The bubble in American higher education is inflating rapidly. Ironically this is happening just at the moment when large numbers of Americans are noticing that there is indeed a higher-ed bubble—that colleges and universities are enrolling too many students at too high a price; that the market for college graduates is saturated and oversupplied; and that there is a serious disparity between the costs and the rewards of the typical college-degree program.
One might think that parents who have some sense of this situation would think twice before spending tens of thousands of dollars (or more) on college, and encouraging their sons and daughters to go deeply in debt. But that hasn’t happened yet, at least not in substantial numbers. The psychology, as well as the finances, of this market differ from some classic bubbles. College degrees aren’t tulip bulbs, or overpriced condos. It’s complicated.
Not that the idea itself is complicated. As George Will describes it, the bubble is what happens “when parents and the children they send to college are paying rapidly rising prices for something of declining quality.” The point at which parents cease to be willing to pay those rising prices is when the bubble bursts. When that happens, the financial assumptions on which American higher education has been based for many decades will come crashing down.
There are, however, two highly unpredictable elements in the current situation. One is the willingness of the Obama administration to sustain the bubble by encouraging more and more students to attend college and by using student loans to support this expansion. The other is the bubble-deflating power of online education.
I want to say something about the interesting riptide of these two developments, but it is helpful first to survey the larger situation.
To make sense of the situation, we need some distinctions. It simplifies things a bit but doesn’t over-simplify them to think of four triplets:
Types of college: public colleges and universities, ordinary private colleges and universities, and elite colleges and universities. The dividing lines among these are not as rigid as they may sound. Public colleges and universities receive only a small fraction of their income from tax revenues and private colleges and universities are also dependent on public subsidies of various sorts. And the dividing line between ordinary and elite private colleges and universities is ambiguous. But that said, these three categories of institution play strikingly different roles in the bubble. The bubble also affects graduate education in ways that are distinct from undergraduate education.
Motivations: Americans pursue college degrees for many reasons but the three most common are credentialing for the workforce; prestige and connection; and actual education. Of course an individual student who is primarily motivated by one factor may benefit from the other two as well. College blends these motivations together by addressing all three with much the same package, but the differences in students’ primary motivations still bear deeply on their choices of where to attend college, how much to spend, and what to do with the opportunities at hand.
Destinations: The bubble is not just a reflex of parents overpaying to send their kids to mediocre colleges. It also has to do with how they see their children’s lives unfolding. If you fully expect your son or daughter to go to medical school, you think one way about college; if you expect your child to get a decent job in retail sales after four years, you think another way. Destinations can be usefully divided into three categories: a bachelor’s degree necessary and sufficient; a bachelor’s degree necessary but not quite sufficient—additional certification needed; a bachelor’s degree merely preliminary and valuable only as a stepping stone to advanced professional training.
Family Finance: As far as the bubble goes, we should distinguish between families whose means are limited to state college tuitions unless their children land large athletic or academic scholarships; families of whose means are so large that they have no real price considerations in choosing a college; and families in between—high earners who are nonetheless price sensitive. The first category consists of families whose combined income is under $100,000; the second category has family incomes over $250,000; the middle category earns $100,000 to $250,000 and have their own marketing shorthand. They are “HENRYs” for High Earners who are Not Rich Yet.
The Sun That Always Rises, Never Sets
The higher-education bubble affects everyone but one part of it is especially unstable. That’s the part that involves ordinary private colleges and universities; parents and students who are primarily motivated by prestige; destinations for which a college degree is preliminary and mainly of use for getting into top-ranked graduate programs; and HENRYs. These are the families that have been willing to pay more and more money for education of lower and lower quality, so long as it delivers access to graduate programs in law, medicine, business, or academic fields. It is unstable because those HENRYs are in a perilous financial position and relatively small shifts in family finances, such as tax increases, can have precipitous consequences. An affluent family that suddenly has to tighten its belt is very likely to take another look at its commitment to Ov’r Priced College and their daughter’s exploration of Post-Colonial Identity Studies.
At the moment, families in this category tend to see the alternatives to expensive four-year undergraduate colleges as too risky. If the goal is to set Alex or Katie up for life, a four-year degree from a prestigious liberal-arts college or major university still seems the best “investment.”
That word, however, requires special attention. A college degree is metaphorically an “investment.” It is much more plainly a consumer expense. Confusing consumption with investment is often what gets us into financial bubbles. A consumer good such as a house in the suburbs can look like an investment if the market has been driving up home resale prices, but few houses accrue value just as houses. They grow older, need repairs, have out-of-date wiring and plumbing, lack the latest amenities, etc. Their intrinsic value, on the whole, declines with the years, other things being equal. Of course “intrinsic value” is hard to measure. Normally we let the laws of supply and demand determine the price point for things, and those laws don’t preclude dizzying run-ups in price when people come to believe that resale prices are bound to rise still further.
The equivalent of this when it comes to college tuition has been the idea that the college graduate is bound to find a better job and make a lot more money than the non-graduate. And—so the theory goes—the addition of a graduate or professional degree on top of the college degree is bound to increase that margin a great deal more.
The advocates of this form of predestination are relentless. And while there is much disagreement on the size of the average college-degree lifetime earnings premium (from $279,893 to $1-million), there is no serious dispute that it exists. But that’s hardly the end of the story. Averages are one thing. Real-life experience is something else. The real life side of this includes:
- Large percentages of graduates who end up working in positions for which the college degree is not required. By Richard Vedder’s account in 2010, we already have 17 million Americans with college degrees working in jobs for which a college degree is not needed—and not included in the employer’s calculation of what he should pay.
- Graduates burdened with student-loan debt at a level that limits life decisions such as buying a house, getting married, and starting a family.
- Prolonged unemployment and/or marginal employment, often resulting in setbacks in earning that can never be erased.
- College attendees who fail to finish their degrees but end up still having to service large student-loan debts.
When we keep these facts in mind, it is easier to see the costs of college as essentially a form of consumption that incidentally and only in favorable circumstances can also function as an investment. But that, in turn, means that selling college as an investment is fundamentally dishonest. A trip to the casino is not an investment.