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The College Education Bubble and Crash

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A new survey takes a look at the critical state of today’s recent college graduates. The survey questioned a nationally-representative sample of 444 recent college graduates between the ages of 22 and 29, about their employment situation and experiences. The questions also lightly touched upon these graduates’ financial condition. I’ve included a link to the full survey at the bottom of this article.

The necessity of choosing a major in college can put quite a bit of pressure on any student, particularly those who have either a wide variety of interests and talents as well as those who may not feel themselves pulled in any particular direction. There’s always the hope or the expectation that the bachelor’s degree will define a career path for the rest of one’s life, and that career path will follow a straight line or an exponential curve.

GraduationAn economist’s opinion is that students, who often go into debt to obtain their degrees, should simply look at the expected rate of return. I can’t tell you how many times I’ve heard or read that students should choose majors like engineering, physics, computer science, or applied mathematics to guarantee high salaries and easy job placement. Not everyone is interested or talented in these areas, and the pure financial approach says that those who aren’t shouldn’t bother spending money for a college education. The return on investment for an education is about more than just money, but that opinion doesn’t exactly make me popular in certain communities.

The financial reality is dire according to this survey. And as much as a college education has value beyond the expected return in the form of salary, no one can ignore the money-related part of the equation. Many decades ago, a college degree was a sign of differentiation, and gave holders the ability to market themselves well and qualify for the best jobs. At the same time, culture put such an emphasis on higher education that as it became available to more people — through grants and loans, not through lowered costs — it’s become less of a distinction. Colleges are basically unchecked in their tuition increases because they know that students will keep coming and the government will continue providing opportunities.

In good economic times, that can be ignored. With a low level of unemployment among graduates, former students can receive jobs, healthy incomes, and can pay down their student loan debt. In difficult times — when Baby Boomers aren’t retiring and there aren’t opportunities for younger workers, for example — the buy-now-pay-later model of education begins to fail. And it always fails for those with degrees in fields that take longer to recover their costs, like the arts and humanities.

Mark Cuban offered an apt analogy. College education is similar to the practice of flipping real estate. In the heyday of oversized, abnormal growth in the real estate market, any fool could make
money by buying a house relying heavily on debt, selling it to a bigger fool, and using the proceeds to repeat the process. There was a promise of success, and it worked well for a while — until the real estate market meltdown, followed by the Great Recession and credit crunch. A similar experience is happening today with the investment in a college education. Cuban argues that it used to be able to “flip” a college degree for a good starting salary and a solid opening to a life-long career, but the investment no longer performs so well.

With the run-up in real estate prices, it became very easy to access credit. Banks would give loans to as many customers as possible, with the knowledge the banks could repackage and sell those loans to reduce their apparent risk. The credit crunch required banks to tighten up their lending standards to the point where credit wasn’t available anywhere. Cuban believes this is where we are heading with student loans.

Years ago, policies were designed to ensure that everyone who wanted to become a homeowner could afford to do so. Taxpayers subsidized a great expansion in homeownership, and the real estate industry thrived. Education for all has been just as much a part of the American Dream, and taxpayers are subsidizing college educations for those who can’t afford it on their own. When it’s so easy to get an education for little money down, and everyone is taking advantage of free-flowing credit, we should have expected that making a return on that investment has become more difficult.

There is more student loan debt in aggregate in the United States than credit card debt, and Mark’s conclusion is that the economy won’t improve until this student loan bubble bursts. He promotes non-traditional universities — though not diploma mills, as he later warns — as the answer, because they can provide a better deal.

While colleges and universities are building new buildings for the English, social sciences and business schools, new high end, un-accredited, branded schools are popping up that will offer better educations for far, far less and create better job opportunities. As an employer I want the best prepared and qualified employees. I could care less if the source of their education was accredited by a bunch of old men and women who think they know what is best for the world. I want people who can do the job. I want the best and brightest. Not a piece of paper.

The competition from new forms of education is starting to appear… You would think traditional university educators would take notice. Beyond allowing some of their classes to be offered online, they haven’t. They won’t. Its the ultimate Innovators Dilemma. They don’t believe they should change and they won’t. Until its too late. Just as CEOs push for that one more penny per share in EPS, University Presidents care about nothing but getting their endowments and revenues up. If it means saddling an entire generation with obscene amounts of school debt, they could care less. This is how they get their long term contracts and raises.

It’s just a matter o[f] time until we see the same meltdown in traditional college education. Like the real estate industry, prices will rise until the market revolts. Then it will be too late. Students will stop taking out the loans traditional Universities expect them to. And when they do tuition will come down. And when prices come down universities will have to cut costs beyond what they are able to. They will have so many legacy costs, from tenured professors to construction projects to research they will be saddled with legacy costs and debt in much the same way the newspaper industry was. Which will all lead to a de-levering and a de-stabilization of the university system as we know it.

Just over half of recent college graduates have jobs. Many of those who do have jobs settled for a position for which their four-year degree was not necessary. 40 percent of recent graduates haven’t even begun paying off their student loan debt. Most recent graduates, while happy with their time in college, would have chosen a major after more consideration, taken different courses, or sought out more working or internship opportunities.

Photo: NazarethCollege
Blog Maverick, John J. Heldrich Center for Workforce Development

Published or updated May 16, 2012. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 14 comments… read them below or add one }

avatar Joe Morgan

Unfortunately, I don’t think anything is going to change until the bubble bursts because all I see is the government offering more loans at artificially low interest rates. We’ve got a lot of reality to deal with and it is only now beginning to catch up. We’ve got a glut of people with 5 figure debt and useless degrees looking for jobs that don’t exist. There’s going to be a lot of pain once this really comes crashing down to Earth.

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avatar Apex

I agree. Unfortunately I think the “solution” to the student loan debt problem is already being played out. There are three things being proposed even now.

1. Cheaper interest on loans.
2. Ability to make smaller payments based not on loan amount but based on percent of wages.
3. Ability to have the loan forgiven if it lasts too long.

As long as this is the path we take, the bubble will not burst, it we be blown much bigger first before anything happens.

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avatar jim

I don’t think that college is a bubble in the sense that its really generally over inflated or going to crash.

I do think as college costs keep going up that more and more people will rethink the investment and rethink majoring in a field with no job demand and rethink paying $50k/yr for an obscure private school nobodys heard of. Prices will probably plateau at some point rather than crash.

You might see a crash in some portions of the college industry. For example the for profit colleges could crash to some extent if the government tightens regulation on them or if people start to realize how useless some of those degrees really are.

Prices may flatten or even trend downwards in some degree, but I kinda doubt that will happen much if at all.

Regarding Cubans quotes, I don’t know of any un-accredited ‘high end’ universities that are worth the money. Who is he thinking about? The vast majority of the for-profit schools are not worth the tuition versus a decent public university or community college. Theoretically a for-profit university could provide a good education at a good price but I’ve yet to see it.

Frankly I think people are making out student loan debt as a bigger problem than it really is. The average debt is still around $25-30k. Thats a lot of money but its manageable. Our nations student loan debt is more than our credit card debt and that isn’t really a BAD thing in my mind. I’d rather our credit card debt not be bigger, wouldn’t you? Our nations auto loan debt is 2 times our student loan debt… are we all panicking over the new car bubble and bemoaning the 2 trillion in car debt that we can’t possibly afford? Or are people more likely to take a $350 monthly car loan in stride and consider a new car every 3-5 years as a ‘necessity’?

Ok, I’ll stop rambling now… ;)

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avatar Ceecee ♦796 (Dime)

From a baby boomer perspective, I gotta say a lot of us may have chosen different paths as well. Although I had a degree, I got most of my jobs because I could type. Before computers took over the world, not everyone could. If I were 18 today, I think I would go for training in a trade rather than a college education. Some of the most learned people I know do not have degrees—-they read!

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avatar Jonathan

I think that it was unsustainable to believe that anyone who wanted to go to University or College could get in because invariably there becomes such a saturation in the market (as has happend) that people start to think twice about taking on massive debts for a smaller return. Yes College and University education is important but is it so important that you run up debts approaching $50,000 in some instances?

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avatar Tom

Hello,
This article does not take account of a substantial change in public policy that is more responsible than any other factor: the massive defunding of public education by the states. This process has been going on for decades and we are now seeing the consequences. I wish that you had made more of an effort to canvas the various different voices who have written about this topic, instead of just citing the speculations of one outsider, Mark Cuban. I’m all for competition from new forms of education, but don’t we need to see some results? Instead, all we have to compare to the traditional models are for-profit universities whose placement rates in jobs are even worse and who leave their students even further in debt. We had a model that worked, and it is being destroyed before our eyes.

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avatar jim

Tom is right. The key reason tuition is going up is that states are putting less and less money into colleges. State tax dollars have been cut in half in the past few decades. If you look at spending per student the spending amount has not gone up nearly as fast as tuition. But tuition is now contributing a larger share of the costs due to gradually dropping state tax funds.

Furthermore looking at the full tuition sticker price is misleading as many (or most) students do not pay the full tuition rates due to financial aid of various forms. The out of pocket costs of lower income students has not risen nearly as fast as the full tuition rates.

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avatar Luke Landes ♦127,364 (Platinum)

It’s a good point about state funding. But while taxpayer funding differs from school to school, with private universities not relying as much on public funds, tuition increases above the rate of inflation have been the reality across all types of schools. Lower-income students do qualify for more aid, but that’s increasingly in the form of loans.

When you look at all types of financial aid, the loans (government and private) are doing the heavy lifting. Grants and scholarships account for a small percentage of that total sticker price. And endowments have suffered the same way state funding has suffered. Aside from a few elite institutions, poorly performing endowments — often invested in high-cost hedge funds which can be devastated in an instant — force schools to increase tuition or reduce aid.

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avatar jim

While we were talking about this subject I went and looked at average financial aid awards over time. Today for undergrads loans of all forms average about $5300 per student and other forms of aid (grants mostly) average $7600.

All the data is available at the College Board site: : http://trends.collegeboard.org/student_aid/

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avatar Kurt @ Money Counselor

The politicians are not to blame for state de-funding of higher education–the taxpayers are. The prevailing anti-tax / don’t cut benefits sentiment in the U.S. has consequences. The student debt bubble is merely one of several equally or more serious effects of strangling revenue while spending ever more freely (and borrowing to make up the difference). The bell inevitably will toll.

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avatar Mike Collins

I was just reading an interesting article about student loans in the NY Times. It discussed the rising costs of tuition and the insane levels of debt young people are forced to take on just to get a college degree. The lower and middle classes are getting squeezed out of an education because the costs are just spiraling out of control.

The lack of state aid is certainly a problem, but the article also highlighted the marketing tactics used by admission departments who are taught by outside consultants to never use words like “pay” or “cost” and to instead focus on the “return on investment.”

Unfortunately many students and their families just don’t realize how deeply they are going into debt until it is too late. And with a tough job market making it difficult to find a job more and more students are going to be struggling to repay their debt.

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avatar Darwin's Money

I think there may be some corrolaries to the housing bubble, but I don’t think Cuban got it right. Much more complex and too simplified. In retrospect, of course, many college grads with 6 figures in debt and no job would have been better off in a trade school or highschool only, but they thought they were bettering their chances at the time they started. Kids need to be realistic and they need responsible parents and guidance counselors to actually “guide” them. Unless you come from money or have a very high probability of marrying into money and not having to work for a living, don’t “follow your passion” and think you’re going to make it. You’ve got to assess what’s in demand, what you can excel at, and how much it’s going to cost. Art history and women’s studies? If your parents are paying the bill, great. But if you think you’re going to pay down a $100,000 loan bill on a salary with that major you’re not being realistic.

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avatar Mike

With older professionals holding on to their jobs longer there’s a ripple affect that causes younger graduates to be shut out of the job market. Another side effect to the great recession.

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avatar qixx ♦1,813 (Half-Dollar)

There is one factor of the education bubble that needs addressed before a crash. The quality and value of public education (grade schools). As long as high school students continue to be unprepared the demand for college will likely not burst.

The other half of holding off a burst is aid. Most all aid goes to students looking at college. Student grants and loans often won’t pay for an education not from a college or university. Financial assistance for a trade school or certification program is harder to get. Since people can’t get funding as easily for trade schools that only leaves colleges where they can get a loan.

They have other options but many don’t learn about them until they have enrolled in State U. Now they are too scared to leave for these other programs.

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