Peter Thiel on the "Higher Education Bubble"

Applying to College
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<p>"Perhaps that is because most U.S. housholds who’se income is around 44,000 look at the Ivy price tag without researching financial aid and are discouraged from applyng? "</p>

<p>An interesting argument, and a possibility, but there is something else here as well. Admissions to selective schools like the Ivies and so forth is at such a level that it generally takes access to resources to get into those places that is a lot easier coming from a well off background then it is from a more modest one. Yeah, we all love to believe that access is equal and so forth, but it isn’t, and more importantly, your background matters in getting into those places, and even among those of lesser means it depends on who you are and where you live. A black or hispanic inner city kid whose family made less the 44k who did well enough to apply could get in with a good scholarship while a kid from a rural farm family who didn’t meet that demographic might not get in.</p>

<p>More importantly, generally higher incomes generally means a family where learning is not just the school, it is in a trove of things, like parents who are educated themselves, read and discuss things that help with the process of learning/doing well in school that in turn helps gain admission. It is also obviously living in an area that is economically better off, that in turn generally means more rigorous schools (talking about public schools here). It is no coincidence that kids from a high school like Scarsdale, NY end up in top schools a lot more frequently then the Bronx, NYC, or score much higher, schools tend to be funded by property taxes and well of areas can spend a lot more then more modest areas…</p>

<p>The other factor is that for well off kids, that learning experience doesn’t end when the school year ends. There was a study of the difference between kids in inner city schools and kids in suburban districts, and what they found out was that when school ended, kids in poorer or rural districts effectively lost 4 months or so because what they had learned was not re-inforced, whereas kids from higher income backgrounds had their learning re-inforced, and as a result kids in inner city and rural, poorer districts are behind. </p>

<p>And given the hyper competitiveness to get into these schools, this is serious. When you are talking about kids taking X ap’s, having a 4.x GPA, Sats>2300, and so forth, to get into these places this is going to be very difficult from modest means, even assuming there is some break given for kids from ‘alternative’ backgrounds. </p>

<p>Given all that, not surprised how very few kids from more modest backgrounds are in those schools.</p>

<p>As far as a bubble happening, part of the problem with the cost of education is that school kind of mask it, they raise tuition, but then they make up for it with grants and aid from their endowment so it is kind of a shell game, they figure they can raise tuition and no one gets hurt. The problem is that as tuition goes up, they eventually are going to find more and more kids who even with aid cannot afford the tuition, and their pool will end up limited by that. Either something is going to have to be done about the cost of admission, or they will end up with a more limited pool of applicants who can’t afford the tuition. Could be the ivies will go back to what they once were, the playing ground of the rich and well off, with a relatively small population of what were once called “scholarship students” from more modest backgrounds.</p>

<p>I think the craziness will end also when people start wising up that there is a broad education market out there, and limiting it to an oligopoly of elite schools doesn’t make any sense, that there are thousands of colleges out there where you can get a good education and not kill yourself financially. Part of this I suspect is going to be cultural, part of the hype about top colleges is being driven by foreign students, especially from Asia, where in their countries where you go to college matters often a lot more then what you do in it (interestingly, there was an article recently about kids who get into Ivies and kind of ‘coast’ through which kind of goes along with this). As their own systems evolve (basing an economy on graduating from only a relatively few elite colleges, as in China, is not going to work in the long term) and also is driven by the rather large immigration we have seen from countries in places like Asia, and over time that hype is going to go away as people realize that the extra cost of going to an elite school simply won’t be worth it. </p>

<p>There are places where going to an ivy matters, if you have your heart set on going to an ivy law or medical school, it could make a difference (on the other hand, if you want to get into a top notch medical school, go to a top tech school like cal tech or mit and do well, and watch what happens) or if you want to go into the world of investment banking, which is run by ivy graduates who make sure only to hire other ivy or a few other elite program graduates, yeah (though I suspect someday someone is going to realize that kind of like the battle of Poitier in the 14th century, where a British force composed of common foot soldiers and archers wiped out the French forces of knights of the noble class, that that kind of school snobbery limits what they can do, they are going to start hiring bright kids from non traditional schools, and find out they can do better then the Ivy mafia and change the game). If you want to do other things, while the Ivies give a great education, for those fields there are places that can do as good or better, offer opportunities, and not leave you hobbled by debt or the like.</p>

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<p>Amen, FooMen, right on the money. What they aren’t saying is those jobs a college kid might get are routinely being sent offshore or being ‘onshored’ under the H1B program, not because they can’t get workers, but because they can get them at cut rate prices because the countries these workers come from don’t create enough jobs, so salaries are depressed.Ironically, the H1 once upon a time was getting people with unique skills, today what you generally get from the outsource places are kids right out of school from India, and it is all about cheap labor.</p>

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<p>@saynotoharvard I agree. The American school system is failing badly :/</p>

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<p>Musicprint, it’s always a pleasure to read your in-depth posts. And while I agree with you that there are many good colleges out there that will provide you with an excellent education, I believe the elite schools with large endowments will continue to have an edge for a long time to come – at least until the day comes when folks can “shop” colleges based on net price rather than a list price which often means nothing. What other product can one buy for as much as 95% or more off list price? – but one must first go through a bloody competition gauntlet and then be subjected to a financial proctological exam before one gets the real net price.</p>

<p>We have a state university within walking distance of our home and the majority of the professors there are excellent; my son took several classes there under a dual-enrollment high school program. The school costs about $9000 a year for tuition and fees, plus books and other out-of-pocket expenses. Yet my son was accepted to Brown University and our cost will officially be $2700/yr, but is effectively less than zero since this figure includes over $3000/yr in allowances for books, personal expenses, and travel back home several times a year. So for less money, he gets superior labs and facilities, professors who are leaders in their respective fields, a brighter and more motivated group of peers, more extracurricular opportunities, international travel exchange options and better job networking opportunities.</p>

<p>The college system won’t start to change until some colleges begin to cut the frills and extras and compete based on net price rather than on features. Yet even state schools that used to be low-priced have decided to play the Ivy League game, with ever-enhanced sports facilities, fancier food offerings and rapidly-rising tuition, offset to a select few via merit scholarships. Even with these schools, it’s hard to know what the net price will be before one goes through the whole apply-get-accepted-get-aid process.</p>

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<p>This topic has been discussed many times before on CC. The bubble is very real because for the most part the typical college degree has little value(exceptions such as accounting and engineering are few) except as a stepping stone to grad school. Moreover FA effectively is just another tax on responsible affluent familes. The current FA policies discourage saving for college and reward spending or early retirement for one spouse. FA is another form of social justice whereby an elite college rewards educated parents who chose lower stress and lower income jobs(doctors/attorneys for example) making say 125-150k with generous FA while forcing others making 200-250k to pay full price. To date I have yet to hear a compelling argument as to why an attorney in a firm(250k) should pay more than a gov’t attorney(150k). It was a lifestyle choice that was right for that individual but should have nothing to do with FA. Now before someone gets all excited let’s all agree that needy students say below 60k should get help and that this issue really only is relevant at the elite rich schools. The schools have done this every year with the help of the gov’t to allow them to keep raising tuition 4-6% annually. The bubble will burst in a few years when families making 250-350k just can’t pay the bill.</p>

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<p>People have to remember that colleges and universities do not create jobs and/or industries, at least not directly. </p>

<p>A few years ago it was really popular to major in computer programming. Now many of those jobs are out sourced. The major is far less popular now. </p>

<p>It is the student’s responsibility to figure out what skills he/she needs and what programs teach those skills. If the student guesses correctly his/her return on college investment will be huge. If not, he will write and read articles likes this and then post it for others to read and then complain about all the things colleges and universities did wrong. </p>

<p>The job/labor market should be interesting in this country for the next 20-30 years. As the Democrats and Republicans fight over the annual deficits and ridiculous debt you have to figure gov’t spending will shrink and/or taxes will go up. The manufacturing jobs are already long gone for the most part. We still manufacture missiles and defense related stuff and a few assorted parts and such. </p>

<p>So where will the jobs and industries come from? </p>

<p>In the past, as this country switched from an agriculture based economy to industry, colleges were able to prepare graduates with liberal arts degrees that didn’t target one job. That model seems less than optimal to me but who knows at this point. I realize people have to think but there just seems to be so much fluff and soft stuff in many degree plans that you really have to wonder what it is worth to pay for a degree largely comprised on non-core material. </p>

<p>I wish we could develop and energy plan that would solve many problems and create jobs. I get the feeling that many degrees basically prepare people to TALK about problems not SOLVE them. We are really good at TALKING and POSTING on Facebook or playing video games but not much else. That is scary but about the way i see it.</p>

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<p>There is an argument that widespread knowledge of liberal arts and sciences is a good thing for society. Whether universities are effective in teaching that is another story altogether, as is whether the benefits to the student (as opposed to society) are worth the extra cost to the student (of course, the same trade-off can be discussed in terms of government financial aid versus the benefits to society).</p>

<p>Liberal arts and sciences students often have about 35% to 50% of a four year bachelor’s degree program in courses for the major, with varying amounts (probably mostly in the 15% to 30% range, though some universities are outside this range) for breadth or common core type of requirements. Engineering students may have up to 85% or so of their courses for their majors.</p>

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<p>The thing is, tuition does not even cover operating costs at most schools.</p>

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<p>Oh how the world has changed over the decades!!! Admission to my alma mater was highly sought and pricey. I was a working-class admit who made it through generous merit scholarships, an on-campus job EVERY semester and a full-time job EVERY SUMMER. Didn’t ask my folks for a dime. Now the coming costs of college for Lake Jr. give me sleepless nights. A student job and summer employment won’t cover it, not be a long shot. Jr. has good grades but so do thousands of other applicants to selective colleges. Fortunately Jr. has got a good head on his shoulders and is quite unimpressed by reputed prestige. He’s visited two premier tech schools and one good (not great) state U thus far. The state U is very much in the running.</p>

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<p>Great point. People live more and more on credit. Just thirty years ago, I did not know one college student with a credit card. Cash was paid for everything. This dependence on credit has made a huge difference.</p>

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<p>I think there are two issues that have to be addressed in education costs:</p>

<p>1) What students themselves want to do and whether the kind of college they go to and the degree they get is worth it.
2) The fact that a lot of students attend colleges when either it adds no actual economic value to them or they aren’t ready to perform competitively</p>

<p>Let’s take 3 Corner Cases.</p>

<p>Example A:
Pete is a high school senior who’s received admission into Harvard and University of Iowa (where he lives). He wants to work in finance someday and is actually smart/driven enough to have done research and know what he has to do during college in terms of networking and grades.</p>

<p>Example B:
David is a high school senior who’s received admission in the same set of schools. He is not sure what he wants to do in life, but wants to have time to explore and think about it. His parents are pressuring him not to miss the opportunity to go to Harvard.</p>

<p>Example C:
John is a high school senior who wants to be a doctor or lawyer. He’s extremely hard-working and willing to do whatever it takes to keep his grades up in college.</p>

<p>For Pete (example A), I would have no problem telling him to go to Harvard even if he gets no financial aid and has to stack on a full $240k in debt. The reason why is (1) his odds of getting into his desired field are drastically lowered from lack of name-recognition and on-campus recruiting if he goes to U Iowa over Harvard. (2) If he goes to Harvard, he will be able to network extensively within the student population and also use the name to connect with alumni who can help him get in and which will be useful as business relationships on a much higher frequency.</p>

<p>If he works at a bulge-bracket investment bank or hedge fund after graduation, it’s reasonable to expect $100 - $150K in his first year of work, and the salary will double within 4 years if he stays in finance. Exponential growth will happen depending on how well he utilizes his connections from Harvard and how he performs in the job.</p>

<p>For David (Example B), I question whether he should attend college at all right now. There are plenty of ways to explore yourself that do not involve paying money to someone. Traveling to Asia, Borrowing some books from the library, etc. The issue he faces is that he has to decide whether whatever he does in life can afford to have $240K of debt from Harvard, while going to Iowa may give him much more freedom, but at the same time make certain choices in life down the road more difficult (though rarely insurmountable).</p>

<p>For John, I’ll tell him to go to Iowa for the lower cost any day. He’s going to pick a field either way that involves grad school, and with the exception of MBA’s, graduate schools place much more of a premium on GPA & Extracurriculars then they do on the name brand of the school.</p>

<p>What’s the point of my examples? The value of Harvard that I consider important has absolutely nothing to do with the quality of the education. It has entirely to do with (1) networking and (2) utility of the brand name towards what you want to do in life. The value of those two components is entirely dependent on what you end up doing and what kind of person you are. I went to an Ivy and then worked in investment banking for a few years at Goldman and have now left to start a private equity firm. For me, it adds a ton of value to have made friends who were born into much more money than my parents ever had, and who are extremely well-connected in terms of what is feasible for my firm. Additionally, having the halo of multiple Ivy-Leaguers on the team makes marketing a much easier process than it would otherwise be in terms of who our networks are. And that will end up directly determining how much I make going forward.</p>

<p>The issue though, is that most fields in life are not ones where the value of having gone to an Ivy comes into play that significantly. If you’re going to be a lawyer or a doctor, it’s all about what your final grad school is. If you want an easy stress-free life where you just enjoy it on a day-to-day basis then it’s unlikely you’re going down a career path that’s as networking-intensive as the ones I’ve described.</p>

<p>I don’t necessarily believe that colleges cost too much. I do believe that many people overpay and make a bad choice about what school to go to because they believe that the “value” of a degree is something that magically appears. At the end of the day, it all comes down to your ambition, what you want to do, and what kind of person you are when you make the choice.</p>

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<p>I don’t understand why people would attack the ivies in this thread. Harvard costs less than my state school for me, and I’m not even particularly poor. I’m upper middle class. The price isn’t rising at every school and for everyone. Part of what has increased the demand at these horribly selective schools (i.e. those populated with people pre-selected to care about schoolwork and community-building) is their overwhelmingly generous financial aid. Consumers aren’t suckers, and that’s why it’s getting harder to get in the top schools where these financial aid packages are granted.</p>

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<p>Student loans are too good to be true in some cases just like the creative financing used to create the real estate bubble. I have a good credit history but… my credit card company would let me charge no where near what some of these students charge in student loans. Why is this?</p>

<p>Because the card company evaluates my risk of default and assigns a credit line and interest rate based on factors like income, bankruptcy, past defaults, current debts etc. None of these things are taken into consideration when giving out these silly student loans.</p>

<p>Lets face it they give out 30k in loans to just about anyone these days through the federal stafford loan program. Some borrow responsibly and some borrow 30k to get a bachelors in art with bad grades from a for profit online school. Then they default for a while and that 30k doubles once it goes to collections. </p>

<p>It is funny that the system is set up this way since any rational finance or accounting person can see that problems lie ahead for many of these people. Student loans should not eat up more than 15% or so of take home income. You can borrow like 80k with uncle sam’s help for a tier 4 law degree or PHD in Philosophy.</p>

<p>At the university I attend I used to work at the tutoring center. I met people with master’s degrees and PHD’s that were working for $10 an hour tutoring the academically challenged. Some of these graduates were really quite brilliant but financially illiterate to a dangerous level. Many of them I know will be poor for a long time. </p>

<p>Unfortunately BA’s are a dime a dozen now since education is easily available. We have online education available anywhere. Being successful isn’t just about getting a degree but getting a degree in a marketable field with good grades from a respected institution. Also you need some kind of work experience before you graduate to stand out. </p>

<p>So there is my rant! No more taxes today! I get to assist in a 403B plan audit today!!!</p>

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<p>JimboSteve,
Not to violate your privacy, but did you qualify for the new tuition assistance plan for up to a certain income at Harvard? Did you get any other scholarships? Where do you live? </p>

<p>The situation is murky because the incomes that receive this support from the Ivies are far from upper middle class and barely middle class in MANY places in the US. It depends on the local cost of living, etc. I can see that the qualifying incomes would be very generous in many other parts of the US, too.</p>

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<p>[url=<a href=“http://www.admissions.college.harvard.edu/financial_aid/index.html]Harvard[/url”>http://www.admissions.college.harvard.edu/financial_aid/index.html]Harvard[/url</a>] says:</p>

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<p>Where in the US would a family income of $180,000 be “far from upper middle class” or “barely middle class”?</p>

<p>Anyway, the high (net) cost of attendance issues are mostly not at Harvard and similarly generous-with-financial-aid schools (which are accessible by only a very few due to admissions selectivity). But many more schools attended by many more students are considerably less generous with financial aid.</p>

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<p>Sorry, but these incomes sound high but do not cut it in some regions. They go MUCH further in other regions!
One place where 100-150k does not go far for a family in a terrain you are familiar with- the Bay Area. Also NYC and DC metro areas. Housing prices, car insurance, gas prices, (in Bay Area-earthquake protection), food prices, health care, local taxes are all astronomical, and the wages are higher but do not make up for that.</p>

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<p>Median household income in San Francisco was $65,519 in 2007; median family income was $81,136 in 2008.</p>

<p>For San Jose in 2007, the median household income was $76,963, and the median family income was $86,822.</p>

<p>$100,000 to $150,000 would still be “upper middle class” at least.</p>

<p>Of course, it may not go far if you buy a $3,000,000 house, two or more $50,000 cars / SUVs, and two $30,000 per year private high school tuitions.</p>

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<p>Well, UCB , what should a “middle class” family of 4 be able to afford (debt-free!!?)?
And an “upper middle class” family of 4?</p>

<p>I would love to know of an official definition of what assets and lifestyle are defined as MC and UMC. </p>

<p>To define SES by income is one approach. But it is interesting to compare the actual costs for given lifestyles region to region.</p>

<p>MC is definitely NOT what you listed in you last sentence, obviously. And the upper income levels supported by the Ivy tuition give-aways would not pay for even a fraction of what you listed.
Private school - no. Not sure about UMC, though.
At least one car in the Bay Area, but $20-25k is more like it. Auto insurance- not a pretty number. Tolls, gas prices, maintenance…
House- own it, needs 2 plus BR. I thought that was a definition of middle class. This is where an area like this area starts to get very pricey…
The list goes on and on.
Relatively some areas just cost more for the same lifestyle than others.</p>

<p>I have no complaints. I was pointing out that Ivy give-aways have less impact in certain regions than others.</p>