Paul L. Caron

Thursday, September 2, 2010

Higher Ed Bubble Dwarfs Housing Bubble

Mark J. Perry (University of Michigan-Flint, School of Management), The Higher Education Bubble Is About to Burst (CarpeDiem):


Note that the housing bubble resulted from about a 4-time increase in home prices between 1978 and 2006, and college tuition has now increased by more than twice that amount since 1978 - it's gone up by more than a factor of ten times. The college tuition bubble makes the housing price bubble seem pretty lame by comparison.

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It is time for entrepreneurs to do to education (including K-12, not just college) what iTunes did to album sales, what the Kindle is doing to paper books, and what Netflix did to Blockbuster.

It is possible to get unlimited real-time 1:1 online tutoring for $100/month/subject. I expect this model to grow.

Posted by: GK (The Futurist) | Sep 3, 2010 2:49:14 PM

There is a major flaw in concluding that higher-ed is in a bubble based on this graph. As the Goldwater Institute has shown in their report on Administrative Bloat, spending per student has increased 34% from 1993-2007 (in inflation adjusted dollars). That's about 2%/yr ahead of inflation. It's hard to make a direct comparison with this graph without doing more work than I want to do for a combox, but my understanding is that inflation over this period was about 3-4%. So is it fair to say that spending per student has risen 5-6%/yr from 1978-2010? that puts the growth on this chart at 475-650. More than houses at 400, but a lot less than the 1100 shown on this chart. Maybe spending per student accelerated in the 90's ahead of inflation, so it would be worth rerunning the CPI, housing and spending/student from 1993 to see how these three really compare. Keep in mind that this includes endowment spending, research spending, tuition, financial aid, and direct govt support (for publics). Direct gov't support has plummeted and research and endowments have skyrocketed. Does that mean there is a bubble? I'm not so sure. But I am sure that just looking at tuition is misleading. It is also worth noting that the average debt of college grad is something like 25k. A lot, but certainly not back breaking. It is comparable to a low-end new car. Given what students spend on electronics, cable/satellite, eating out, clothes and cars, I'm surprised the debt level isn't a lot higher.

Regarding grade inflation, we looked into that here. When we compared grades of students with the same incoming SAT score, we found no evidence of inflation. Grades have increased, but so have incoming SAT scores. Like a lot of schools, we've elected to keep our student body size roughly constant while the pool of students applying to college has increased. That has allowed us to be more selective. I'm not sure whether or not this is a good idea, but you should expect grades to increase with increasing preparedness of your students.

Posted by: anon prof | Sep 3, 2010 2:23:48 PM

I live in Georgia and appreciate the mathematically-challenged lottery players for putting my kids through college. A problem that we have, though, is grade inflation by professors to keep more students eligible.

"The lottery is like a tax on the mathematically challenged.” ~ Oscar Wilde on the lottery

Posted by: Woody | Sep 3, 2010 11:44:46 AM

Binah: you are only "charged" for 4 years. You PAY as long as you owe a balance. Just like you are only "charged" once when you buy a house.

Posted by: gullyborg | Sep 3, 2010 11:30:05 AM

"Note that the housing bubble resulted from about a 4-time increase in home prices between 1978 and 2006" ???

Yes, the prices increased, but saying the increases were the cause of the bubble gives Dodd, the Frank-ster and Slick Willy a total pass for prevailing on (read:threatening) financial institutions to give loans to lots of people who were simply unqualified. So, when their policy resulted in increased demand, prices rose. It would also be instructive to compare the average sq. ft. of homes built in 1980 vs those in 2008. Not only did price per sq. ft. of new construction increase but the size of the average home increased as well. Also, don't forget those marble and granite countertops. Most of us who grew up with formica suddenly wanted something nicer. And why not, the house you bought today would be worth 40% to 50% more in just a few years. Also, availability of loans to non or marginally qualified buyers also drove some who were well qualified @ $X to purchase homes costing $2X or more. Part of this is the McMansion effect, not just inflation on tracts full of 1,500 sq. ft. split foyers.

Posted by: Conservadad | Sep 3, 2010 11:16:41 AM

I haven't yet seen a mention of the PVFW of an engineering degree versus a women's studies degree. Part of the bubble is the explosion of useless majors and useless courses (and even useless teaching of worthwhile subjects). My daughter was being taught US History that isn't true. She no longer attends that university. She is my fifth child and my enthusiasm for college education has followed a steep downward slope.

Posted by: Michael Kennedy | Sep 3, 2010 8:07:33 AM

Easy fix: make college loans fully dischargeable in bankruptcy. Again. It is not a coincidence that the bubble in tuition and college costs corresponds with the period after Congress exempted Federally-guaranteed student loans from bankruptcy discharge.

Congress needs to realize that the easiest way to spur the economy is to convert current unpaid student loan balances into grants, and then make all new student loans just like credit card debt. Lenders would think twice about loaning money for college, and tuition would drop like a rock. And maybe some bad schools would go out of business.

Posted by: curmudgeoninchief | Sep 3, 2010 7:17:51 AM

Tuition has gone up much faster, but you "only" pay for four years, or five, or six, or seven, or eight -- not 20 or 30 years. So the total debt burden is the right way to look at it. Housing was a much larger bubble, at least on the side of those paying the bills. OTOH, housing never got so far out of line with the CPI as higher ed.

That said, I know one friend after another ranging from mid 20s to mid 30s stuck with student debt that amounts to a mini-mortgage; or their parents are stuck with comparable home equity debt.

The BLS numbers show a slowing "differential gain" from having a college or grad school degree. The college advantage is real, but it stopped growing in the 90s. The grad/professional school differential advantage stopped growing some time in the last decade. Meanwhile, higher ed prices are continuing to rise rapidly -- not a tenable situation. Higher ed remains a good thing, just not at this price.

Posted by: Binah | Sep 3, 2010 7:08:14 AM

I think all of these stats regarding the "cost" of college are misleading. I suspect all these stats simply take tuition (and perhaps other costs) and plot them. In reality colleges have created a wide scale of costs. Upper income families pay the sticker price while lower income families pay some discounted rate because of grant aid (not loans) from the institution and federal government.

I have children at two very high cost colleges. My wife and I get to pay the sticker price. Based on "aid" stats it appears the average student receives almost a 50% discount. That discount is paid by me paying both a higher tuition and higher federal taxes (the other source of grant aid). I estimate that I am paying an additional $11,000 a year at each school because the schools want to take that money and give it to other students in the form of a grant. I view this as simply another tax on earnings. And, just like the federal income tax, inherently unfair. The schools look only at income, not what produces the income. Many of those students receiving aid had mothers who stayed home. That's fine. But don't come back years later and expect my wife and I to pay for your child's tuition because you stayed home. It's income re-distribution by the colleges pure and simple.

Posted by: Over50 | Sep 3, 2010 6:13:04 AM

I had a moment of clarity and realized that what you buy with a school loan is an overpriced teacher ...

Posted by: Jeff | Sep 3, 2010 6:08:59 AM

Comparing an asset price (housing) to annual tuition cost is an apples to oranges comparison.

The "asset" you get from investing in college is the incremental earnings versus those who do not go to college, or who go to less expensive colleges. There's no necessary relationship between the cost of education and the value of education. The value of education may be increasing faster than cost, or vice-versa -- the graph doesn't give us any insight into that relationship.

The education asset may be subject to bubble-like behavior because it's so difficult to measure the value of the education asset. However, since the asset cannot be transferred, it is not subject to "greater fool" irrational buying.

Posted by: Thomas Dinsmore | Sep 3, 2010 6:02:19 AM

College costs have gone up more than housing because students can get grants and subsidized loans for college expenses. Like clockwork, when the feds raise grants $2000 for students, tuition goes up $2000.

It's not rocket science how to fix this.

Posted by: Chester White | Sep 3, 2010 5:59:51 AM

How much of the tuition increase is the result of reduction in appropriations for the state (at least for state schools). Is it that operating expenses have gone up and appropriation have gone down or is the money going somewhere else?

Posted by: Bugsy | Sep 3, 2010 5:40:39 AM

A better measure of a bubble is the amount of debt that goes into it. Better yet, how much additional debt beyond the normal status quo. I do think there's a higher education bubble (in a sense), but that it's still far less than the housing bubble.

And the housing bubble is not over. Think about this: right now the government is assuming the risk for allowing ordinary individuals to borrow huge amounts of money for 15 years with interest rates of 3.85%. Given the potential for inflation, given that the underlying asset prices haven't even stabilized, given the default rates today, this makes absolutely no sense.

Insane amounts of money are still being pushed into the economy via gigantic firehoses. Something bad will happen, but we don't know what, yet.

Posted by: 適切 | Sep 3, 2010 5:01:51 AM

To Jeff regarding collateral:

Not quite "you" but close - it is the off balance sheet asset we might call "present value of future wages."

PVFW is exactly what is covered by life and disability insurance. And PVFW is what banks look to first, for any lending, secured or otherwise.

So the issue is: To judge tution, can we look to comparable growth in wages? That's what we do when we compare, for example, productivity gains to capital investment.

Alas, unlike capital investment, for tution the answer is a clear "no."

[To be fair, we should look at the specific thread, e.g. lifetime income arc of those born 1985-1995, tracked from say 2010 through 2060, rather than the cross-sectional average wages of all workers in 2010.]

Posted by: Robert Arvanitis | Sep 3, 2010 4:57:47 AM

at least a person can flip hamburgers ... though a house can be used to flame broil them!!!

Posted by: spankie | Sep 3, 2010 4:57:47 AM

at least with a house you have a tangible asset ...
your school loan collateral is what ? you ?

Posted by: jeff | Sep 3, 2010 4:31:16 AM