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The College Education Bubble

This article was written by in Education. 30 comments.


This is a guest article by Investor Junkie, a blogger who writes about investing and being an entrepreneur.

In the past 10 years we’ve had many financial bubbles. First it was the tech bubble, and then it was the housing bubble. But do we have a higher education bubble? Having a web site named Investor Junkie I’m obviously into investments. With proper planning, I believe a higher education can be a profitable investment.

With the amount it costs for an education today, it’s important to consider the return on your investment. It’s an important investment of your time and money that if done carefully, can reap years of rewards. The CollegeBoard has some interesting statistics about the average cost of a college education for this year. According to their stats, these are the average yearly costs.

Private: $26,273 (up 4.4% from last year)
Public: $7,020 (up 6.5% from last year)

This doesn’t even include food, board, and book fees. In comparison to these increases, the average annual inflation rate was only -0.34% last year. (See later in the article how this rate might be questioned.) FinAid makes this depressing statement on their web site:

A good rule of thumb is that tuition rates will increase at about twice the general inflation rate. During any 17-year period from 1958 to 2001, the average annual tuition inflation rate was between 6% and 9%, ranging from 1.2 times general inflation to 2.1 times general inflation.

How can they justify the increases that over the past 10 years doubling inflation? If I earned the same investment returns colleges had with their tuition fee increases, I would have made out like a bandit.

Paying for college

How can someone save for college when the increase of college costs are beating most investments? Assume the average rate of the stock market is 8%. When starting with zero savings, this means you are almost ensured your goal will not be met.

I currently have two children with a third on the way. We are saving for our children’s education, but with the rate of increases it will be impossible to completely pay for our children’s education through saving alone. Just to keep up with the increase in costs, you need fund the total amount today ($105,092 for private schooling) so you are prepared in the future. This also assumes your investment matches the typical stock returns; if not, look out!

If your child isn’t first draft in college football picks, what are you other options? The CollegeBoard has an answer for this (emphasis is by me):

There is more than $168 billion in financial aid available. And, despite all of these college price increases, a college education remains an affordable choice for most families.

So if your family can’t afford it, don’t worry. There is massive amounts of money still available. What exactly is “affordable” if you have a college payment that equals a home mortgage in some parts of the country? The key part of this equation is for those who qualify for scholarships. For most, the logical conclusion is to get a college loan to pay for some or all of it. Debt is debt, no matter if it’s for consumer items, a house or an investment. Eventually it needs to be repaid. The worst part of college debt is it hangs around you forever. No bankruptcy will eliminate it. It doesn’t take a PhD degree to determine that $100,000 (at least in today’s value) will take years to recoup in salary.

If a recent graduate is able to get a job, according a BusinessWeek, they made on average $49,307 in 2009. In December 2009, the Wall Street Journal reported the rate of unemployment for recent college graduates was 10.6%, similar to the national level. Once a graduate gets a job and has other living expenses, how quickly will they be able to pay it off?

An education is an investment in your future, with the hope your salary increases because of the higher education. With any investment the goal is to achieve gains you wouldn’t have if you didn’t invest. The question is at what point does the amount of money required for a college education becomes not worth it? When does the ROI (return on investment) outweigh other investment choices? If you look at it from purely an investment standpoint and not for “enlightenment,” your choice of major and school might be different. The end goal should be getting the best bang for you buck.

What’s the cause?

Why is the cost of a college education rising as such a rapid rate? I only come to two valid conclusions. One option to consider, is the inflation rate is not an accurate representation. This could also explain increases health care and commodities. Maybe statistics like ShadowStats are discussing in fact showing the true inflation rate and better explain the reason education costs are increasing at the current pace.

The other conclusion is government intervention into the education system is causing the increases in pricing, whether through loan guarantees or loan offers direct to students. The government putting out more money to the public than what normally would be available makes more dollars chase after too few resources.

Regardless of the root cause, the cost increases are not sustainable. Students and parents can make other choices, such as attending a two-year college, attending a trade school, purchasing a business franchise, investing in a new business, or (in my opinion the worst option) not going to college at all. As many recent graduates have found out, a college education does not guarantee a job.

These recent graduates have the most amount of amount of debt compared to any previous generation. Today’s college education is equivalent to yesterday’s high school graduation, except with massive debt. That’s not a great situation to be in when just starting your career and life.

Published or updated March 27, 2010. 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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Investor Junkie likes to discuss what it's like being an entrepreneur and investing. He's about making money work for you by talking about passive and active investments. View all articles by .

{ 30 comments… read them below or add one }

avatar Damilola

Great article Investor Junkie. For some reason when I saw the title, I assumed the article was going to talk about how higher education isn’t worth as much as it used to be (which it did say at the end) and how to make it worth more. For some reason it seems that’s what most people are talking about these days (Seth Godin’s Linchpin comes to mind)
I am currently in an advanced degree program and what I learned so far (outside of equations and so on) is that to make your degree worth more than it is, you have to make yourself more valuable than the rest of your peers. It’s not about getting above 3.0 gpas anymore, but about exposing yourself to larger opportunities e.g. learning that new software that is relevant to your program but may not be taught in class, taking additional classes in areas that are only indirectly related to your program (e.g. an engineer taking a few language courses) and of course getting experience by taking part in internship and co-op opportunities.

PS In regards to your comment about why tuition increases I had always thought it had something to do with state budget cuts as well. The state makes less money available to the school which in turn leads to increase in the money the school needs to pay its employees and keep facilities running. It’s probably a combination of both federal funding to students and state funding to the schools.

PPS Now headed over to Investor Junkie’s site for more good stuff

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avatar Investor Junkie

Thanks for the complement. You are right about making yourself worth more. Anything to get a leg up will make you more competitive than your peers. It is unfortunately a dog-eat-dog world when getting a job.

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avatar Erica Douglass

Good article. I might add that college education is one of the biggest ways Generation Y is funding baby boomers’ retirement plans! Most colleges funnel a ridiculous amount of money to retirement plans and pensions. (Upwards of 30% of their total funds in some cases.) It’s one of the biggest, most insidious money transfers from working individuals to those who retire. (Not quite as big as Social Security.)

-Erica

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avatar Investor Junkie

Excellent point! I wasn’t going to get all “conspiracy theory” on ya but this is very true!

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avatar jim

There is no evil plot to steal from the young and give to the old going on here. Most of the cost of education is labor. That is the case for many things. I don’t know where you get that 30% figure but it can’t be representative of typical spending. The UC system spends 59% of their budget on salaries and 12% on benefits.

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avatar steveDH

Great article, that points out many of the barriers facing young adults today. As a purists many might feel that the cost simply reflects what the market is willing to pay. Just like CEOs and sports participants. On the other side it’s a ripoff that only the government can fix (i.e. their having taken over all student loan lending). There are alternatives – even a couple I didn’t read here. One it taking a job without a college degree with a company that supports education with financial aid while you work. (Building loyalty I suppose) The other is the Armed Forces (not a great alternative right at the moment) which will contribute a great deal of aid while you get your degree. Many doctors, although obligated to serve after Medical School, received their education through military programs.

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avatar Steve

I wonder if the price will continue to increase until the expected return drops to break-even?

Government-subsidized debt to increase the education level of the citizens does seem like a good idea.

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avatar JT

“Government-subsidized debt to increase the education level of the citizens does seem like a good idea.”

It does seem like a good idea; however, in practice, it hurts more than it helps. Like Investor Junkie said, the increase in government subsidized and government backed loans, coupled with the inability to discharge student load debt in bankruptcy, has allowed colleges to increase tuition far faster than a free market would allow.

Additionally, we have corporations and businesses refusing to look at anyone who doesn’t have a degree. This pressure to have a degree, just to get your foot in the door, has led to a sharp increase in demand as competition for jobs becomes fierce.

There is absolutely a bubble in higher education, and by my best guess it will burst sometime within the next 5 years.

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avatar Investor Junkie

If you read other blog posts or comments of mine you’ll see I’m not for government intervention. This post was trying to be more neutral on the subject. Like JT says the government assistance is more of a bad thing than a good thing. The final HC bill signed today cuts of the middleman (the bankers) and now goes directly to the government. Which leads to question what does HC have to do with student loans anyways? From my understanding the wording has nothing to do with helping pre-med or med students.

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avatar Apex

@Junkie

I don’t quite understand the point of this article.

The title asks if there is a bubble in education. Bubbles occur because of too much demand for limited supply. The only way to deal with bubbles is to reduce demand or increase supply. Your article doesn’t seem to address either of these issue but only talks about the increasing costs of education. The potential reasons you give for this increase in costs does indirectly address the potential for it to be driven by too much demand via the governement subsidies, but then you go on to say that the worst choice available is to choose not to go to college. But if there is a bubble being driving by the government giving out too much money creating too much demand then how can that be reconcilled with your believe that not going to college is the worst choice possible. If there is too much demand then that means too many people are choosing to go to college.

So it would be helpful if you could clarify what the bubble portion of your article is about and what your point is with respect to dealing with the bubble aspect of education (presumably you believe there is a bubble based on your title).

Thanks.

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avatar Evan

Apex,

I think it is an over supply problem – the government is providing wayyyy too cheap money thereby allowing anyone to finance any degree. Thus leading to the degree being worth “less” thus failing to repay then a tightening of lending and then a reduction in college enrollment because who can afford to send anyone to college without financing.

PUT VERY SIMPLY

Great post!

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avatar Apex

Technically that would be government money leading to an excess demand for EDUCATION resulting in an excess supply of DEGREES making the degree less valuable.

But my point was not about whether its supply or demand. My point was that I am not clear on the point of this article. If there is a bubble in education what is the fix or what should we do in response to it. Maybe there was no point other than to state that there is a bubble.

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avatar Investor Junkie

Hi Apex,

To make people aware there is a bubble. I also believe it’s not sustainable.

To solve the issue… hmm.. If the markets really worked properly it would fix itself no? I would say less government intervention, but that’s not happening. Outside of this, I’m not sure either but that can be a good topic to discuss in the comments.

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avatar Dan

I suspect the long-term free-market fix is one where people stop going to college for degrees that don’t have much value in the business world and a proliferation of two-year degrees that teach to the job.

Part of my mindset I’m sure is biased — I started out as an engineering major and switched to computer science, and then started an MS in applied math. These are all relevant disciplines in the real world.

For the life of me, I don’t understand why people pay out the schnoz for a BA in art, history, sociology, political science, or psychology. These are all degrees that have little utility on their own, and are only worth something, if at all, when coupled with a graduate or professional degree. (And truth be told, even with comp sci, if one wants to be a code monkey, there’s no shame in going to Devry or ITT Tech, getting some programming experience, and hitting the job market.)

avatar Investor Junkie

Dan,

I also agree about liberal arts degrees, but who am I to judge? As long as I’m not funding it (no government subsidy) you could study about ant farms for all I care. Just don’t complain you can’t make a career out of it and $100k in debt because of it.

avatar Dan

See, I don’t believe this at all. The Stafford loan limits are quite low — $27,000 for dependent undergraduate students and $45,000 for independent undergrads and those dependents whose parents were denied a PLUS loan. This is cumulative over the course of the ENTIRE four-year degree, not each year. The later is enough to cover tuition and room and board for in-state rates at many flagship institutions, but hardly enough to cover the full freight at private schools. Yes, the rates for Stafford loans are pretty good, but those limits are too low to support your theory that the government allows “anyone to finance any degree” — not when you consider private schools and out of state tuition at other public schools.

And let’s talk about PLUS loans for a minute… IF one qualifies for them, the going rate these days (since 2006 through 2012) is 8.5%. In my world, that’s not “wayyy too cheap.”

Grad school is a different beast. The lending limits are much higher, but so are the rates. My stafford loan rates were 6.8% and my PLUS loan rate was 8.5%. So I still don’t consider the government to be lending money “way too cheaply.”

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avatar Evan

My Law school loans are capped under 5% (I refinanced them when I got out of school in 2006) For upwards of $80K worth of loans. I think that is cheap money.

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avatar Dan

I agree that it is cheap money. But the argument as presented involved undergraduate education, which makes the analysis quite different.

In your case, we’re talking about what easy access to an abundance of cheap loans does to the market for lawyers. In the other, we’re talking about what easy access to cheap loans does to the market for… who, exactly? I can’t say “the market for those with a BA/BS” because most companies look for a specific education, not “any college degree will do.”

avatar Dan

Apex,

I think you raised a good point — how can there be a bubble if the worst thing a person can do is not go to college? (And further critical analysis shows that the author introduces the piece by asking if there is a bubble, but then he doesn’t explicitly answer his own question. As you pointed out, he really doesn’t clearly make his case either.)

One thing that makes this topic even more complicated is that not every student pays the “advertised” price at a private university. I graduated from a private institution that is routinely considered one of the most expensive in the nation; I had a scholarship that covered about of my total expenses, putting my out of pocket costs at just under twice what I would have paid at my in-state flagship institution.

One assertion that I will flatly reject as strongly influencing costs at private schools is the federally backed student loan issue. At the undergraduate level, the limits on stafford loans are quite low ($5500 for freshmen, $6500 for sophomores, and $7500 for juniors and seniors.) Remember, these loans are the kinds that students can get with no credit check whatsoever. For other loans, students (and their co-signers) must pass a credit check — I’m sure this severely limits the abilities of a student to borrow enough to cover the full price of a $30k/year tuition bill.

One thing, I’m sure, that drives up the tag at the most expensive schools *is* the supply/demand issue. I’ll throw out Harvard & Yale just for the sake of it. Over the years, I don’t think Harvard and Yale have added much capacity. But as the population grows, so does the demand for higher education — and at these perceived elite institutions, you have more bodies chasing the same amount of seats.

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avatar Investor Junkie

“how can there be a bubble if the worst thing a person can do is not go to college?”

For the individual yes, for the country it’s not good.

Well would you agree that for specific fields, it’s critical to get a college education? A perfect example today is for doctors (GP especially with the HC law). If there are people who look at the costs and decide they don’t want to go to college because of the many years required to pay back their loans (let’s even forget about the taxes issue), and instead works for McDonald’s (not accurate but you get the idea). My question is society better off then? Making loans available to anyone at a low rate only increases the cost and makes it that much harder to afford schooling.

The costs, the salary and the time it takes to pay back loans can be rational decisions a student will make in either deciding on major or even going to college.

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avatar Dan

IJ,

“Well woudl you agree that for sepcific fields, it’s critical to get a college education?” As you can see from my reply earlier, yes, I do. But there’s also a huge difference between the education required for different disciplines. Most of the conversation has been centered on undergraduate private and public schooling costs, which an MD is not. And if one wants to be a doctor, one should do themselves a favor and attend an instate institution for undergraduate work and get out as cheaply as possible.

And you’re right, your example isn’t perfect — you’re comparing a career that requires about 10 years of schooling to one that you can get with just a high school education. And if one decides not to be a doctor, he/she likely already has a BA/BS to fall back on or head towards a different direction for grad school.

Furthermore, I do think the economics of a BA/BS and a graduate or professional degree are totally different. Most people, when they’re 18 and contemplating college, have no clue what they “really” want to do, and go to college because it’s what people do. (How many surveys have we seen that show that people generally aren’t employed in the areas in which they studied as an undergrad?) In which case, it’s better to get through the BA/BS as cheaply as possible. Grad school is a much different beast — I’m pretty sure those heading in that direction *want* to study that specific discipline and intend to seek employment post-graduation. In that case, it’s much easier to make the cost/benefit analysis and reject it if it’s not worth it.

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avatar Apex

@Dan,

I agree with all of that.

And to answer IJ (as you did as well), clearly there are certain fields for which a college education is necessary. Clearly doctors as mentioned but also engineers, pharmacists, and a whole host of fields that are in the sciences and in disciplined fields. But in the soft or creative fields is a degree really that critical. What does a general liberal arts degree do for you. Or even a general undergraduate business degree. For some people it might be supportive of their career but for many its a place to hide and just get out with something. Then they manage a taco bell (which doesn’t even really need a high school diploma). Now if there weren’t a truckload and a half of graduates coming out with a general business degree maybe it would have some value but there are too many people going to college to get these types of degrees which don’t provide people with highly rigorous skills which can be put to work in the work place.

Now if we could get some of these people to go into other disciplines that we need in this country and will increasingly need to both meet job demands (so we don’t have to import so many foreigners on H1-B Visas) and to help drive our increasingly high tech economy that would be great. We don’t have a bubble in high tech and highly skilled education. We have a bubble in low quality education. And thats because we tell everyone they need an education and leave it at that letting them think all education is mostly equivalent. Or at least that all education is a vast skills improvement over no post secondary education. And this is just not true. A history degree might open your mind but there are not nearly enough jobs to hire all the history degrees and very few pay very well either. But thats ok, just go to college. Thats the key, just get in there and get a degree, any degree.

But that is a big fat lie. And there is almost no one along the path advising students to the real truth.

1. Some people are not cut out for college, but there are plenty of other skills you can learn in 2 year schools, in trade schools, working as an aprentice, etc. Find out what you are good at and what you enjoy and start there.
2. Some degrees in college are very valuable, some are moderately valuable, some are nearly worthless. Choose wisely.
3. The more valuable degrees are generally harder and more work, but this will affect the rest of your life. The decision you make here for the next few years will dictate the next 60 years of your life. Other than a life partner there may not be a single more important decision you will make the rest of your life. How much effort have you put into informing yourself about this decision? Are you choosing the path of least resistence thinking that the kind of degree and how well you do in it are not really that important? Because if you are, you are wrong.

But to say that would be to make some people feel bad that their degree is less valuable or less rigorous which of course is the absolute truth.

We don’t need to just funnel people into college like a herd of cattle. We would be better served to weed out the ones that don’t belong and help direct and redirect those that are there to the areas they can be most beneficial to society and that will serve them best. Of couse the decision is always with the individual but if we don’t give the individual all the proper information and tell them the truth but instead let them believe that any college is good and thus different paths are relatively equivalent, should we be surprised when we get an over abundance of the easier lower quality degrees out of people who think that any degree will help them immensely.

All things being equal wouldn’t you choose the easier path? I would.

avatar Investor Junkie

@Apex,

Your comment is well thought out and I completely agree. I put in simple terms of ROI.

A few of my friend did study history in college. The only viable career is teaching from that. There is nothing wrong with that, just understand the college major determines the career path. I think most miss that point and just pick any major.

A few of my friend went to college to party. Nowadays (I graduated in 1993) college is a much more costly proposition and can’t be used just to party.

avatar Apex

Dan, yes, I think it is a contradiction to state that there is a bubble in education and then also say the worst thing is to not go to college. That would seem to be similiar to saying there is a bubble in housing and the worst thing you can do is to not buy a house.

So just to give my personal opinion on the matter. I do believe there is a bubble in education. I do not believe the worst thing you can do is not go to college. And I think lots of things contribute to the bubble not just government money. Some would be government money, public perception about the need to get a degree, school counselors etc telling everyone that college is the best path, the ability to live “free” or “cheaply” for 4,5,6 years and pile up debt and have fun, among other things.

There are plenty of people for whom not going to college is a big mistake. But I believe there are also plenty of people for whom going to college is a big waste and often a mistake. Some people are not cut out for college. Some people think they can go to college and just get any old degree and get a good job. Many people entering college are not making well informed decisions. They don’t have all the facts. Thats why they are surprised when they get out of college and can’t land the job they want or even a very good job and then you have all these people with 4 year degrees competing for jobs that have no real need for a degree and certainly not the one that the person happens to have.

But because all these people have degrees it becomes an easy way to weed out the “less qualified” candidates and thus it feeds on itself and becomes a self reinforcing thing this need to have a degree. And so to differentiate people go on for masters and PhD or multiple degrees or whatever else it is to show that they are set apart from the morass of indistinguishable college degrees.

I think we need a refocus on determining what peoples natural abilities are, what their interestes are, what job prospects those things can lead to and what the pay is likely to be and what the best path is to get there. I have little hope for that happening because we have all bought the mindless drumbeat that it’s a no brainer, you just go get a college degree. Thats the obvious first step. And by thinking that way it becomes not a very valuable step for many people because for a number of people, that step really wasn’t useful on the path that would be best for them but it has become a kind of pedegree that without it you are labeled as not capable and that just is not accurate.

Bubbles can extend far beyond any reasonable or rational justification before they pop and if they have artificial support they can extend even farther.

Thats my opinion.

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avatar Investor Junkie

Hey Apex,

I was referring to bubble in price. If the government, and until recently private sector, have easy credit to get student loans, don’t you think that increases enrollment? Meaning there would be students who without big loans would never go to college. I don’t have stats handy but I know enrollment is at all time highs (not sure the past 2 years though). My point is the easy credit is making enrollment much higher than if credit was much harder to acquire.

Think about this, what assets do you have to back up this debt? It’s not a house, or car? There are no assets tied to the loan right? For all intensive purposes it’s a unsecured personal loan (that now can never be wiped off after filing bankruptcy). The rates should reflect this.

“worst choice available is to choose not to go to college.”
This is more a matter of my opinion than anything else. I’ve seen other argue that college isn’t needed:

http://www.erica.biz/2009/young-entrepreneurs-college/

While I think some people are better suited not going to college, I believe most can use it to their advantage. Not only for career growth but also for problem solving skills. Though some of my friends where on the 6 year plan and partied too much.

I think there is going to be a tipping point where enrollments do decrease, regardless how free the credit flows. This is because it’s not a path of “guaranteed” higher paid employment the promotional material states it is. I think the rational decision for some will rather take lower paying jobs with no debt. Than coming out of college, maybe getting a job, and being in debt for 10-15+ years. I have a few friends in the computer field, without any college education, run rings around college educated individuals and make just as much as others.

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avatar Apex

@IJ

“I was referring to bubble in price”

Yes but do you propose that bubbles in price occur without excess demand or restricted supply? And one could argue that restricted supply isn’t really a bubble, its a shortage based price increase that will persist for as long as the shortage persists. So really a true bubble which means a price that is beyond what it is really worth and what a healthy properly functioning market should set the price at can only be caused by an artificially inflated level of demand. Typically there are things in the market that are causing that artificial inflation of demand. I listed some of those things in a previous post.

“If the government, and until recently private sector, have easy credit to get student loans, don’t you think that increases enrollment?”

Yes I do. I listed that as one of the causes for the increase in enrollment (i.e. increase in demand). So it seems we are still talking about a bubble caused by an artificial increase in demand.

And at the end you say you think this will eventually be solved by enrollment decreasing as people start to decide its not worth.

But the confusing thing to me is that you still continue with this concept that not going to college is the worst choice possible and you re-enforce it in the comment above with the statement that: “I believe most can use it to their advantage. Not only for career growth but also for problem solving skills.”

The idea that there is a bubble, which you think is caused by too much govt money leading to too high of enrollment is entirely incompatible with the notion that most people should be going to college.

So you see my confusion as to your point. I think you think the government should provide less dollars to go to school and you think that will lower price. But it seems you think that as a result of that lower price then more people could afford to go and thus more should go because its so valuable. But it doesn’t matter where the dollars come from. If more people want to go because of cheaper price that will increase demand which will drive the price back up. Perhaps not as high as it is now but that would mean an overall lower enrollment (again assuming a pure supply demand curve econ 101 type of environment and we know nothing is that pure but we can talk about it in the abstract as a model for approximation).

Perhaps you are arguing that taking out the government money would eliminate some of the people who are not serious about it and having those people in the mix drives up the cost for everyone else. That could be possible but it doesn’t seem like you tried to make that connection so I am not sure if that is your point or not.

I keep coming back to the point of a bubble caused by too much demand as a result of easy money and the concept that demand should be high because not going to college is a poor choice. Until you can explain how those two fit together to allow as many to go to college as possible but yet reduce the bubble caused by excess demand, then I don’t see how the points are consistent with each other.

You can understand why people want government money when holding views like going to college is the most important thing a person can do. If that is the belief then why wouldn’t you want the government to do whatever is possible to help ensure everyone has a chance to do that? Thats why the two concepts that the government giving easy money is causing too many people to enroll is not consistent with the belief that as many people should go to college as possible.

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avatar Matt

From what I’ve seen, the costs are largely rising because of the increased focus on student housing and other “general use” facilities that are very expensive to build yet seem to attract students.

I would say the private college these days is a waste of money. Studies show that unless you go to MIT/Harvard/Yale, college has no correlation with career success.

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avatar CJ

You raise some good points. As tenured faculty at a private university I can see a lot of things coming together.

1) The default position of politicians and academics seems to be everyone should go to college. This affects the amount of money available to borrow. If you want an unsustainable system, make sure the primary recipients of a service are spending someone else’s money.

2) This means that colleges end up lowering some standards to fill their classes and now must add some remedial courses. Students are asked to do less work, many students stay longer (especially at big state schools) and being a college graduate no longer means you can write and speak well. A bachelor’s is now a de facto entry-level degree for many businesses since it’s an easy and legal way to reduce applicant pools.

3) In order to attract students, it is much cheaper to build a multi-million-dollar sports complex or student union than to make a decades-long salary commitment to hire and tenure a star professor. Like GM, these places have a huge chunk of their budget down to personnel costs for retirees and other non-teachers, increasing present costs.

4) The younger generation is used to having constant guidance and support. Most schools have added many more counselors, tutors, therapists and other non-teaching staff to attract students.

5) Like healthcare or airline tickets two people receiving the same service don’t always pay the same amount. In order to attract students, schools offer deep discounts. This encourages both inflating the pre-discount price and spreading the cost around to others. A favorite trick for private schools is to discount tuition down to the prospective student’s home state public university tuition. (That’s why schools love international students – they often pay full price in cash.)

OTOH I think that higher education will soon be in for a rough time as people reassess their plans. Consider:

Why a parent would pay $40,000 a year for a student with an undecided major is beyond me. Especially when taking out a loan against your home is no longer an option for many families. Expect more parental pressure for students to go into “money-maker” majors with high ROI. This will also mean students won’t do as well either because they aren’t suited for it or aren’t happy.

Advertising often focuses on the higher salaries degrees command. But question professors and admissions people and they quickly start talking about quality of life and well-roundedness. This is an indication that nobody really has up-to-date numbers. Why should I pay $150,000 to become well-rounded when the public library is around the corner? Plus (2) above makes it easier to get through four years and not learn very much at all. Employers notice this trend.

On average a degree increases income, but that varies. An engineer or nurse will do well. Don’t expect that sociology or philosophy degree to increase your income. It would make sense for schools to charge based on program ROI but it would be much more paperwork and offends the sensitive professors.

The natural reaction to this is something like the University of Phoenix — all academics and no extras and no tenure costs. Expect four things:
A) More students will work for a bit and then go to school. This will allow them to save up for school. It will also make them more serious students if it’s their own money.
B) More people will look at higher ROI schools like U of Phoenix. Most of their students are over 30 and already have jobs. This is not a coincidence.
C) More people will spend two years at a cheaper community college getting general courses out of the way and then switch to a “name college” for their degree. This will save a huge amount of money and most CCs have articulation agreements that graduates are automatically accepted at the local four-year college. Expect hungry colleges to target these students and make more recruitment visits to CCs.
D) Not all professors are eligible for tenure. Nationally close to 70% of classes are taught by non-tenured faculty. Expect schools to offer fewer people tenure, offer limited tenure, and try to use more adjunct and part-timers who don’t get benefits or retirement. Also expect faculty with little understanding of economics to fight this but offer no alternative solutions.

So it is a bubble in that things will be changing dramatically, but it’s still a good idea to get a degree if (1) you know what you want to do (2) don’t go into crushing debt and (3) consider ways to reduce your cost (like CCs). Oh and notice I didn’t even talk about dorm life, parties and football games. As the price tag goes up, the person paying the bills will put much less consideration on that.

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avatar Apex

@CJ,

Wow, you are tenured faculty at a private university? What kind of a strange breed must you be amongst your colleagues.

This comment was so spot on and gave such good possible future scenarios that it is the best comment on this thread.

I have nothing to add other than I wish my kids could get professors like you (except that I also probably won’t be sending them to a private university).

Great insights CJ!!!

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avatar Eric

Don’t even get me started. I lucked out with a full ride scholarship based on a perfect GPA and 95 percentile SAT scores. Too bad all of my friends are still paying their student loans to this day though. The cost of college is ridiculous.

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