Higher education bubble in the United States
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The higher education bubble in the United States is a highly controversial claim that excessive investment in higher education could have negative repercussions in the broader economy. According to the claim, generally associated with fiscal conservatives, although college tuition payments are rising, the supply of college graduates in many fields of study is exceeding the demand for their skills, which aggravates graduate unemployment and underemployment while increasing the burden of student loan defaults on financial institutions and taxpayers. The claim has generally been used to justify cuts to public higher education spending, tax cuts, or a shift of government spending towards the criminal justice system and the Department of Defense.
The "higher education bubble" is controversial and has been rejected by most economists. Data shows that the wage premium, the difference between what those with a four-year college degree earn and what those with only a high school education earn, has increased dramatically since the 1970s, but so has the 'debt load' incurred by students due to the tuition inflation. Research from the Center for Household Financial Stability, Federal Reserve Bank of St. Louis, presented in 2018, predicts a declining but still positive income premium for completing college but a declining wealth premium, which is almost indistinguishable from zero for the most recent cohort. The data also suggests that, notwithstanding a slight increase in 2008–09, student loan default rates have declined since the mid-1980s and 1990s. Those with college degrees are much less likely than those without to be unemployed, even though they are more expensive to employ (they earn higher wages). The management consulting firm McKinsey & Company projects a shortage of college-educated workers and a surplus of workers without college degrees, which would cause the wage premium to increase and cause differences in unemployment rates to become even more dramatic.
In 1971, Time ran the article "Education: Graduates and Jobs: A Grave New World" which stated that the supply of PhD students was 30 to 50 percent larger than the expected future demand in upcoming decades. In 1987, U.S. Secretary of Education William Bennett suggested that the availability of loans may be fueling an increase in tuition prices and an education bubble. This "Bennett hypothesis" claims that readily available loans allow schools to increase tuition without regard to demand elasticity. College rankings are partially driven by spending levels, and higher tuition is also 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.
A variation on the higher education bubble theory suggests that there is no general bubble in higher education (on average, higher education really does boost income and employment by more than enough to make it a good investment) but that degrees in some specific fields may be overvalued because they do little to boost income or improve job prospects, and degrees in other fields may in fact be undervalued because students do not appreciate the extent to which these degrees could benefit their employment prospects and future income. Proponents of the theory have noted that schools charge equal prices for tuition regardless of what students study, but the interest rate on federal student loans is not adjusted according to risk, and there is evidence that undergraduate students in their first three years of college are not very good at predicting future wages by major.
A study from the Labor Department found that a bachelor's degree "represents a significant advantage in the job market." In 2011, The Chronicle of Higher Education ran an article saying that the future is bright for college graduates. Glenn Reynolds argued in his book, The Higher Education Bubble, that higher education as a "product grows more and more elaborate – and more expensive – but the expense is offset by cheap credit provided by sellers who are eager to encourage buyers to buy."
The view that higher education is a bubble is highly controversial. Most economists do not think that returns to a college education are falling but instead believe that the benefits far outweigh the costs. Yet, the returns for marginal students or students in certain majors, especially at costly private universities, may not justify the investment. It has been suggested that the returns to education should be compared to the returns to other forms of investment such as the stock market, bonds, real estate, and private equity. A higher return would suggest underinvestment in higher education, but lower returns would suggest a bubble. Studies have typically found a causal relationship between growth and education, although the quality and type of education matters, and not just the number of years of schooling.
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 but only rented through wages, there is no similar mechanism that would cause an abrupt collapse in the value of existing degrees. For this reason, this analogy could be 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."
However, the data actually show that notwithstanding a slight increase in 2008–2009, student loan default rates have declined since the mid-1980s and 1990s. During both periods of growth and recession, those with college degrees are much less likely than those without to be unemployed, even though they earn higher wages.
A key measure of the benefits of a degree is the college graduate's earning potential – and on this score, their advantage over high-school graduates is deteriorating. Since 2006, the gap between what the median college graduate earned compared with the median high-school graduate has narrowed by $1,387 for men over 25 working full time, a 5% fall. Women in the same category have fared worse, losing 7% of their income advantage ($1,496). A college degree's declining value is even more pronounced for younger Americans. According to data collected by the College Board, for those in the 25–34 age range, the differential between college graduate and high school graduate earnings fell 11% for men, to $18,303 from $20,623. The decline for women was an extraordinary 19.7%, to $14,868 from $18,525. Meanwhile, the cost of college has increased 16.5% in 2012 dollars since 2006, according to the Bureau of Labor Statistics' higher education tuition-fee index.
Alternatives to bubble theory
A different explanation for rising tuition is the reduction of state and federal appropriations to colleges, making them more reliant on student tuition. Thus, it is not a bubble but 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.
A second theory claims that as a result of federal law that severely restricts the ability of students to discharge their federally guaranteed student loans in bankruptcy, lenders and colleges know that students 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 only provide students loans that the students can be reasonably expected to repay. As evidence for this theory, it has been suggested that returning bankruptcy protections (and other standard consumer protections) to student loans would cause lenders to be more cautious, thereby causing a sharp decline in the availability of student loans, which, in turn, would decrease the influx of dollars to colleges and universities, who, in turn, would have to sharply decrease tuition to match the lower availability of funds.
Economic and social commentator Gary North has remarked at LewRockwell.com, "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 culture is going. The dynamism, the originality of these entrepreneurial experiences, the fact that 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.
Commentators have recommended certain policies to varying degrees of controversy:
- State and federal governments should increase appropriations, grants, and contracts to colleges and universities.
- Federal, state, and local governments should reduce the regulatory burden on colleges and universities.
- Minimize the risk of investment in higher education through loan forgiveness or insurance programs. The federal government should enact partial or total loan forgiveness for student loans.
- Colleges and universities should look for ways to reduce costs without reducing quality.
- Federal lawmakers should return standard consumer protections (truth in lending, bankruptcy proceedings, statutes of limitations, etc.) to student loans which were removed by the passage of the Bankruptcy Reform Act of 1994 (P.L. 103-394, enacted October 22, 1994), which amended the FFELP (Federal Family Education Loan Program).
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