The College Bubble

For years, colleges have treated their students as consumers, building ever more elaborate facilities and hiring ever more dazzling star scholars to lure applicants. They did this regardless of how high these investments drove tuition, since easy credit meant families could stretch to cover the costs. But with the credit crisis come signs that the college bubble is bursting, as “consumers who have questioned whether it is worth spending $1,000 a square foot for a home are now asking whether it is worth spending $1,000 a week to send their kids to college,” the Chronicle of Higher Education suggests. Further evidence: The New Yorker aims to deflate creative writing programs, “designed on the theory that students who have never published a poem can teach other students who have never published a poem how to write a publishable poem.” [%comments]


This is best seen working at a state college. Getting the trickle recently got more complicated. Instead of the rest, it is the best of the rest, especially when the state increases tuition and fees to compensate for state deficits. The deluge in students seeking cheaper education gives the state schools more of a selection. College on the cheap got more expensive and more selective. Cheap schools think they can go to the bank. We all know how that turned out.


The other dirty little secret is that only the saps like me who've worked hard to amass a little money pay full retail for our kids. Between grants, forgiven loans, scholarships and other sources the average student pays about 60% of stated tuition.


There is a difference, right? The house may have cost $100k to build, but the cost of the land and the home "appreciation" is speculative.

Public Colleges (I assume) are charging in-line with their expenses for salaries and facilities. In other words, there is no built-in speculative cost of college (at least for public schools). When a house is sold, the seller tries to get as much money as possible from the buyer, and I don't think that's the same for public colleges. What they do is say "here's our budget, what do we need to charge to break-even or stay afloat?"

How does that make this bubble different? Anyone want to speculate?


First of all, we know that people with more years of post-secondary education have higher average salaries. But why? Here are the four factors that contribute:

(1) College students have higher IQs than non-college students. The SAT, which is basically an IQ test, is used to select people who are suitable for college study. The book The Bell Curve explained that IQ is positively correlated with income independent of education.

(2) College students come from wealthier families than non-college students. Wealthier families provide their children with industry contacts and other advatanges that help them earn more money independent of their degree.

(3) Credentialism: employers value the credential of the degree even though the degree holder doesn't have any job skills that the non-degree holder doesn't possess. Somem industries, such as law, are regulated so that only those with the credential are allowed to practice. Education for the sake of the credential imposes an externality on society. The person with the degree is getting a job opportunity over an equally qualified non-degree holder. Normally, the best public policy is to discourage activities with externalities, but U.S. policy of encouraging education is doing the opposite and thus making a bad situation worse.

(4) Students might actually be learning job skills that they wouldn't have otherwise been able to learn if they were not in college. This primarily applies to more vocational courses of study such as nursing or engineering.

I think that the economists in the NY Times article are ignoring factors (1) and (2), especially factor (1) because it's politically incorrect.

My conclusion is that America is overeducating its youth, and we should cut down on the number of people attending college. A good start in this direction would be for the government to stop funding higher education and to cut out the student loan program.



#4 - IQ ain't what The Bell Curve cracks it up to be. I suggest a read of Stephen Jay Gould's excellent The Mismeasure of Man for a different perspective.

That said, I agree that the college push of recent years was probably harmful in the long term. More realistic college expectations are probably in order.


Oh, but cutting government spending on education very well could lead to a return to the days when only the economic elite went to college. Government funding is there to make college more of a meritocracy, and for that reason I think government funding is worth keeping around.

Ray K

Having to do with #1 & 2, we know from Freakonomics that the biggest indicator of child outcome is the parents. Thus it should come as no surprise that smart wealthy parents tend to breed and raise smart wealthy kids. While no one should be denied an education (if they can finance it), this fact must be considered. There are certainly methods of gaining financing outside the federal government. The problem is that it requires work, which some people will not put forth, and thus are probably better left out of college. Personally, I paid very little to go to an out-of-state state school. I am proud that I received no federal or state government assistance.

For the corrollary, if anyone has noticed a mechanism that keeps lazy rich kids out of college and high paying jobs I'd like to hear it.

Degrees for Everyone!

#4, college students no longer have higher IQs, better study skills, come from wealthier families, nor necessarily have better credentials like they did 20 years ago.

Today we are enmeshed in an "Everyone must go to college!" ideology that encourages people to attend college even if they have mediocre intelligence and/or academic talent, have no where near the monetary sources to pay for college (without resorting to the hellpit of the student loan industry), and expect to get the credential just by paying tuition and sort of showing up. There are too many mediocre people who either bluffed or cheated their way through college, are swamped with students loans they will be repaying until they die, and have credentials that are essentially unnecessary to do the work they need them for.

If college has truly replaced the high school diploma in terms of a minimal credential, then EVERYONE has overpaid for their college education. The days of a college education virtually guaranteeing economic success have been over for a decade.



I think the decoupling of IQ and schooling is definitely a problem.

Vaguely related, traffic fatalities went way down when the economy tanked. Much more than should have for the decline in driving.

Speeds and fuel efficiency improved too.

I think it's likely due to the relationship of intelligence and income. The bad economy didn't just reduce congestion due to less cars on the road. It got the slow stupid drivers off the roads.

I doubt there are less drunks on the roads, just less stupid drunks.


Absolutely right. And note that this bubble has exactly the same elements as the housing bubble did -

- Easy access to credit regardless of the borrower's credit-worthiness

- Policies aimed at pushing all Americans into college, regardless of whether appropriate

- A conventional wisdom that a college degree (like a house) is always a good investment

- An unsustainable mismatch between tuition increases and wage increases


I'm pretty sure economic theory suggests that tuition costs dictate college expenses and not the other way around? Derived demand, anyone?

And the term bubble doesn't seem too appropriate either. Normally bubbles build up when people overvalue a product's worth, then pop when a more realistic valuation emerges. In this case, perceived value of a college degree hasn't changed; it's just that cost constraints have decreased the quantity demanded.


I went to community college and then a public university to get my B.A. I then went to a public university to get my Master's degree. None of these schools were my first choice, but they did the trick (i.e., gave me a good education) and I save a boatload of money compared to what I could have paid for 6 years of private university.

I really think college counselors at high schools should sit down with prospective college students and go over their options financially, including how much they'd need to pay back, how long it would take to pay those loans, and about how much it would cost per month. Then add in the likely take home pay and expenses a student would have while working. Could be a real wake-up call for those planning to go to private school without financial aid.

college tax

Beware the headline tuition number: most students do
not pay the published tuition rate because they receive
institutional grants. According to the College Board Survey,
2/3 of these grants come directly out of the tuition
proceeds of other students (not the endowment proceeds). This disparity between the headline tuition number and the average tuition payed is akin to a hidden
tax - and it is this tax that should be the focus of parents' anger.
Another factor distorting headline tuition is the room and
board which has been growing at a rate faster than CPI,
housing, and owners-equivalent-rent for the last 20+
years. Eventually this number will become so distorted
that a tuition-only or off-campus rate will have to quoted


@ #3: This occurs even in public schools. The President of the University of Florida, for example, has publicly expressed a goal of raising undergraduate tuition as much as possible in order to build the facilities that will affect US News ranking.

Generally the sort of thing that raises a schools profile are not the same things that an undergraduate will directly be able to use or generally directly benefit from. I'm not saying these things are bad, but it is difficult for me to accept raising undergraduate tuition to build a cancer research lab.

UF also recently floated the idea of eliminating undergrad education and nursing majors.

Granted this is only an anecdote, as I attended UF for undergrad. It seems to me that there is a disconnect for University Presidents between the incentive to provide value as a public institution, instead incentivizing maximizing the metrics based around ranking withotu regard to undergrad cost.


Magnus Falk

IQ is indeed overrated, I'm a former Mensa member (didn't feel like the membership gave me anything) and it took me 7 years to get my college diploma. Mainly because I'd never had to actually study before to get by.


I think the commenters here are actually railing against the english, history, art history, and similar non-specific degrees, which I agree are much too expensive at a normal college tuition cost. There's hardly even money in journalism.

But college degrees are required for students going into science, engineering, and medicine. Can you imagine a high school student, who maybe knows a little bit of calculus at the high end, starting a career as a civil engineer?

I think the solution is to push sciences more; create 5- or 6-year law school programs that take the place of the liberal arts undergrad / law school pattern; and give would-be art history majors a museum pass and a guide to getting a job.

(As a disclaimer, I went to business school for undergrad, which was a colossal waste of time. But it did teach me how to solve problems.)


What nobody seems to have addressed is WHY four-year colleges are so expensive. The answer is because they support a huge research structure. Undergraduates are asked to financially support all this research through their tuition payments even though they arguably receive very little benefit from it. Many of their classes are taught by TA's, not professors, and only rarely to they get the opportunity to work on the research projects that their tuition dollars are supporting. This is why community colleges, which conduct no research, are actually a much better financial deal for students.

The logical answer is to separate the research and teaching functions at the university-wide level, but I doubt that will ever happen.



One of the dirty little secrets of undergraduate business curricula is that many of the business professors themselves will tell you that unless it's at one of the highest end schools (like Wharton or Stern) that undergraduate business degrees in general are a waste of time.


What I like about the piece is that it places responsibility for this bubble right where it belongs- on the colleges. Its not the students, its not their parents and its not the government. The schools created this mess and they better figure out a way to improve the situation. This shouldn't get accomplished by begging the government for more help, soaking students and their families or by selling their students to corporations who'll give students college money in exchange for life contracts.

Who wants people to go to college the most? The government benefits from an educated citizenry, of course, but state schools are good enough for that. States benefit from a larger tax base and workers who improve the lives of their citizens, but loan forgiveness programs can take care of that.

It is the schools themselves who need students and they already have some of the groundwork in place to make it possible for those who cannot afford their schools to go. They have financial aid offices; they have alumni funds. All they need to do is to stop using the money for stupid things and start churning out their own university student loans.

These programs are self-financing (after the initial start-up) and they could have interest rates so low that they would undercut the federal rate. They already do financial counseling and some already do the collecting.

If these schools are so sure that they put out a great product (their degree programs) let's see them assume some of the risk and responsibility.


Edward S

My father went to a state university in the early 1960s and the amount he paid in tuition was about the same as students at the same university pay for books alone today. Even adjusting for inflation, the difference is immense. Clearly the costs of higher education have gotten out of control. At state universities, these unreasonable costs can (and should) be reigned in by voters, state legislators, and university officials. The assumption that student loans and grants make accountability in university spending unnecessary is looking more and more unreasonable in the current recession.

The solution is not, as one reader suggested, to cut government funding for higher education. Instead, we should be more discerning in how this money is used. In addition to reductions in institutional costs, states should impose enrollment caps on certain departments based on realistic employment opportunities in those fields and steer more students into vocational education, rather than liberal arts education.

State universities should also use more of their resources to provide free, high quality education (more comparable to the top private universities) for the top students. Once state universities become competition to the private universities (rather than a less prestigious alternative), private universities will be forced to take a harder look at their own tuition costs and expenses.