We used to be in denial that there were any bubbles, now everything is a bubble. This article in the Chronicle of Higher Education sounds the alarm on higher education (tassle twirl: lone gunman.)
Is it possible that higher education might be the next bubble to burst? Some early warnings suggest that it could be.
With tuitions, fees, and room and board at dozens of colleges now reaching $50,000 a year, the ability to sustain private higher education for all but the very well-heeled is questionable. According to the National Center for Public Policy and Higher Education, over the past 25 years, average college tuition and fees have risen by 440 percent — more than four times the rate of inflation and almost twice the rate of medical care. Patrick M. Callan, the center’s president, has warned that low-income students will find college unaffordable.
Meanwhile, the middle class, which has paid for higher education in the past mainly by taking out loans, may now be precluded from doing so as the private student-loan market has all but dried up.
The analogy to the housing bubble is certainly tempting. Pell grants and Stafford Loans are to Colleges what Fannie and Freddie are to housing. It is undeniable that easy access to credit fueled rises in tuition. It is not a stretch to think of these loan programs as essentially subsidies to Universities as they raise tuition dollar for every dollar of loans that are essentially forgiven.
But the analogy doesn’t go any farther than that. There is no speculation fueling demand for higher education. There is a permanent and measurable difference in earnings for college graduates. There will continue to be a robust market for credit to students because, to borrow a phrase, consumption wants to be smoothed. And unlike subsidized loans for housing, there is a real externality that justifies continued federal presence in the student loan market.
Cheap Talk 
4 comments
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June 11, 2009 at 7:21 pm
Todd
So do you think average college tuition will be higher or lower five years from now? What about ten? Will we have to go as long to get a degree? It’s getting a lot easier to educate yourself these days. Also, I’m not as convinced as you seem to be that there are positive externalities associated with college attendance sufficient to justify government intervention. If consumption wants to be smoothed, and going to college leads to increased income sufficient to repay loans and enjoy a higher standard of living, why exactly do we need the government? Why couldn’t the private market supply the necessary funding? Seems like the biggest winners in this scenario are the students themselves.
June 11, 2009 at 11:19 pm
Vinnie
“There is a permanent and measurable difference in earnings for college graduates.”
Sure, ok. But isn’t there still something unsustainable about the current rate of tuition increases, especially if that “permanent and measurable difference” stands to shrink in the coming years?
June 12, 2009 at 4:22 pm
jeff
I won’t make any prediction about tuition increases except to say that to some extent they will track any changes to federal subsidies. Again I think of these as essentially transfers from government to the universities since the universities can raise tuition dollar for dollar.
But whether tuition precipitously drops or continues to increase, it is not because of speculation about the value of a college degree as in the housing bubble. Because the value of a college degree is not determined by demand from next-generation speculators as housing was. (I am not selling you my degree for you to sell to someone else, etc.)
June 30, 2009 at 1:33 pm
Jussi
You can find some related data from here:
Click to access HeyU.pdf