Mark Cuban on the "College Bubble"

Mark Cuban, who answered reader questions here a while back, compares rising college tuition costs to the housing bubble in a recent blog post.  Here’s his argument:

It’s just a matter of time until we see the same meltdown in traditional college education. Like the real estate industry, prices will rise until the market revolts. Then it will be too late. Students will stop taking out the loans traditional Universities expect them to. And when they do tuition will come down. And when prices come down Universities will have to cut costs beyond what they are able to. They will have so many legacy costs, from tenured professors to construction projects to research they will be saddled with legacy costs and debt in much the same way the newspaper industry was. Which will all lead to a de-levering and a de-stabilization of the University system as we know it.

And it can’t happen fast enough.

IMHO, the biggest problem the economy has is the enormous student debt new college grads and those leaving college find themselves with. In the past leaving college meant getting a job and getting a used car and/or an apartment with some friends. Yes there was student debt, but it wasn’t any where near your car payment. You could still afford the car and the apartment. Now its the exact opposite. Today, the minute you graduate college you face the challenge of debt against a college education whose value is immediately “underwater”

Cuban argues that college debt is to blame for many of the economy’s woes.  “The crush of college debt has taken an entire generation of graduates, current and future out of the economy,” he writes. “Which is exactly why the economy hasn’t grown and won’t grow beyond microscopic growth rates we have seen so far.”  Interestingly, student debt doesn’t seem to have soured university grads on the college experience; recent survey data indicates that only 3 percent of college grads regret having gone to college.

Related: we are working on a Freakonomics Radio podcast about “the value of college,” which is so interesting (to us at least) that it might become a two-parter, set for release sometime this summer.


frankenduf

"the biggest problem the economy has is... student debt"?- nah- it's the banks- and of course, it's no coincidence that the finance industry wants to skim $ out of the student loan process, hence their lobbying against federally based student loan funding

squished18

I wonder if the low regret rate is due to the fact that the bubble hasn't popped yet. How many US homeowners regretted owning a home ten years ago?

Kyle

Agreed. Or, maybe it's the question asked... I don't regret going to college in the least. It was a better experience than I could have ever imagined.

What I do regret is going to an out-of-state school for undergrad and now for my dual JD/MBA degress. By the time I graduate, I will have upwards of $350,000 in student loans, with my interest totals growing rapidly every day. My sibling had close to $200,000 in loans when she graduated, and without a doubt she was and is handcuffed by the debt. She should have a new car and a new house by now... but no, she has a beat-up old wagon and rents an apartment with 2 other people, barely scraping by because of her loan repayment each month.

The nation needs to find a solution for student loan debt or the economy will continue to struggle. Graduating class after graduating class will continue to be unable to put money back into the economy because they'll be paying off student loan debt for 20-30-40-50 years.

On another note, not only should Univerisities consider lowering tuition costs, but they should also make it easier for "out-of-state" students to become "in-state students for fee-paying purposes." I have lived in Indiana since 2006, when I started my undergraduate degree. Now, I have committed to spending 4-6 more years of school here and who knows how many additional years post-graduation, but I am still paying out-of-state tuition for my graduate degrees because my core "purpose" for being here is education, and not work. I'm not going anywhere Indiana. Let me pay a little (actually a lot) less in tuition, and I'll give you even more money back in spending after I graduate. Seems reasonable to me.

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Lee D.

Most colleges, unless they have a very unusual endowment fund, count on the higher fees paid by out of state students to meet their budgets, in fact admissions are tasked to make that balance accordingly. In fact, many small schools will give sports scholarships to out of state students due tot eh likelihood their friends will follow them and pay the higher tuition. Secondly, you will find zero voice or support to get lawmakers to change laws for the express purposes of placing more burdens on their in-state constituents making the assumption that state support is required to meet their budget needs. However, there are great examples of supply and demand benefiting college students who promise to work in economically disadvantaged areas in certain states. Mainly this is limited to teaching jobs but there are other areas of need that would offer tuition/loan forgiveness in return for work in these geographic and economic areas of need. However, my guess is that, altruism aside, to maximize your economic potential you will take a job in the private sector, probably at first in Indiana and hope that congress keeps the interest rate on your loans low.

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Jonathan Jackel

The problem with Cuban's analysis is that bubbles are usually related to assets that can be sold and resold. When a shock hits an overheated market, sellers rush for the exits. That's what pops the bubble and causes prices to spiral downward. There's no possibility that kind of a run with college degrees. Grads might have buyers' remorse for spending so much on a degree with a small economic return, but that will not directly translate into lower demand for college education because a degree -- practically any degree -- is seen as an important credential to get any kind of middle-class job. For the bubble to pop, there will need to be a credible alternative to a college education.

misterb

How does one repossess a college degree? Are there trillions of dollars of CDO's based on education debt? I think the analogy has a limited application. Commenting on Cuban's original post, he assigns no value to the cultural contribution of higher education - in his argument, the only value of college is as job training. Perhaps the low regret rate is due to the fact that many graduates feel that increased learning has enriched their lives in ways that can't be captured in dollars; in other words - in the most important ways.

Walter Wimberly

What people talking about the college bubble fail to realize is that companies still want to see degrees for new hires. When that ends, and you can be a _________ without a $40 - $100k degree, then the degree bubble will truly burst. Until that time, people know to go work for Company X requires a degree in Y, high school students (and their parents), who don't fully understand how much money is truly involved will continue to go to college.

Kids are told all the time that to earn good money, you have to have a degree. The list of jobs that pay well, and don't require the piece of paper, are few. And, just being honest, the number of people who can write that iPhone app, or start the blog and make enough to live on is few. That is why the iTunes store has ~350,000 apps, but you only hear about a few making real money.

The real way to get the bubble to burst, is for there to be an viable alternative to college, that employers will acknowledge. This could look like company sponsored trade schools, certificate programs, employment testing, etc. The problem with all of these is that there is some additional cost to the company. If the company requires new hires to have a degree, there is little if any cost to them, especially in this current economy.

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caleb b

I believe Cuban’s analysis is spot on. People like to poke fun at art history majors who can’t find jobs, but the problem is much, much bigger than that.

I majored in business and graduated 5 years ago and even with great grades and financial aid, I still had to borrow $50 grand to make it through school. I went to a state schools and I worked part time. But HEAVEN FORBID, I transferred and changed majors so I needed a fifth year to graduate. I wasn’t lazy, I worked, I didn’t borrow to go on a lavish study-abroad trip to Europe. Hell, I was so broke that I didn’t even buy my books, I read them in the book store and put them back on the shelf.

It is just EXTREMELY difficult to make it through school these days without borrowing money (a lot of money). It can be done, but if you make any mistakes along the way (like transferring, or changing majors, or not making a 1,400 on your SATs because your parents couldn’t afford the test-prep), you’re screwed.

Blaming the 18-22 year old students is not the solution. It's the schools that are jacking up the prices to insane levels to pay for "freshmen experience activities," or building ever nicer dorms, or building new alumni events building.

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Tom

Well, it's both. Schools know their customers. How many 17-18 year olds just HAVE to go to the party school, the school with the awesome dorms, the school with the brand new student union or fitness center? Few parents CHOOSE which college their children will attend. The kids choose, the parents subsidize (sometimes), and the debt accumulates. How many 17-year-olds are willing to go to the boring commuter state school, live at home, go to community college for 2 years for all the gen eds, etc?

VERY FEW. There is an entitlement mentality surrounding the "college experience", and the universities know this - they cater to this. And yes, it drives up costs. Calculus hasn't changed in 400 years, why do you need to learn it in a posh hotel-like conference room with smart boards? You don't - but kids want that.

I do agree with people that the demand for college degrees won't go down anytime soon - it's the first thing employer's look at on a resume.

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Tom

Calculus wasn't even invented 400 years ago - but you get my point.

Clint

I went to a top 100 school,I have 2 BA's and 2 Master's Degrees, one in Economics and one in Finance. When I graduated with my 2nd MA I had 0$ in student debt. I did the smart thing, worked part time through college, went to an in-state school, had multiple scholarships, got an Assistantship for my 1st Master's Degree and used my company's tutition re-embursment benefeit to pay for my 2nd degree.

College is only expensive if you are out of state, don't know how to get scholarships, or lazy and don't want to work while you are in school. There are soo many ways to get funding for college tutition, people just don't take advantage of them.

I only had to take out a student load to pay for my books. Even then that was only a few thousand dollars for 8 years of college.

Malcolm

As any recent graduate from the University of California system can tell you in state tuition are skyrocketing as well, 8% a year just like private schools. At the same time community college and Cal State schools are reducing classes and enrollments.

I'm not sure I buy the idea that the bubble is going to burst though, how exactly does Cuban envision students are going to suddenly stop taking out loans? Despite the high price there is still a line at the door of students waiting to take on debt in order to gain access to the higher income that college education affords. As long as a degree is worth the price and the risk, students will begrudgingly pay.

Eric

Nobody regrets going to college; it's typically one of the high points of any given person's life. Who regrets going to class a few days a week and getting fall-down-drunk on the weekends?

RZ

I won't argue against Cuban's main point that college costs are getting too high, but I think a related issue is an economically bad choice of school for a lot students. Many opt to go to private schools when they intend to go into a field of work that doesn't pay much (e.g., Teachers College, Columbia, for those who plan to become classroom teachers). That puts them in big-time student debt when they get out.

Art

I think the elephant in the room here is that 80% (WAG) of the jobs out there say they require a degree; when the reality is that most of them could be done by someone with just a high school diploma and a little on the job coaching.

The requirement of a college degree for low level jobs sprung from the overwhelming numbers of baby boom children growing up and needing a place to work. It was a quick and dirty way for HR departments to throw out 3/4 of all applications without having to the face to face work of previous generations.

That same surplus of manpower has locked out their children and possibly even their grandchildren from landing those jobs because they, themselves are still doing that work.

On top of that they've systematically dismantled the public education system that gave them the basic skills to get the jobs they are doing now. Thereby forcing their grandchildren into indenturing themselves to the various banks just to make ends meet.

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Sophie

With student debt so high, why is that that they government isn't more proactive at lowering rates? Even better, why are schools allowed to raise tuition costs to such extreme levels? With costs much higher than the return (at least for 2012 graduates), what's the motivation for students to choose college?

- alittlehappi.blogspot.com

Jersey Hiker

I have to wonder what the long-term implications are. I am paying off significant debt in a job without a 401k. I am barely able to save any money for retirement. I do not expect to have any of the benefits of social security. And I consider myself lucky. On one hand, I wonder how my generation (I'm 29) and those younger than me will be able to support an already aging and retiring generation above us, and on the other I'm wondering how well my own generation will fare when we age and are supposed to retire if all of our savings are deferred to pay off our student loans.