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September 14, 2012


Revisiting The Higher Education Bubble (Part 1)

by Jeremy Arnone

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:

  1. The dominant goals of institutions are educational excellence, prestige, and influence.
  2. There is no limit to the amount of money an institution would spend on these goals.
  3. Each institution raises all the money it can, and spends all it raises.
  4. 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:

  1. Individually, each college is trying to improve.
  2. More revenue is very useful in the quest for improvement.
  3. An increase in financial aid gives colleges the option to raise revenue by raising tuition.
  4. 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.

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12 Comments Post a comment
  1. Brent Hanson
    Sep 17 2012

    The fact that students can borrow $10,000 as easily as they can borrow $5,000 only provides institutions with a handy rationalization for raising tuition. Out-of-control increases in college costs are enabled by ultimately unsound student loan programs. Increasing costs and apparently decreasing quality create a double-whammy for higher education.

    Unfortunately, the knee-jerk response to prove or improve quality by minutely assessing every aspect of the college experience is only adding expense and diverting resources that could actually be used to directly improve the quality of students’ experiences. Meaningful accountability is vital, but institutions, accrediting agencies, government leaders, and other stake-holders need to work for streamlined and efficient (as opposed to ever-more cumbersome) methods of assessment. Elaborate and mammoth accreditation and assessment exercises are likely to result in elaborate and mammoth (and largely narcissistic) documents rather than resulting in common-sense improvements for which the need is more often than not self-evident. Reminding ourselves that student loans pay for assessment might help us keep it in perspective.

    Until the assessment pendulum starts to swing back in the direction of sanity, the double-whammy of decreasing quality and increasing costs supported by loans that won’t be paid back is likely to continue spiraling out of control.

  2. Dominik Lukes
    Sep 17 2012

    Although it’s about how to promote credentials for higher ‘unschooling’, I did wonder: “why, if the “education” they provide is valued so highly, do most universities entrust teaching and development of instructional materials to those they value the least!”

  3. Steven B
    Sep 17 2012

    Talk of the higher ed bubble has been out there for some time so I’m glad to see you bringing it to the attention of this audience. I wrote about it back in 2010 at “From the Bell Tower” and I don’t think the academic library community is paying much attention – at least not as much attention to a few librarians losing their jobs just recently. But if we don’t pay attention to the big picture, it’s only going to worsen.

  4. Scott Sanders
    Sep 17 2012

    Excellent post! Malcom Harriss had a great description: “When you hire corporate managers, you get managed like a corporation, and the race for tuition dollars and grants . . . has become the driving objective. . . . The goal for large state universities and elite private colleges alike has ceased to be (if it ever was) building well-educated citizens. . . . Instead we have, in Bousquet’s words, “the entrepreneurial urges, vanity, and hobbyhorses of administrators: Digitize the curriculum! Build the best pool/golf course/stadium in the state! Bring more souls to God! Win the all-conference championship!” These expensive projects are all part of another cycle: corporate universities must be competitive in recruiting students who may become rich alumni, so they have to spend on attractive extras, which means they need more revenue, so they need more students paying higher tuition. For-profits aren’t the only ones consumed with selling product.”

  5. Dec 28 2012

    It would be cool to have a +1 / like / thmbus up / thmbus down button for all comments. It would help users find comments that are highly regarded and skip some of the others.

  6. Jan 19 2013

    You’re so cool! I do not suppose I’ve read a single thing like that before. So wonderful to find someone with some genuine thoughts on this subject matter. Seriously.. thanks for starting this up. This web site – Revisiting The Higher Education Bubble (Part 1) | A Little Bit of … is something that is needed on the web, someone with a bit of originality!

  7. Feb 16 2013

    Way cool! Some extremely valid points! I appreciate you writing this article and also the rest of the site is very good.|

  8. Adam Yoksas
    Apr 15 2013

    I’ve often thought about what education really is, from a broad societal point of view. Is education a pedagogical institution that teaches students? Or is it more of a classification institution that verifies who is who, for the benefit of employers?

    I once thought we were in the business of pedagogy in education. But I’m becoming more convinced that the institutions that are outside of the academy really don’t care about what we have to teach. Rather, they want to know who is a lawyer, who is a banker, who is an engineer and who is a retail clerk; they want us to tell their HR departments who is who, and the relative ranking between candidates.

    Enter this whole “self-teaching” movement in education. It’s a movement where we throw a bunch of resources at students (online links, libraries, help desks, etc.), throw them a task (a research paper, a presentation, a question), and tell them “teach yourself” with no supervision. Those who can manage the task are allowed to continue. Those who fail are drummed out.

    In this sense, teachers these days are looked at as little more than assessors and gatekeepers. /What they teach/ is of little consequence. /How they assess/ is greatly scrutinized.

    I’d say a good 90% of my job as a university lecturer has to do with assessment in one way or another. It is as if the things I teach are meaningless, just as long as I assess everyone well.

  9. Daniel Berm
    Apr 15 2013

    Why is it that colleges need so many administrators? Our local university, of which I am familiar, has long had more administrative staff than teaching staff. Many of the Vice-Presidents, Deans, Directors, Advisors, Coaches, and allied staff –we even have an exotic “Assistant Director of Sports Information” are very expensive time-servers, as they come fully equipped with offices and office staff. Now they neither teach nor learn, but evidently seem needed — such as the plush perks and astronomical salaries given over to college Presidents. Parents are patsies not to check why it is that administrators receive fat salaries while their children are being taught by fellow-students, a.k.a. “Graduate Assistants” — who teach for poverty wages because they need pay their tuitions.

  10. Konnie
    Apr 15 2013

    What would happen if all the graduates defaulted on their debts at the same time???

    • Apr 15 2013

      Good question. First, there’s no way to truly default on a student loan – unlike most debt, there are virtually no options to ever discharge it, and liens can be assessed against any earnings. Second, nearly 70% of student debt is effectively guaranteed by taxpayers. Both of these factors help explain the explosion in costs.


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