An Education Bubble?

Not long ago the Chronicle of Higher Education published an article by two entrepreneurs who suggested that the nation may be experiencing an “education bubble” parallel to the nation’s housing bubble, which ended in a painful collapse when reality set in.

Joseph Marr Cronin and Howard E. Horton aren’t the first to propose the idea that higher education may be unsustainable in its current form. However, the publication of their opinions in a leading journal of higher education has boosted the idea’s credibility.

In the article, Cronin and Horton warned colleges and universities to get their costs and prices down. Without this austerity, students are likely to attend in fewer numbers, which will in turn cause universities’ revenues from tuition to go south. (Cronin and Horton happen to have a company that can help lower teaching costs by expanding online education.)

If the two are right, cutting costs would be a good start, but perhaps not enough. In this column, I will look systematically at whether or not higher education is in a “bubble” about to burst.

A bubble is a period in which the price of a good or service becomes inflated far beyond the actual value of the good or service. In a bubble, prices may initially start to go up for a good reason, but as the trend continues, more and more people are persuaded to buy more and more of the good or service. This pushes the price to astronomical heights and causes producers to expand supply.

Ultimately, people buy simply because others are buying, expecting to sell at a profit because so many buyers are out there. But the difference between the price the good is selling for and its real value grows so large that it becomes unsustainable. Once people realize that the price and value are out of sync, they stop buying and prices collapse—the “bubble” bursts.

Let’s look at the American housing bubble. The nation had a long history of housing as a solid investment. But in the 1990s, the federal government pressured banks to expand access to housing by virtually eliminating down payments and other safeguards. Bankers’ normal worries about moving in this unprecedented direction were eased because two quasi-governmental firms, Fannie Mae and Freddie Mac, were ready to buy those loans, relieving the original lender of all risk. Fannie and Freddie did this because the government backed their loans with implied guarantees.

The result was reckless borrowing, a growing demand for housing, and fast-rising prices that spurred more supply. People lost sight of the true value of what they were buying; they borrowed, bought, and sold because other people were doing it—to the point where amateur mom-and-pop investors bought and “flipped” houses to cash in on ever increasing prices.

In retrospect, of course, we see that the housing stock was severely overbuilt in response to government pressure and implicit government guarantees of safety. Those forces led to completely unrealistic expectations by both buyers and sellers. In 2008, the bubble burst, prices plummeted, and (because Wall Street had multiplied the ante), a global panic occurred.

To what extent is the higher education today similar to the housing bubble?

Like the housing industry, higher education has a long history of solid value. The claim that college graduates earn significantly more than high school graduates (often stylized in the statement that they make a million dollars more in their lifetimes than high school graduates do) is based on genuine statistics—just as housing was a solid investment for many decades.

And just as married couples saved for a down payment to buy a house, so, in the past, parents were supposed to save for their children’s college. Whether most parents really did “save for college” I don’t know, but the phrase was once a staple of middle-class parental expectations.

Beginning in the early 1990s, however (about the same time as the expansion of mortgage lending occurred), a variety of programs intended to increase access to higher education made saving less necessary. According to education economist David W. Breneman, writing in the Chronicle of Higher Education, “a plethora of new programs to help more-affluent families pay for college” was created. Except for increased use of merit scholarships, which private colleges also adopted, these were government programs: tax-favored savings plans and an expansion of subsidized college loans.

The discounts, subsidies, and loans permitted families to forego saving for college educations, and debt began to replace the traditional means to pay for college. For most graduates the resulting debt (about $20,000 per student) has so far been manageable because of the higher salaries college graduates earn.

But how much are those degrees really worth today? Less than they were a few years ago. In the past, employers hired graduates on the assumption that they possessed a certain set of skills. If that is no longer true, the amounts being paid for college may be greater than the market value of the diploma earned.

One survey shows that college graduates are not as proficient in literacy as they used to be. Another finds that students only study about half as much as their professors think they should. Other reports show that good grades are easier to get than ever, with a B average or better now typical at most schools. If all students at a school always get good grades, a diploma from that school is no longer an indication of the student’s quality.

Thus, the value of a college education—as measured by students’ preparedness for the workplace—may be falling below what students are paying for it. Once this becomes known, colleges may be hard-pressed to fill classrooms. That could burst the bubble.

There are signs that colleges already have too many classrooms and other buildings. Campus facilities are underutilized—Friday classes are increasingly rare, and summer school is an afterthought in many places. Vast amounts of plant and equipment sit empty, but at the same time schools are also outdoing one another in constructing new, expensive “green” buildings—not to mention building research facilities designed to spur regional economic growth.

The above conditions—overconstruction and underutilization, plus rising prices and the assumption that many more students want to go to college—argue for the existence of a bubble. If it exists, it could burst if students reduce their purchases of the product (education), or even if they begin shifting to less-costly community colleges (a move that President Obama is promoting). Should this happen, a lot of schools could be in trouble if they can’t reduce their costs.

That brings us back to Cronin and Horton, who started this conversation by suggesting that schools may be able to survive the coming collapse by cutting costs.

Most schools, both public and private, are scrambling to cope with reduced state funds and shrunken endowments. So far, however, a serious decline in enrollment has not occurred. If it does, cost-cutting will have to be even more severe.

But controlling costs is only part of the story. In the long run, schools must restore the value of the college degree if they are going to continue to attract students. Price and value must come into alignment.

Raising the value of the degree will require the elevation of teaching—perhaps even following in the footsteps of
Lindenwood University, a school that avoided bankruptcy in the late 1980s by bringing in a new president who eliminated tenure and made teaching preeminent.

Restoring value might also require more stringent admissions policies so that only students who can do demanding work will be accepted. It will mean an end to easy courses and easy grades. And it will mean finding ways to be sure that students are actually learning what the public and employers expect them to learn.

In other words, to improve their long-term stability, colleges must move in exactly the opposite direction from the way most are going now. In the short run, that will depress current enrollments and possibly cause the bubble to burst sooner.

But whatever the outcome, higher education will be healthier if schools both lower costs and return to providing an education that adds value to students’ knowledge and reasoning abilities. Bubbles burst, but life—including housing and education—goes on.