Revisiting The Higher Education Bubble (Part 1)
Today’s post on the higher education bubble is the first of three updates of last year’s post. This post will incorporate additional research and insights to help explain how we got where we are today. Subsequent posts will examine ways to deflate the bubble and long-run implications for the higher education industry.
When we look at higher education today, there are 4 key players: Schools, Government, Parents, and Employers. Let’s quickly review how each contributes to the education bubble.
To understand how Schools impact the bubble, we have Bowen’s Rule:
- The dominant goals of institutions are educational excellence, prestige, and influence.
- There is no limit to the amount of money an institution would spend on these goals.
- Each institution raises all the money it can, and spends all it raises.
- The cumulative effect of the preceding is toward ever increasing expenditure.
This rule is not contested by any research, shows how non-profit schools simply substitute wasted spend for profits, and explains why we might not expect schools to contribute to a solution. Former Harvard president Derek Bok states, “Universities share one characteristic with compulsive gamblers: there is never enough money to satisfy their desires.” Per Robert Martin: “Higher education finance is a black hole that cannot be filled.” Or Ronald Ehrenberg: “Administrators are like cookie monsters…They seek out all the resources that they can get their hands on and then devour them.”
To understand the role of Government funding on the bubble, we have Bennett’s Hypothesis 2.0:
- Individually, each college is trying to improve.
- More revenue is very useful in the quest for improvement.
- An increase in financial aid gives colleges the option to raise revenue by raising tuition.
- Most colleges succumb to this temptation; therefore, higher financial aid = higher tuition.
Economics professor Richard Vedder looks at the rapid rise in tuition the past 30 years. “What happened? The federal government has started dropping money out of airplanes.” Economist Bryan Caplan agrees. “It’s a giant waste of resources that will continue as long as the subsidies continue.” Argues Jonathan Robe, “Cheap student loans (backed by the government) make students far less price conscious, and enable schools to raise tuition because they know if the student can’t pay, the buck gets passed on to the taxpayers.”
Parents send their kids to college so they will learn valuable skills while increasing their lifetime earnings potential. Regarding skill development, in Academically Adrift Richard Arum finds that 1/3 of students gain no measurable skills in college, and for the rest, the gains are minimal. Regarding future earnings, data does conclusively show that earnings increase as the level of education increases. Of course, correlation isn’t causation. To this point, Princeton economist Alan Kreuger finds that when controlling for student’s talent, top-tier colleges add no measurable value to lifetime earnings.
It is unlikely that parents would voluntarily reduce the amount of education they demand for their children, given incentives today. Peter Thiel argues that parents are terrified about what will happen to their children if they don’t go to college. Parents are “Paying for college because it’s an insurance policy against falling out of the middle class.”
Finally, Employers, who have also benefited from the bubble. Increasingly business looks at college degrees as a minimum job requirement, not because of any benefit from the degree (or requirements of the job), but simply because they need an easy way to screen applicants (Doesn’t have a degree? Must be lazy or dumb). Argues professor Richard Vedder, “Employers seeing a surplus of graduates are just tacking on that (degree) requirement.” The result is credential creep into many jobs which manifestly do not require a college degree. Employers have little motivation to change the way they operate – they’re hiring overqualified people at bargain rates.
So where do we stand today? Outstanding student debt recently passed $1 trillion, based on costs increasing 900% over the past 30 years (12x more than the price increases that led to the housing bubble). Meanwhile, wages of college-educated workers are unchanged and a recent study found that 53% of bachelor’s degree holders under 25 are under- or unemployed. This combination has led to student default rates of up to 15%. With that number increasing every year, it seems likely that some sort of correction is inevitable. The scale and scope of this correction depends on where things go from here. That’s a topic for the next post.