar -- went towards instructional costs. The rest, Eisman claimed, was spent on marketing and executive salaries."

http://www.3quarksdaily.com/3quarksdaily/2010/07/is-forprofi...

I think government subsidized four year research universities will be overtaken in the US by the community college system which will start to offer four year degrees. We can't afford to pay for professors that might teach one or two classes per semester.

In non top tier private colleges more and more non alumni revenue generating study areas will close. It won't make sense to anyone to spend $200k to get an undergraduate degree in education where you can expect to make $40k per year. Very top tier private colleges won't be hit as hard as their student bodies trust funds will absorb the cost.

Maybe they could make the schools partly responsible for false advertising and high costs. Also, there is a serious lack of oversight of universities. Accreditation is a joke now days. There is such a divergence of curriculum amongst reputable schools and it gets worse for the new profit schools.

I'm glad I only had to pay 5K a year compared to others dealing with 10-20K tuition cost for school no even close to the top tier universities in the US. Harvard charging 20K is ok considering the rep you get just having a degree from there. But random private school X? not so much.

From the end of the article: "I haven't found a way to short higher education as a whole. If you can think of one, let me know." Any ideas?

Is there a business opportunity providing a new signaling credential/certification that hasn't been as diluted as "a college degree"?

(An organization providing such a service would face a lot of temptations to get in on the traditional higher ed gravy train, while it lasts, but its ultimate success through the crash would depend on it staking out a different identity. It would probably also need a strong culture of elitism -- drawing a lot of detractors, and possibly lawsuits once its certifications get used in employment decisions.)

We need difficult college courses which yield degrees. Its quite simple, really. If the course is hard and fruitful, very few unmotivated people will get through it. And a motivated person is sure to succeed (at least much much much more likely). This way having a degree REALLY will mean something. If 10/1000 graduate from this program, you graduating means that you really did accomplish something great. Also we need a way to snapshot your success. In other words if the school dies, it should not diminish what you did in school. There should be a way other than the name of the school to indicate that you passed through the blazes of academic hell and came out triumphant.

Bubbles are not visible when you are in them. So I guess it is a good bet that when many are saying something is bubbling, it probably isn't.