Higher Education's bubble is about to burst

Franks · June 7, 2010, 8:47pm

[Glenn</a> Reynolds: Higher education’s bubble is about to burst | Washington Examiner](<a href=“http://www.washingtonexaminer.com/opinion/columns/Sunday_Reflections/Higher-education_s-bubble-is-about-to-burst-95639354.html]Glenn”>http://www.washingtonexaminer.com/opinion/columns/Sunday_Reflections/Higher-education_s-bubble-is-about-to-burst-95639354.html)

It’s a story of an industry that may sound familiar.

The buyers think what they’re buying will appreciate in value, making them rich in the future. The product grows more and more elaborate, and more and more expensive, but the expense is offset by cheap credit provided by sellers eager to encourage buyers to buy.

Buyers see that everyone else is taking on mounds of debt, and so are more comfortable when they do so themselves; besides, for a generation, the value of what they’re buying has gone up steadily. What could go wrong? Everything continues smoothly until, at some point, it doesn’t.

Yes, this sounds like the housing bubble, but I’m afraid it’s also sounding a lot like a still-inflating higher education bubble. And despite (or because of) the fact that my day job involves higher education, I think it’s better for us to face up to what’s going on before the bubble bursts messily.

College has gotten a lot more expensive. A recent Money magazine report notes: “After adjusting for financial aid, the amount families pay for college has skyrocketed 439 percent since 1982. … Normal supply and demand can’t begin to explain cost increases of this magnitude.”

Consumers would balk, except for two things.

First – as with the housing bubble – cheap and readily available credit has let people borrow to finance education. They’re willing to do so because of (1) consumer ignorance, as students (and, often, their parents) don’t fully grasp just how harsh the impact of student loan payments will be after graduation; and (2) a belief that, whatever the cost, a college education is a necessary ticket to future prosperity.

Bubbles burst when there are no longer enough excessively optimistic and ignorant folks to fuel them. And there are signs that this is beginning to happen already.

A New York Times profile last week described Courtney Munna, a 26-year-old graduate of New York University with nearly $100,000 in student loan debt – debt that her degree in Religious and Women’s Studies did not equip her to repay. Payments on the debt are about $700 per month, equivalent to a respectable house payment, and a major bite on her monthly income of $2,300 as a photographer’s assistant earning an hourly wage.

And, unlike a bad mortgage on an underwater house, Munna can’t simply walk away from her student loans, which cannot be expunged in a bankruptcy. She’s stuck in a financial trap.

Some might say that she deserves it – who borrows $100,000 to finance a degree in women’s and religious studies that won’t make you any money? She should have wised up, and others should learn from her mistake, instead of learning too late, as she did: “I don’t want to spend the rest of my life slaving away to pay for an education I got for four years and would happily give back.”

But bubbles burst when people catch on, and there’s some evidence that people are beginning to catch on. Student loan demand, according to a recent report in the Washington Post, is going soft, and students are expressing a willingness to go to a cheaper school rather than run up debt. Things haven’t collapsed yet, but they’re looking shakier – kind of like the housing market looked in 2007.

So what happens if the bubble collapses? Will it be a tragedy, with millions of Americans losing their path to higher-paying jobs?

Maybe not. College is often described as a path to prosperity, but is it? A college education can help people make more money in three different ways.

First, it may actually make them more economically productive by teaching them skills valued in the workplace: Computer programming, nursing or engineering, say. (Religious and women’s studies, not so much.)

Second, it may provide a credential that employers want, not because it represents actual skills, but because it’s a weeding tool that doesn’t produce civil-rights suits as, say, IQ tests might. A four-year college degree, even if its holder acquired no actual skills, at least indicates some ability to show up on time and perform as instructed.

And, third, a college degree – at least an elite one – may hook its holder up with a useful social network that can provide jobs and opportunities in the future. (This is more true if it’s a degree from Yale than if it’s one from Eastern Kentucky, but it’s true everywhere to some degree).

While an individual might rationally pursue all three of these, only the first one – actual added skills – produces a net benefit for society. The other two are just distributional – about who gets the goodies, not about making more of them.

Yet today’s college education system seems to be in the business of selling parts two and three to a much greater degree than part one, along with selling the even-harder-to-quantify “college experience,” which as often as not boils down to four (or more) years of partying.

Post-bubble, perhaps students – and employers, not to mention parents and lenders – will focus instead on education that fosters economic value. And that is likely to press colleges to focus more on providing useful majors. (That doesn’t necessarily rule out traditional liberal-arts majors, so long as they are rigorous and require a real general education, rather than trendy and easy subjects, but the key word here is “rigorous.”)

My question is whether traditional academic institutions will be able to keep up with the times, or whether – as Anya Kamenetz suggests in her new book, “DIY U” – the real pioneering will be in online education and the work of “edupunks” who are more interested in finding new ways of teaching and learning than in protecting existing interests.

I’m betting on the latter. Industries seldom reform themselves, and real competition usually comes from the outside. Keep your eyes open – and, if you’re planning on applying to college, watch out for those student loans.

sunnyflorida · June 7, 2010, 8:52pm

AMEN. I have though this for a few years. This is the next loan crisis, for sure.

toblin · June 7, 2010, 9:12pm

It is EXACTLY like the housing bubble. Easy credit to finance a dream that too often turns into a nightmare. Even worse, unlike a mortgage loan where the house is the collateral, with a student loan YOU are the collateral. And your wages (lower than you thought you’d earn) will be attached for 25 years with non-sensible interest rates and ridiculous penalty fees. The truth is you’d rather be in default on a $500K mortgage than in default on a $100K student loan. The borrowers, the lenders and the colleges, (that are well aware of where the money is coming from), share equally in the blame.

QwertyKey · June 7, 2010, 11:01pm

So, an unrelated question based off of this article…

Can employers not ask for IQ tests? If they can’t, how can they be allowed to ask for an SAT score (as I’ve seen some ask for in my University’s job postings)?

GeekMom63 · June 8, 2010, 1:07am

I’ve taken at least one IQ test for a job (I think more) and my husband has taken one. The one I took was with a very large company, so they must have had lawyers approving it.

FutureActuary · June 8, 2010, 1:27am

Not an IQ test, but my company administers a math test during the initial interview for nearly all positions. It’s about 20 word problems, mostly utilizing basic algebra. Just enough to demonstrate reading comprehension, ability to apply given information and find a mathematical solution.

(Somehow I didn’t get to take the math test. I think I’m the only person in my whole office that didn’t. No one is really sure how that happened.)

QwertyKey · June 8, 2010, 1:32am

They gave you algebra problems for an Actuarial job (figured they would have been more rigorous… If you can pass actuarial exams, you can probably do Algebra), or is that still in the future?

Gardna · June 8, 2010, 1:38am

IQ tests are in that gray area of employment law. Employers are permitted to use them but if they are challenged (usually under a racial “disparate impact” clause) they have to prove that it has something to do with the actual job and isn’t just a generic line in the sand. These restrictions are only on IQ tests though; other tests like the math tests that FutureActuary mentioned are never challenged unless they’re really stupid (quizzing people on Dante’s Inferno for a job at Wal-Mart, or expecting people to be good at World of Warcraft to dig ditches or something).

ALF · June 8, 2010, 3:19am

This has been discussed extensively in another thread. The only ‘bubble’ that might ‘burst’ would be the over-arching need on the part of some families to place their kids in the most elite institutions possible, regardless of cost. The student who graduated from NYU with $100K in loans could probably have enrolled in her state’s flagship university at less than half the cost, and there probably would have been merit aid as well for someone accomplished enough to get into NYU. So, that Religious & Women’s Studies degree still might not be worth a lot on the job market, but instead she would have had a much more manageable debt.

sk8rmom · June 8, 2010, 7:19am

Alf, you’re talking about just one rather extreme example. But what about the people that borrowed more conservatively and got a more useful degree, such as engineering, but found that their loans were forced into default and tripled within a few years? There are all kinds of examples like this out there and it underscores the need to break the myth that a college degree is going to guarantee a good job. Sometimes, the economy or life just happen to real people and I’d love to meet the young adult who doesn’t make a single career planning mistake along the way! Consider Alan Collinge’s story, he’s a USC engineering grad who is the founder of StudentLoanJustice.org and author of “The Student Loan Scam”:
[News:</a> ‘The Student Loan Scam’ - Inside Higher Ed](<a href=“http://www.insidehighered.com/news/2009/05/05/collinge]News:”>http://www.insidehighered.com/news/2009/05/05/collinge)

Default rates for both federal and private loans are rising rapidly. While the federal government is making some attempts to curb this through IBR/ICR and loan forgiveness programs, the private student loan industry seems to be trying to mask it by excluding borrowers who have made a single payment in two years from their reported default rate. Meanwhile the damage is done not only to the borrower’s credit, but also that of the cosigner. This is a real problem and it merits serious thought - with well over $700B in student loans outstanding, rapid increases in default rates can quickly turn into an ugly situation for all concerned. Many private lenders have tightened their standards for forbearance and offer this option for only a few months at a time which is not long enough to conduct an effective job search in this economy. After that, the loan goes into default and the penalties and fees can cause the loan to snowball at an alarming rate.

Ivyparent · June 8, 2010, 9:35am

This is an important thread. High-cost universities have an obligation to advise loan applicant students of the costs, and give them data on real-history earnings of graduates in specific majors. For example, is a $100,000 undergraduate loan burden, followed by a $100,000 law school burden reasonable? Often it is. It may take 10 years to pay off, but a lawyer’s earnings will cover it, assuming the student earns very good ug grades and gets into a reputable law school, does well there, and starts out as a $75,000+ associate, and jumps to $150 k+ partnership in his/her early 30s. Similarly for premeds/med students.

It may make sense to take out large loan amounts for some situations where specified public services, such as teaching, can generate quid pro quo loan forgiveness (govt pays the loans off).

It certainly makes sense, in an era of bank bailouts, for student loan interest rates to be lowered, including no interest accrual(govt pays this as a subsidy) during university/grad/professional school attendance.

Individuals in high-priced universities need to be advised, and figure out, before getting mired, “What am I getting into here?” It’s abominable for the universities to say they are doing this for the public good, i.e. admitting working-middle-class students in order to “expand diversity”, and then crush these students with oppressive financial burdens from which there is no escape.

If they can follow Harvard et al’s lead and offer sufficient grants in aid (or grants plus work study) to make attendance possible without loan-taking, this is legitimate. If they lack the endowments to enable this, then they should use means testing for admissions, as a thoughtful, humane-to-applicants measure, or else they should provide counseling to admitted applicants who declare they will need financial aid, before these students make their own final college-choice selections.

Obviously more Pell grant funding, and armed-services scholarship money are in order, but the most return on investment for society can be achieved if recipients go to public universities, i.e. 2-3 public university students for the same cost as 1 private university student.

We are likely going to enter an era where many more students who are admitted to high-priced private colleges, will select flagship public universities, leading to a domino effect where lesser-qualified students who in previous times would have attended the flagships will have to go to ex-teachers college state universities, and students who would in previous times have gone to these state universities will have to go to community colleges.

Sub-elite-tier private universities that lack large endowments will see their enrollments shrink, or else find themselves admitting less-academically-qualified, but more-affluent students in order to maintain current enrollment levels.

There are things we could do. We could revamp public K12 education to train more students to be self-directed learners, which would make more lower-cost online education feasible, we could have 2-year full grant-in-aid and work study plans, with loans substituted for years 3-4, and insist that students choose majors at the end of second year, and stick with them.

High-priced universities can expand transfer opportunities so students who do well in public universities in years 1-2 can save money and then receive private educations for upper-class years. (Lower-class distribution courses are not worth the same $30-40,000 tuition as upper-class discipline/major-specific courses; it’s not altogether unlike being charged a Mercedes 2-year lease price for a Kia.)

FutureActuary · June 8, 2010, 9:36am

Qwerty - actuary is still in the future. The algebra test they give is for most positions though, (from file clerks to some management levels.)

Higher Education's bubble is about to burst

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