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.

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  1. frankenduf says:

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  2. squished18 says:

    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?

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    • Kyle says:

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      • Lee D. says:

        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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      • DanSanto says:

        I realize this is a bit harsh, but if you’re coming out of college with $350,000 in debt, then you’ve just made a boneheaded mistake along the lines of a family making $50,000/year buying a $10,000,000 home.

        Unfortunately you must have skipped a class called Math 101 where it talks about a little thing called “interest” and more importantly a class called Common Sense where they discuss crazy things like needing to repay money you borrow. Even at just 3% interest, you will need to make $1500 in monthly payments. Did you just not think about that?

        I’m sorry you’re going to have a tough time, but I don’t have much sympathy. Even the most simple forethought should have shown you the stupidity of taking $350,000 in debt for college during an uncertain job market. Especially with the example of your sister being loaded with only half your debt and still almost crushed.

        And you say you are not taking these classes for a job, but rather for the education. You decided that you were going to borrow $350,000 just for your own personal betterment without any plans on paying it back???

        Could you not have found some way to borrow only $100,000 for your personal betterment?

        Nope. No sympathy from me whatsoever.

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      • Jakeness says:

        What’s wrong with wagons?

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      • rick says:

        I cannot understand why you would have 350K in student loans for a BS or BA degree. I am paying for my son to go to a state university and total costs are about 21K/year.

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      • Brock says:

        To everyone going nuts on this guy, it’s not unreasonable to have $50,000-100,000 worth of undergraduate loans, and then I wouldn’t be surprised if a dual MBA/JD degree can run upwards of $100,000-200,000 – Granted, the average cost of medical school is $150,000. Best case scenario, that’s $150,000 accounted for, and worse case scenario, that’s $300,000 accounted for; was it a good idea? Well, we’ll let time be the judge of that.

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      • SMike says:

        @DanSanto:

        Getting a JD/MBA generally (although a lot harder nowadays) is a path to a high paying job which will allow you to pay off the debt fairly quickly. I have a friend who enrolled in a top-level MBA program for around $170,000, got a job as an investment banker (in 2008 no less), and payed off his student loan entirely within the first year.

        And when Kyle said that the core “purpose” for being here is education, he was probably referring to how the state considers his residency status, not his own goals.

        “Even at just 3% interest, you will need to make $1500 in monthly payments. Did you just not think about that?”

        Congratulations on criticizing someone’s financial literacy without knowing how a loan works.

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      • Enter your name... says:

        Dan,

        Have you calculated the savings you would incur by deferring grad school for one year, so that you officially become an in-state student? Sure, you’d have to get a job during that year to pay on your existing student loans (after the grace period), but I think it might pay off in the end, especially if you could get a job that is somewhat related to your future career, like being a legal secretary.

        And you do have a part-time job to reduce your need for loans, right?

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      • Dan says:

        To rack up that kind of debt, you surely must have been borrowing for living expenses as well, and you must have been living reasonably well. I can’t see how tuition alone could put you that deep in the hole.

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      • Steve O says:

        I don’t see how people missed Kyle’s comment that he regrets his choice of an expensive school, instead of regretting going to school. The bubble isn’t a result of college being a worthless good–it’s a result of it being overpriced. Many students that have loads of debt have paid for more expensive alternatives of a commodity–they paid more, but didn’t get a commensurate increase in value.

        In the case of a JD, students have fewer options, but in high school we were led to believe that law degrees were extremely competitive and prestigious, and you have to go to the best possible school to get into law school. That used to be the case, but now, the market can’t support an ever-increasing number of lawyers at the same pay.

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      • rageon says:

        Something to keep in mind is that many of the people with these outlandish amounts of debt are people who went to law schools with the belief that they would immediately graduate into a 6-figure salary. Schools, particularly law schools, are reporting inflated salaries for their graduates, and a lot of people who believed them are instead trying to figure out how to pay off their debt on $35,000/year.

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    • john says:

      You may be right. But I regret mine, and I’d sell it to you right now for half of what I paid for it… or maybe less… make me an offer.

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    • Sarah says:

      I think the low regret rate is due to the fact that we don’t feel like we have options if we don’t go to college. It’s not that I regret my higher education, it’s that I’m furious that I had to put myself in this financial situation to TRY to make something of myself. To ask if one regrets college is simply the wrong question.

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  3. Jonathan Jackel says:

    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.

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    • misterb says:

      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.

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      • Joe J says:

        I see the reasons being they just got back from a fun vacation and were asked did they regret it, 2 months later they got the bill. Kids are being told over and over thet the golden ticket is to go to college, financially for many majors it hasn’t been true for a while. Culturally, it’s debatable, spend 5.5 yrs (the current avg for a 4yr degree) and 350,000 in another way and we will see if your life is enriched more.
        The main reasons student debts are a problem are, tuition has been growing so fast. When you have a pricing system where the consumer doesn’t directly or immediately pay, you get ridiculous price increases. A second is loans are given out with no basis on, projected ability to pay, or value in the item being bought.
        The easy solution is make student loans like other loans. You would never get a buisness loan without describing how your buisness was going to be profitable.
        you would never get a house or car loan without the house or car as collateral, and a fair market estimate of their worth.

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    • Owen says:

      This comment is spot on. The increasing cost of college education is closer to the increasing cost of health care. Neither have any method to limit or put pressure on price increases. If Mark Cuban thinks he could get a well paying job with no qualifications besides a degree from a trade school he’s deeply mistaken. There’s a bunch of unemployed graduates from accredited colleges that just bumped you running.

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      • Mike B says:

        Mark Cuban thinks that the path to success is starting some BS internet company and then selling it for billions of dollars to some deep pocket like Yahoo or Facebook. For as much “savvy” as Cuban has, he still basically won the lottery and runs around promoting that as a strategy for the masses. If he were to start his life over odds are that he’d wind up as just another member of the class of failed entrepreneurs that dot our landscape because at the end of the day all Cuban produces is ideas, not goods or services.

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  4. Walter Wimberly says:

    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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    • Enter your name... says:

      The mindlessness of some of these requirements is mind-boggling. My husband was once turned down for an interview at Apple because his college degree — from the 1980s — wasn’t in computer science.

      His thought? “And their CEO’s degree was in…what now? Oh, that’s right: he doesn’t have one, does he?”

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      • Jason says:

        Actually, Enter your name (hee hee) makes an unintended point about why college degrees are so necessary for most people looking for work. Apple did not want to hire another Steve Jobs – they already had one, and he was playing a role as visionary leader – they wanted to hire a computer programmer. That is how a pyramid works – just because Mark Cuban (or Jobs or Gates) didn’t graduate college, it doesn’t mean that their companies could succeed without a big base of people with college-learned skills. Computer programming, business functions, etc., are all needed in a big, successful company, and if trade schools want to offer similar levels of quality in preparing employees with those skills, they will quickly become just as expensive as universities.

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      • Enter your name... says:

        Not a geek, are you?

        Twenty years’ experience in the Silicon Valley trumps a CS degree *from nearly three decades ago*. Comp sci students back then learned how to program in Pascal and COBOL. They learned how to run MS-DOS. Networks were built on Thin Ethernet (copper wires). Do you think any of that would have been useful in iPhone engineering?

        The shelf life of a CS degree is a couple of years at best. Sometimes it’s not even that: some of these recent CS grads can tell you all about the relative merits of sorting methods (an essentially useless skill these days, but it was a big deal when you were running a Pentium 286), but can’t figure out why their Windows box isn’t talking to their printer and have never installed an operating system, because the computers come from the store with the OS pre-installed and updates run automatically. (Naturally, these are the ones who get jobs in tech support. I’m sure you’ve all encountered them.)

        This turns up all over the Silicon Valley: for example, Bruce Schneier’s undergrad degree is in physics.

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  5. caleb b says:

    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 says:

      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 says:

        Calculus wasn’t even invented 400 years ago – but you get my point.

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      • JPB says:

        The problem with boring community college is that all the kids around here who go there end up working in ShopRite at the deli department. They also wind up taking a lot of the same classes again, paying twice, if they try to transfer their 2 years of courses to another college, even a state school.

        State schools are also getting much more competitive. I know more than a few kids who didn’t get into state schools simply because the state schools can only take 30% of the applications they get now.

        It’s not simply a matter of Junior wanting to go to an “experience” college. In some cases, those colleges, the expensive ones, are the only ones accepting Junor. THAT’S a problem.

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      • a says:

        I went to the boring commuter school, I loved every minute of it. I also worked a full time 40 hr a week job while going to school. I woke up at 4:30 am everyday, and got home around 10:00 at night.

        I got my college degree and I was debt free. I had to sacrifice a ton to do it, but I know from first hand experience that it is possible to do. I find it very disconcerting to hear that people go into 50k, 100k, sometimes even more debt to go to school. And I wonder what they were doing during that time, when I was squeezing as much productivity as I could out of myself so that I wouldn’t be crushed by debt.

        Alas, I think that the truth sits in the middle as it often does. I was always pissed off when my tuition went up, but on the other hand I was equally pissed off that nobody seemed to notice. I don’t think there is a bubble. My personal take is that college is just a signalling game. And the signal is just getting too expensive, and we will start pricing the lower productivity students out of the college market, we are just moving toward an equilibrium right now. The higher productivity students will continue to go.

        Finally I want to say that a college education is still extremely important. Zuckerburg, Gates, and Jobs did not get the college degree, but they still went to college to get educated. I think that people forget there is a difference between a degree and education. Remember they aren’t equivalent, that is something that you need to accept about college.

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    • Mike B says:

      I hate to break it to you, but an Undergraduate Business is just as bad and just as “soft” as an Art History degree. Business is Economics for people who can’t do math and while a valuable add-on at the Master’s level for people who already have a good foundation, trying to skip ahead leaves one grossly under qualified for any sort of high paying “Business” job. Oh, and the fact that you changed into it and took 5 years to graduate means that you lack proper planning skills as well.

      The problem with tuition is that people of average ability are paying high prices for degrees for which there is no market demand. The revolution will come when institutions that cater to the soft, experience driven student are able to provide that experience at a pricing point that will match that student’s future earnings potential.

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      • Enter your name... says:

        I don’t think that a change of major indicates poor planning skills. I think that when such a change necessitates a fifth year, it indicates that the school has a needlessly onerous “distribution” program. So many schools make 80% or more of the classes “required”, and right down to the details.

        In one sister’s school, it wasn’t good enough to take a history class. You have to take a specific history class. You have to take a specific writing class — and which one is the right one depends on your major. If you were majoring in history and wanted to take the sociology writing class, you had to get special permission in advance, or it wouldn’t count towards graduation, even though they’re in the same division.

        The students concluded that the professors were using this as a “full employment act”. If they couldn’t require their majors to take writing-for-dancers and history-for-business-majors, rather than plain old writing and history, then their department might shrink, and English and history might grow.

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  6. Clint says:

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    • Malcolm says:

      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.

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      • Sean says:

        “As long as a degree is worth the price and the risk, students will begrudgingly pay.”

        There’s the flaw in your assumption. Eventually students will just stop going to college. Too many kids are graduating with worthless degrees and making no more money than their high school classmates who went right into the workforce for this to be sustainable.

        It’s a prime example (which art appreciation majors never learn, because they don’t take statistics) of how correlation does not imply causation. The observation was that lifetime earnings of a college graduate were significantly greater than the lifetime earnings of someone with a high school education. So people assume that any degree will do, that simply graduating from college immediately puts him or her into a different earning class. Unfortunately, the causal relationship is not with the degree, but with what the student learns. Come out of college with knowledge and tools to be useful, and you will make money. Most kids aren’t doing that now, though, so they are coming out of school with 6 figures of debt so high that they’ll never see a return on that investment.

        If college had cost what it does today when I went (starting to feel like a long time ago), I may have sought another path in life.

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      • Eh? says:

        Sean, while we’re on the topic of statistics though, who can blame the average high school/parent for believing that college = higher income and employment? I recall this happening in law schools, where law schools pointed out that they had significant amounts of employment post graduation, and said this made them supreme overlord. Unfortunately, if you took a look at the data, any type of employment was considered employment. So you could work at McDonalds and guess what? You’re employed. This is a bit of an extreme example, but you get the point. People are led to believe X and Y, but how often does the data tell the complete story?

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    • Mike K says:

      Congratulations on being born at a time when college fees were lower, I salute you on your clever achievement!

      Scholarships: By their very nature not open to everybody.

      Company tuition reimbursement plan: Also open to a very few people.

      Part time work: How many part time jobs pay college fees and living costs of $22k-$50k a year?

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  7. Eric says:

    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?

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  8. RZ says:

    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.

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