Not long ago, I asked why the US government was making such a push for high-tech education for American students, while at the same time, doing everything possible to eliminate the job opportunities that would allow high-tech graduates to pay back their student loans. My conclusion was that a whole generation of students were deliberately being scammed into taking on these loans, which cannot be discharged in bankruptcy, so as to create a new class of peons in the US. (See Just Say No to Student Loans for High-Tech Education.)

It turns out that there is much more to the story than that.

What makes a speculative bubble?

A speculative bubble inflates when people continue investing in something that they anticipate will give them a payoff in the future, without regard to whether that investment is based on any genuine worth that could sustain the anticipated rise in price.

Take the housing bubble, for example. People took out “liar’s loans” to buy and sell property that they could not afford, figuring that the housing prices would keep going up indefinitely. Problem is, housing prices cannot keep going up indefinitely, because in the long run, housing prices are based on people’s ability to pay, which, in turn, is based on both the local and the national economy. For example, if houses in the suburbs of a metropolitan area cost approximately half a million dollars, but there are too few high-income jobs in that metro area compared to the number of expensive houses, then the excess houses will remain unsold until their prices come down. That will drive down the price for anybody who already owns such a house and wants to sell it. People who own rental property face similar constraints; the amount of rent that tenants can pay is based on what they can earn from the jobs in the area.

When the economy went sour, everybody who bought property at inflated prices was affected at once. That’s why we have so many foreclosed houses, and so many mortgages that are “upside down” – meaning that more is owed on them than the house is worth.

Why college tuition is the next bubble

What does this have to do with college tuition? Plenty, as it turns out. Forget about the propaganda spewed by liberal-arts “educators” who keep themselves in business by shilling for an expensive education because it supposedly makes young people into upstanding citizens of good character (actually, it does nothing of the sort). Tuition is an investment that must be evaluated just like any other investment.

As we all know, the real reason most people spend their money on a college education is so that they, or their offspring, can earn much more in the future than they would without that diploma. What happens when the college tuition gets to be so expensive that the cost of repaying student loans will wipe out, or more than wipe out, the lifetime earnings advantage? Suppose you have enough money saved up that you do not need to take out student loans. Even then, you still have to consider whether you could have gotten a better long-term payoff for yourself or your children by investing that money in something other than tuition.

Back to School

September 5, 2010 – By Roger Kimball

“New Houses were built in every direction; an illusory prosperity shone over the land, and so dazzled the eyes of the whole nation, that none could see the dark cloud on the horizon announcing the storm that was too rapidly approaching.”

—Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

It wasn’t that long ago that I was having lunch with the father of a friend at Mory’s, the venerable dining club at Yale, and he said to me: “Do you realize, Roger, that tuition at Yale next year will be $10,000? Ten-thousand dollars.” We paused for a moment over the Golden Buck to savor this enormous sum.

Ten-thousand dollars per annum was indeed a tidy sum. It is still is. But if you hope to join the Whiffenpoofs next year, it’s going to cost someone at least $52,900.

Exactly who is going to be presented with that tab depends on a number of factors, some of which I’ll mention in a moment. But first let’s step back and ask this embarrassing question: Is it worth it?

Is four years at Yale (or Harvard, Princeton, or any other “competitive” college) worth $53,000 x 4 plus annual tuition increases for a grand total (assuming you are entering right now) of roughly a quarter of a million dollars?

This is a question that, to the consternation of academic administrators, more and more parents — not to mention responsible teenagers — are asking themselves.

I took my epigraph from Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds, a remorseless anatomy of financial “bubbles” from the Mississippi Scheme and South Sea Bubble to Tulipomania in 17th-century Holland and beyond. “At last, . . . the more prudent began to see that this folly could not last forever. . . . It was seen that somebody must lose fearfully in the end.”

Glenn Reynolds, a lawyer and genius loci of the Instapundit blog, has for many months been been cataloguing signs of the higher education bubble. Writing recently in the Washington Examiner, Reynolds explained the process:

“The buyers think what they’re buying will appreciate in value, making them rich in the future. The product grows more and more elaborate, and more and more expensive, but the expense is offset by cheap credit provided by sellers eager to encourage buyers to buy.

Buyers see that everyone else is taking on mounds of debt, and so are more comfortable when they do so themselves; besides, for a generation, the value of what they’re buying has gone up steadily. What could go wrong? Everything continues smoothly until, at some point, it doesn’t.”

Have we reached that point in higher education? Over at Instapundit, Reynolds recently linked to an illuminating article at “TaxProf Blog” which includes this illuminating chart comparing the rise in housing prices with college tuition since 1978.

Read the rest.

Avvo.com: 8 Reasons College Tuition Is the Next Bubble to Burst

Tuition has been increasing at such an alarming rate that some say we’re witnessing yet another bubble in America — this time not in the stock market or in housing, but in college tuition.

Stephen Burd, of the Education Policy Program at the New America Foundation, explains in this interview how federal student loans became non dischargeable in bankruptcy in 1998, and then private loans became non dischargeable as well in 2005. Taken together, these laws mean that students who are overpaying for degrees now with borrowed money will suffer the consequences for life.

Read the rest.

While the following list summarizes the author’s reasoning for why the bubble is ready to burst, it’s worthwhile to read the article itself for the statistics and the rationale to back up each point:

• Tuition is, and has been, increasing at double triple the rate of inflation…
• Students are borrowing more than ever to pay for college…
• For profit colleges are paying homeless people to take out federal loans to enroll…
• Colleges are on a non-teaching staff hiring spree that far outpaces enrollment…
• For profit reliance on federal loans has reached an all time high…
• Schools are spending on luxurious amenities to lure in more students…
• College president salaries are sky high, even in a historical economic downturn…
• The student loan problem cuts across all schools, for profit and nonprofit…

As with the recent housing bubble and every other speculative bubble, there is always evidence of widespread corrupt practices on the part of those seeking to enrich themselves before the bubble bursts. Just follow the money.

Debt Bubble: Will the Market Crash Because of College Costs?

The college tuition bubble has been the result of demographics, parents and educators giving young people poor advice, increasing government assistance, and (illegal) collusion between universities and financial institutions. The so-called Baby Boomlet generation — which dwarfed Generation X in size — began going to college in the late 1990s and 2000s, and they had grown up with parents and teachers insisting that a college education was the only way to become successful. At same time, the increasing affluence of the middle class in developing countries created a large number of people who were eager to get a college degree in the United States as well. Demand and prices rose.

And as the demand rose, so did the competition for a limited number of available spaces at universities. So colleges began building luxurious dormitories, expensive facilities, decent cafeteria food, and other items geared towards attracting students. All of this was expen­sive — though this factor is mitigated by the fact that private universities sat on endowments of millions or billions of dollars (at least until the financial crisis).

The icing on the cake was the fact that financial aid departments at universities made deals with financial institutions. Here is just one example:

Colleges across the country are taking kickbacks from student loan companies and reaping other benefits while making it harder for students to get better deals on their loans, the state attorney general has charged.

New York Attorney General Andrew Cuomo said Thursday an investigation he began last month into the $85 billion student loan industry found numerous arrangements made to benefit schools and lenders over the students.

Cuomo’s office is investigating at least six lenders: the nation’s largest student-loan provider SLM Corp. — commonly known as Sallie Mae; Nelnet Inc.; Education Finance Partners Inc.; Edu­Cap Inc.; the College Board; and CIT Group Inc.

As a result, of these factors, the return on a college investment has been decreasing over time. Moreover, here is an interesting infographic on how student-loan debt has increasingly enslaved young people since the 1960s.

Read the rest.

Now what?

At this point, I suggest that tuition at US colleges has become so expensive, and the job prospects for educated Americans so meager, that if you plan to remain in the US, you should wait for the tuition bubble to burst, and costs to drop drastically, before you even consider going to college or sending your kids there.

I also suggest that, if you have any discretionary funds, and not many people do these days, you look carefully at what is actually going on at your alma mater. Academia in general has been insulated from the demands of the real world for far too long, and has become a haven for all of the wrong types of people, who nonetheless flatter themselves that they are our betters. (For a long-overdue, and rather shocking, evisceration of some of the denizens of academia, see Victor Davis Hanson: We Are Ruled by Professors.)

Whenever your alma mater asks for your contributions, before you write that check, you might want to make sure that your money won’t be supporting any of the manifold varieties of leftist or pro-jihadist indoctrination that seek to destroy everything that you stand for.

UPDATE:

Here is another excellent, and very readable, article on this topic (h/t: Snork):

The Bubble: Higher Education’s Precarious Hold on Consumer Confidence

This article makes many valid points, for example:

…This argument subsumes several other points: that a nation’s productivity really does correlate closely with the percentage of the population holding college degrees; that the knowledge and skills cultivated by our current system of higher education generally match the developing and future needs of the marketplace; and that the American public would prefer a system of higher education underwritten to a much greater degree by the taxpayer.

Response: The view that higher education can thrive by growing still larger and that the costs can be shifted away from the tuition-paying student to the “government” is unrealistic, and all the underlying premises of this argument are doubtful. The nation that currently has the highest percentage of college graduates, at 45 percent, is Russia—which is nobody’s model of economic prosperity and competitiveness. The American public has little confidence in the overall quality of our higher education system. It has simply viewed itself as lacking attractive alternatives. The public is not inclined to pay more and more into a system that has proven to be ineffectual.

The public policy counsel that we have to keep the present system afloat for fear of some economic catastrophe relies on fear of the unknown. The reality is that Americans will continue to seek both practical knowledge and cultural achievement even if the system of higher education that has grown up largely since the Higher Education Act of 1965 begins to unravel. New institutions will arise to meet the actual needs. The best parts of the old institutions will survive. We won’t face economic catastrophe or an uneducated mass. There are more ways to educate people than the advocates of our current system realize.

Actually, the Russian economy has been doing better in recent years; the turning point came when they stopped following the lead of the Harvard “advisors” and other carpetbaggers with academic credentials, who came in after the dissolution of the former Soviet Union to plunder whatever they could.

Higher education also has expensive ideological commitments that it can’t easily shrug off, including diversity, feminism, and sustainability. Each of these is a major cost driver that, worse, is diffused throughout the budget and kept obscure. Colleges don’t want their trustees or anyone else trying to calculate what they spend annually to engage in the exercises of identity politics. A cost that can’t be tracked is a cost that can’t be controlled.

That, to me, says it all.