Higher education bubble

The higher education bubble is a speculative boom and bust phenomenon in the field of higher education. According to the theory, while college tuition payments are rising, the rate of return of a college degree is decreasing, and the soundness of the student loan industry may be threatened by increasing default rates. College students who fail to find employment at the level needed to pay back their loans in a reasonable amount of time have been compared to the debtors under sub-prime mortgages whose homes are worth less than what is owed to the bank.

In 1971, Time ran an article "Education: Graduates and Jobs: A Grave New World," which stated that the supply of post-graduate students was around twice larger than the expected future demand in upcoming decades. In 1987, U.S. Secretary of Education William Bennett first suggested that the availability of loans may in fact be fueling an increase in tuition prices and an education bubble. This "Bennett hypothesis" claims that readily available loans allow schools to increase tuition prices without regard to demand elasticity. College rankings are partially driven by spending levels, and higher tuition prices are correlated with increased public perceptions of prestige. Over the past thirty years, demand has increased as institutions improved facilities and provided more resources to students. Additionally, schools tend to enroll fewer students as they improve student offerings and increase prices. This suggests that it is in schools' best interest to increase tuition prices as much as possible, so long as financial aid ensures an ability to pay on the part of students and parents.

A 2009 article in The Chronicle of Higher Education related concern from parents wondering whether it is worth the price to send their children to college. The Economist in turn hypothesized that the bubble bursting may make it harder for colleges to fill their classes, and that some building projects will come to a halt. The Boston Herald further suggested the possibility of mergers, closures and even bankruptcies of smaller colleges that have spent too much and taken on too much debt. National Review writer Dan Lips has proposed that the bubble's bursting may bring down higher education prices. Glenn Reynolds wrote in the Washington Examiner that those who have financed their educations with debt may be particularly hard-hit.

Further speculation as to the higher education bubble was the focus of a series of articles inThe Economist in 2011.

Controversy

Study comparing college revenue per student by tuition and state funding in 2008 dollars.

The view that higher education is a bubble is controversial. Most economists do not think the returns to college education are falling. In a financial bubble, assets like houses are sometimes purchased with a view to reselling at a higher price, and this can produce rapidly escalating prices as people speculate on future prices. An end to the spiral can provoke abrupt selling of the assets, resulting in an abrupt collapse in price — the bursting of the bubble. Because the asset acquired through college attendance — a higher education — cannot be sold (only rented through wages), there is no similar mechanism that would cause an abrupt collapse in the value of existing degrees. For this reason, many people find this analogy misleading. However, one rebuttal to the claims that a bubble analogy is misleading is the observation that the 'bursting' of the bubble are the negative effects on students who incur student debt, for example, as the American Association of State Colleges and Universities reports that "Students are deeper in debt today than ever before...The trend of heavy debt burdens threatens to limit access to higher education, particularly for low-income and first-generation students, who tend to carry the heaviest debt burden. Federal student aid policy has steadily put resources into student loan programs rather than need-based grants, a trend that straps future generations with high debt burdens. Even students who receive federal grant aid are finding it more difficult to pay for college."

Ohio University economist Richard Vedder has remarked on the PBS Newshour that:

"The reality is: there is a growing disconnect between what the labor market is telling us on the one hand and what college enrollments are on the other. By one way of measuring things, using U.S. Government Bureau of Labor statistics data, as much as one out of three college graduates today are in jobs that previously or historically have been filled by people with lesser educations, jobs that do not require higher-level learning skills, critical thinking skills, or writing skills or anything of that nature."

Alternatives to bubble theory

A different proposal for the cause of rising tuition is the reduction of state and federal appropriations to colleges making them rely more on student tuition. Thus, it's not a bubble rather a form of shifting costs away from state and federal funding over to students. This has mostly applied to public universities which in 2011 for the first time have taken in more in tuition than in state funding, and had the greatest increases in tuition. Implied from this shift away from public funding to tuition is privatization, although The New York Times reported that such claims are exaggerated.

Another proposed cause of increased tuition is U.S. Congress' occasional raising of the 'loan limits' of student loans, in which the increased availability of students to take out deeper loans sends a message to colleges and universities that students can afford more, and then, in response, institutions of higher education raise tuition to match, leaving the student back where he began, but deeper in debt. Therefore, if the students are able to afford a much higher amount than the free market would otherwise support for students without the ability to take out a loan, then the tuition is 'bid up' to the new, higher, level that the student can now afford with loan subsidies. One rebuttal to that theory is the fact that even in years when loan limits have not risen, tuition has still continued to climb. However, that may not disprove this proposed cause: It may simply mean that other factors besides 'loan limit' increases played a part in the increases in tuition.

A third, novel, theory claims that the recent change in federal law removing all standard consumer protections (truth in lending, bankruptcy proceedings, statutes of limits, the right to refinance, adherence to usury laws, and Fair Debt & Collection practices, etc.) strips students of the ability to declare bankruptcy, and, in response, the lenders and colleges know that students, defenseless to declare bankruptcy, are on the hook for any amount that they borrow -including late fees and interest (which can be capitalized and increase the principal loan amount), thus removing the incentive to provide the student with a reasonable loan that he/she can pay back. Under this theory, it would be more profitable for the lender if the student defaulted (due to the increases in the amount of the loan after fees and interest are capitalized), and thus there is no free market pressure-type motive for the lender or the college to help the student avoid default. This is especially true because the government, if it is the lender or guarantor of the loan, has the ability to garnish the borrower's wages, tax return, and Social Security Disability income without a court order. Some have called the Federal Government 'predatory' for making loans which will have such a high default rate, since the default rate for Student Loans is projected to reach 46.3% of all federal loans disbursed to students at for-profit colleges in 2008.

Economic and social commentator Gary North has remarked at LewRockwell.com that "To speak of college as a bubble is silly. A bubble does not pop until months or years after the funding ceases. There is no indication that the funding for college education will cease."

Azar Nafisi, Johns Hopkins University professor and bestselling author of Reading Lolita in Tehran, has stated on the PBS NewsHour that a purely economic analysis of a higher education bubble is incomplete:

"Universities become sort of like canaries in the mine for a culture. They become the sort of standard of where a culture is going. The dynamism, the originality of these entrepreneurial experiences, the fact that a society allows people to be original, to take risks, all of it comes from a passionate love of knowledge. And universities represent all the different areas and fields within a society. And the students and faculty come from all these fields. This is a community that represents the best that a society has to offer. And there was a mention of our universities being the best in the world."

See also

• College tuition in the United States
• EdFund
• Free education
• Higher education
• Higher Education Price Index
• Post-secondary education
• Private university
• Student benefit
• Student debt
• Student loan
• Student loans in the United States
• Tuition agency
• Tuition center
• Tuition fees
• Tuition freeze

External links

• "College, Inc.", PBS FRONTLINE documentary, May 4, 2010