The Higher Educational Bubble Continues to Grow

The definition of an economic bubble is, according to Wikipedia,  “trade in high volumes at prices that are considerably at variance with intrinsic values”.(Another way to describe it is: trade in products or assets with inflated values.) 

Universities and colleges have inflated values disproportionate to their value. A number of signs of the stock market bubble, technology bubble, and recent credit bubble point to the higher education bubble continuing to grow.

Core Mission and Fundamentals are Ignored
A really insightful meme on this was written by Clark Aldrich called Schools from Stockholm Syndrome to Cruise Ships. Where he indicated that colleges are becoming more like cruise ships than educational institutions. They are indeed closer and closer to resorts than to serious places of educational intent. The increase in costs is not going to the educational missions of the colleges, it is going to amenities. They amenities are not going to help new college graduates to get jobs, they are not preparing them for workplace acumen. In fact, as Clark points out, they are creating unrealistic expectations.

One sign of a growing bubble is when core missions and fundamentals are ignored. Financial institutions did not focus on core business drivers, they ventured into exotic loans schemes. When they discovered that fixed mortgages were no longer profitable enough, they created variations such as interest only mortgage and other “modified” mortgage vehicles. Colleges and universities have lost focus on education and, instead, have focused on amenities and cosmetic campus improvements not on fundamentally improving the education of the students. The educational model–put them in a classroom and lecture–is basically unchanged since the 1800s.

Disproportionate Compensation
Another sign of a growing bubble is out of control compensation at the highest levels. Recently a lot of attention has been given to the fact that 23 Private College Presidents Made More Than $1 Million. While the salaries of public school officials continue to rise as well. This is especially striking when an average worker (an adjunct faculty) makes about $49,000 a year according to SimplyHired. This is a new phenomenon, according to the article, as recently as 2002, there were no million-dollar presidents, only four earning more than $800,000, and 27 earning more than $500,000 (now there are 110). This shows a growing, not a shrinking bubble.

Product Value Doesn’t Match Marketplace Expectations
Yet, one more sign is that the perceived product value doesn’t match marketplace realities. Students are not graduating with high priced jobs. Many are graduating into the unemployment lines with huge debt. An example of this is student, Trina Thompson of the Bronx. She graduated from New York’s Monroe College in April with a bachelor of business administration degree in information technology and couldn’t find a job so she sued the university for her money back. Many comments are that she needs to “grow up” or “that a college education doesn’t guarantee a job” or “her attitude proves why she doesn’t have a job”.

But wait a minute…she paid over $70,000 for a four year education and now can’t recover her value. This law suit is only the first of what will be many.

Here is an interesting quote from a US Today Article. “The average debt for a college graduate has soared 50% in the past decade, after inflation, according to the Project on Student Debt, a non-profit advocacy group. Just as record-low mortgage rates have eased the impact of soaring home prices, low student-loan rates have let borrowers cut their payments, softening the impact of rising debt.”

Because money was easy to come by, students didn’t mind borrowing. Things are changing. Undergraduate students aren’t getting jobs but average over $20,000 in debt when they graduate which makes it hard to make ends meet especially if they except to live as well as they did in college. Trina is not the only one wondering if college is still worth the price?

Prices are Manipulated Without Regard to Market Supply/Demand
The sticker price of college tuition is seldom ever paid, colleges continue to let parents and eager young students know that financial aid is available in a number of formats and they will work with you to get the best “deal” on your four years of college.

 Isn’t this like buying a car (before Edmunds), dealers put an outrageous sticker price on the car and then you “negotiate” them down to a “fair” price or a “bargain.” Since no one knew the real price, many people ended up paying more than they need to. Additionally, according to a US Today Opinion piece, In good times, colleges blame tuition hikes on high labor costs. In bad times, they blame endowment troubles. Either way the rates continue to go up unabated. This is a growing bubble.

Exclusivity Perception
One trick Bernie Madoff used to steal money from investors was to indicate the difficulty “average” folks had in getting into his selective fund. It was perceived as difficult to get an opportunity to invest with him. To many it seemed his doors were closed. He made you think that you had no chance to invest with him. The prey would then be frustrated, upset and a little disappointed because they weren’t good enough to get into the club.

But a little while later, Bernie would circle back around and say, “well because I like you, I’ll make an exception and let you in.” The victims couldn’t hand him their money fast enough. As one article states, “A chance to send your funds to Mr Madoff was so coveted that it was in essence by invitation only.” The academic equivalent is the concept of Selective or Highly Selective Colleges. If you are “lucky” enough to gain admissions, you are so grateful…you pay the high tuition…a carefully orchestrated result.

A Delusion that “This Market is Different”
Housing prices will never decrease, this market will never slow down, we are in a new economy, these are internet-based business models, not old school models. No matter what the bubble,  people within the industry always seem to have a rationale of why “This is different and normal rules of economics don’t apply.”

The same is happening in higher education. In one article William Powers, the president of the University of Texas at Austin states “The market is choosing quality regardless of incremental costs.” These aren’t incremental costs, college tuition has increased by more than three times the rate of inflation for the last 20 years, despite U.S. wages flat-lining since 2000. That is not the definition of incremental.

But do cost and quality really equate, the answer is not really. In fact, the high sticker price of many colleges is actually part of their marketing strategy.

As counterintuitive as it seems, schools have often found that raising tuition attracts more applicants because families tend to equate high price with quality (Money Magazine Article.) The market has gotten away from the rational fundamentals.As an example, in 2000, Ursinus College in Collegeville, Pa. boosted tuition and fees by 17.6%. The following year the school received nearly 200 more applications than the year before, and within eight years the freshman class had grown 56%. Schools are competing in an environment where, it is hard to convince potential students that a school is as good as its rivals unless they charge an equal or higher rate of tuition.(Money Magazine Article.) This is a price war based on perception and not on the reality of the actual value of the education.

According to the same Money Magazine article “prices for colleges have begun to follow their own peculiar logic. In the absence of any objective measure of the value of an education, price becomes the default yardstick. The more expensive a college is, the better the education it presumably provides.”

But as Charles Miller, who chaired the U.S. Department of Education’s Commission on the Future of Higher Education was quoted as saying: “If college costs continue to escalate at this rate, you may reach a point where the investment simply isn’t worth it.”

Bubble Articles
Here are some other articles about the bubble:
Is Higher Education the Next Big Bubble?
Evidence of the Tuition Bubble
The Coming College Bubble?
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