The Cost of the College Bubble

Last week, I began examining the evidence that higher education has been oversold to the point that we are now in a bubble—that is, the value of a college education may be less than the price being paid for it. I showed that enrollment has risen so much over the past generation that roughly 70 percent of all high school graduates now enroll in some sort of college.

But this level of enrollment only evinces a bubble if the students aren’t receiving value in exchange for the high cost of higher education.

An examination of the cost of higher education—to students, parents, and taxpayers—shows that costs are high, indeed. (Scroll down to see the charts.) From 1990 to 2010 college tuition and fees in the U.S. increased more than 286 percent. According to the College Board, the average cost of one year of college—including tuition, fees, room and board, books, supplies, and transportation—is nearly $40,000 at private 4-year universities and $19,388 for in-state students at public 4-year universities.

In fact, tuition has increased at a far greater rate than housing did before the bursting of the real estate bubble in 2006. The graph below, which University of Michigan at Flint professor Mark Perry originally posted (along with excellent explanations) here, shows that the education bubble is still inflating. The graph shows monthly median new home prices, the Consumer Price Index, and the CPI for “College Tuition and Fees”—all from 1978 to 2011. All three series are adjusted to equal a value of 100 in January 1978.

However, because colleges provide financial aid and discount tuition for many students, looking at raw tuition and fees isn’t enough. Beginning in 2010, higher education institutions that participate in the federal student aid programs are required to provide new data that can be used to calculate their “net price” of attendance (after tuition discounts and aid) to the National Center for Education Statistics. Going forward, this data will be useful to gauge the true scope of tuition increases.

In the meantime, though, there is evidence that students are beginning to feel the effects of escalating tuition. According to the Project on Student Debt, in 2009, average debt levels for graduating seniors with student loans rose to $24,000—a 3.45 percent increase from $23,200 in 2008. The Huffington Post has been highlighting students who have “majored in debt” far above these averages.

The Department of Education released new data this year, which show that 13.8 percent of student loan borrowers who entered repayment in 2008 defaulted on their loans within three years of entering repayment—about 467,000 students. Moreover, the overall student loan default rate is on rise; the rate in the 2008 fiscal year, the latest period for which data is available, was 7 percent, up from 6.7 percent the year before and 5.2 percent in the 2006 fiscal year.


Next week, I’ll show what students are receiving in exchange for rising tuition.