Wednesday, January 28, 2009

Higher Education Bubble

An article by Donald Downs last month wonders whether higher education could be the next bubble.
believing that higher education is a necessary, if not sufficient, ticket to personal success and social progress, the public has tolerated increasingly higher costs and tuition---forces that citizens have rebelled against in other consumer domains .... With seemingly no viable alternative or exit strategy, consumers have stretched their pocketbooks to the breaking point and taken out loans to purchase a chance at the American Dream. (Today over 35% of students rely on student loans, and the number is growing.) .... Believing that home prices would rise virtually forever, consumers and investors were willing to stretch themselves and their debt to the limit in order to obtain housing stock. We all know what happened when that assumption ran into the brick wall of reality. Is higher education immune to such a shock?
Higher education is facing some difficult times as endowments, even at top tier schools decline, and schools are asking for a bailout.

Education has been able to continue increasing in price because it has always seemed well worth the price, since those with college degrees earn so much more income throughout their life than those without degrees. But these statistics are probably inflated since most college graduates are people who would probably succeed with or without a degree, and most of those who don't get degrees are the type of people that wouldn't succeed even if they had a degree. If you really wanted to see how much education increases lifetime earning you'd want to compare two sets of people who both have equal probability of success and see how education helps them. I'm sure a college degree still does increase lifetime earning, but the actual increase in lifetime earning is probably much closer to the amount being paid by college students (especially at more expensive private schools) and is probably only barely worth it for some and not even worth it for others. And the more the cost of education increases the number of people for whom it is still worth it will decrease. As students become aware of this, enrollment numbers will drop.

Bryan Caplan makes the argument that the whole purpose of education is signaling, which is to say that the degree announces to a prospective employer, "I'm smart, hard-working and can make long-term commitments." In other words, you don't actually learn much useful knowledge or many useful skills is college, you're just showing employers that you're capable. But, if higher education is just signaling, surely there are cheaper ways for prospective employees to demonstrate these traits, like passing skills and knowledge exams before being hired or doing unpaid internships. Employers still haven't yet figured out a cost effective way to do this, but if they do, this could also lead to further declines in enrollment.

People are asking whether college education is worth it (here and just today here and Charle's Murray's book, Real Education) and prospective students will be too. The business model of universities (bloated administrative costs, giving professors ample time for research, tenure, large expensive facilities, revenue mostly from student loans and alumni donations) is not sustainable, and it is likely universities will be changing. The education bubble may be ready to burst

Postscript: As someone trying to enter into higher education as a professor, this is definitely of interest and concern to me. I do think universities will be adapting, and I think myself and anyone else in my position should be thinking about what place we might have in this future.

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