

College, as an Asset Class, is a Bubble. - steveplace
http://www.investingwithoptions.com/2009/08/college-is-a-bubble/

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amalcon
"College" really represents two separate asset classes: education and
credentials. Education leads directly to productivity. Domain-specific
education (like what college provides) is not a commodity: its value is not
directly market-based. An education does not become more valuable based on
demand. The value depends on who has the education, their ability to apply it
to the current situation, and the current state of the domain. It can also
depend, to an extent, on the number of people with similar education, but this
is a very slow-acting force: it can take generations to have any effect. That
sort of "slowness" will tend to retard bubbling.

Credentials are a tricky subject as well. The particular credentials we're
talking about have value because people trust in their correlation with
education. These are much closer to a commodity, because the job market is
aware of credentials. Demand for credentials can increase their value.
Credentials can, therefore, bubble.

Now, if you're going to college for the education, that's fine. You'll get the
same result regardless of what the market for credentials does. If you're
going for credentials, you might get caught in the bubble. What's worse, if
you're going for the credentials, your education _will_ be of a lower quality
than someone going for the education.

~~~
caffeine
The measurable benefits of college (i.e. technical abilities) are largely
obtainable without going to college. A substantial investment in effort and
materials is required, and perhaps the final product does not attain that
achieved by a college education. But the difference in achievable technical
skill probably does not warrant the difference in price between the two
options (excepting cases like certain sciences where experience with specific
laboratory procedures is highly valuable).

The price of college is therefore primarily the price of a credential, and of
the "intangibles." As my parent argues, credentials are bubblable; and as the
OP argues, the market value of intangibles is (nearly by definition) a product
of social factors, and advertising - hence subject to "bubbles" (by which I
take it we mean wild price fluctuations unrelated to the underlying asset's
value).

Personally, I think the price of college is really the price of a credential
of the intangibles - belonging to a certain class in which there are a set of
prioritized attitudes and shared cultural idioms, and a shared experience.
This hypothesis suggests an incentive toward uniformity of experience among
educational institutions - which (I opine) can be observed quite widely.

~~~
amalcon
I disagree with your first point, but I upvoted because it is a well-stated,
intelligent argument.

While it's true that you can get an education without going to college,
college is a more efficient mechanism than most. They typically cover a
variety of things that are not obviously important to someone studying
independently (algorithmic complexity would be a good example), and (much like
with a startup) the possibility of failure is an effective motivator.

It's certainly not the best solution for everyone -- not everyone learns the
same way -- but there are a lot of people for whom it is a good choice.

~~~
teeja
I learned yesterday that Edward Fredkin had a high-school diploma (and one
year at Caltech) when he became a full professor at MIT in 1968.

The value of a sheepskin is less now than it was then. It ain't what you know.

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steveplace
Hi, post author here. A couple notes:

1\. It seems that the comments are focusing on the value as related to the
student-- that's certainly one part of the equation, but don't forget that
there is value for the financing companies that give easy credit access to
students, and I feel that is where the excess demand is coming from.

2\. This is a very volatile argument, especially in educated circles because
people take it personally. Whenever I have this discussion it seems to boil
down to anecdotes and how _my_ degree is of value. That's something to avoid.

3\. This is part one in a series and I'm currently working on the data to test
the hypothesis. I will be looking at per-major opportunity cost, total amount
financed versus {cost, time} and a couple others.

4\. Just because I'm calling it a Bubble does not mean I'm calling a top in
either tuition rates or financing. As the recession begins to hit states
harder, more budget cuts will trickle into state public education and revenue
gaps will need to be filled somehow. IDK if it's through fed stimulus or
spending cuts, but it possibly could lead to an increase in tuition rates as
financing is still available and the students won't recognize the true monthly
cost until after graduation.

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krschultz
The difference is that your education is not transferable. You only have one
education level, and it is only useful for you.

The housing bubble was driven by speculation and people owning multiple
properties, some as "investments" that they flipped for a profit.

There is no equivalent for that in education.

Education is more like health care, the cost is rising fast and we need to do
something about it. It is not a "bubble".

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brazzy
While there are certainly similarities between real estate and tertiary
education, the title claim is obvious and unmitigated rubbish. A bubble is
only possible when prices are drive up by speculation. Where exactly is there
a speculative market in college degrees?

~~~
steveplace
Thanks for the feedback. Let's look at your statement:

 _A bubble is only possible when prices are drive up by speculation._

And who says they aren't? There are two sides to college: the actual paper,
and the underlying financing. The latter is where I think we will find the
bubble.

Analagous to the housing market, the demand for college would not be as great
if easy-credit financing were not available. And college loan companies would
have less incentive to give out finaid if it were not backed by the federal
government. _That's_ where the speculation lies, in the packaging and
securitization of tuition loans.

Or it could be rubbish.

~~~
brazzy
Maybe I'm not up to date on trading fads, but as far as I'm aware, the
"packaging and securitization of tuition" is an exception rather than the
norm. At most, it creates a theoretical _potential_ for a speculative market
and thus a bubble.

But there's still a fundamental difference: a degree cannot be sold, and
acquiring one is a multi-year undertaking, which puts a tight limit on the
number of degrees on person can hold.

Even the securitized aspect of the housing bubble depended very much on the
inflated _resale price_ of the underlying asset to yield ROI fairy tales. With
tuition, there is no resale price, and basing valuation on the cost would be
absurd. The only sensible base is the income gap - and for that to be driven
up by speculation would require a rather different world from ours, where
companies buy and sell ivy leage graduates at inflated wages _and_ with
inflated severance payments to the previous employer.

Oh yes, there is a market that works like that. Only, it's not in college
graduates but in professional soccer players.

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maxharris
This is only true for degrees that are easy and/or economically unjustified.
For the forseeable future, I don't think this applies to someone majoring in
molecular biology (for example).

~~~
steveplace
Absolutely. I'm currently mining data by degrees to analyze the true
opportunity cost for various fields. A degree in communications, for example,
may not be economically justifiable in the current environment. But we can
flip it around and say a doctorate in medicine may not be viable due to the
cost and amount of debt on the student. It's all anecdotal until I pull up
some real data.

~~~
DTrejo
Hope to see your results when you finish.

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zck
>...this thought has been in the back of my mind since we started hearing
about the spectacular gains from Ivy League endowments and why they aren’t
doling them out to at-need students.

This is a very frustrating statement. First, unless I'm missing something,
endowments aren't showing "spectacular gains" as of late. Additionally, Ivy
League schools are doling out financial aid to at-need students. For example,
Harvard has "no expected parent contribution" for students whose parents make
less than $60k per year.
([http://www.admissions.college.harvard.edu/financial_aid/hfai...](http://www.admissions.college.harvard.edu/financial_aid/hfai/index.html)).
Cornell has replaced any offered loans with grants for students whose parents
make less than $75k per year. (<http://cornellsun.com/node/26757>). As a
hypothetical example, parents who make $50k per year are expected to
contribute $5000 per year. The student is expected to contribute $2000 and
have a work-study paying $1800 per year. The student takes on no loans, gets
$39,000 in grants per year, and graduates debt-free.
(<http://www.news.cornell.edu/stories/Jan08/finAid.html>)

~~~
steveplace
Well I may have mistyped, but the "since" part of the statement dates back to
the summer of '07 when we started hearing about the great moves in university
portfolios due to alternative asset classes like VCPE and timber. Clearly that
has changed a little bit.

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jhancock
7 - People refuse to believe that the asset class could have the possibility
of a bubble

I'm not so sure that people refuse to believe. The clip from Barney Frank is
interesting as it shows how the blow hards on the hill put a "its for the
people" spin on their policies. Now maybe Barney Frank is actually in it for
the people and simply does not understand anything about economics and credit
markets. But of this I am certain: if you look at the very long list of
interests that lobbied for extending more credit to homeowners, the list does
not include "The lobby for irresponsible middle-class that want to buy jet
skis". The bubble was created by a multitude of interests that all profited
from extending credit. Its not that they didn't believe they were creating a
bubble. They simply did not care. This is the same with the dot com bubble.
The people committing fraud knew very well they were lying, but it was making
them rich or possibly so, and this sort of fraud is hard to pin down and
prosecute.

The net effect of item 7 is the same without regard to my perspective. The
ability to keep something like this from happening again may matter whether it
was a matter of "belief" or "greed". The greed part can be solved by
separating the politicians from the money.

As for education. There are probably a lot who refuse to believe that some
aspects of education are unnecessary.

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jeremytliles
I think the comparison with housing is interesting, especially given the
social status implications. RE: tuition vs. CPI, I think it has been pretty
well documented that tuition increases have far exceeded CPI, at least over
the last 20-30 years.

It would be interesting to also examine what educational institutions will
have to do should they come under pricing pressure. If tuition has to go down,
how can they increase revenues from other streams or cut costs?

And as Howard Lindzon alludes to in the comments, is there a social cost? Is
there an important element of kids achieving quasi-independence in the shelter
of a university setting apart from the educational material itself, and if so
how can this be replaced?

~~~
kmano8
Maybe signing up for a few years of service work helps replace this. A number
of my peers made the decision to pursue a year or two of service after
graduating from undergrad, where a wide range of jobs are available (working
at an orphanage, teaching at an inner city school, etc). Not only does this
give you some social awakening (albeit, not quite the same as party school
xyz), but now you're benefiting society a bit more too.

~~~
klodolph
I hope your peers aren't unaware of the class privileges they are enjoying.
Getting an undergrad and then going into a low-paying service job is tough if
you're poor.

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johnnybgoode
I'm glad more and more people are realizing this. If you think about it for a
short while, you can use the similarity between college and other bubbles to
take advantage of the situation.

~~~
swolchok
How? It's hard to buy some education, wait a month, and sell it.

~~~
flogic
Actually if you assume education is information transfer it's quite easy. You
can even sell it twice or more times.

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hristov
It is so annoying when some finance person decides to apply rules of finance
to things they do not apply, and then pats himself on the back for being oh so
clever.

No college is not a bubble, because the definition of bubble does not include
things like college education. A bubble refers to things that can be re-sold.
More specifically a bubble refers to things whose sale value is much higher
than their intrinsic value because of irrational expectation of ever-
increasing resale value.

Education cannot be resold. Once you get some education it is yours. The only
value of education is its intrinsic value, there is no resale value.

So there is no college bubble unless you are referring to college stocks. Now
is college education too expensive, or overvalued? Perhaps. Are university of
phoenix diplomas not worth the tuition? Probably. But one can express these
ideas without making nonsensical comparisons with bubbles for tradeable
commodities.

Talking about bubbles, anybody know how one becomes a "professional
derivatives trader"? None of those guys seem very smart and yet they seem to
make a lot of money.

~~~
klodolph
I would say college cannot be resold, but it is sold in the first place. I
looked up the Wikipedia article for "Economic Bubble", which defined it as
"trade in high volumes at prices that are considerably at variance with
intrinsic values." A college education is definitely a product, even though it
is completely illiquid. I would definitely agree that many or even most people
are paying more for college than it is worth, though not in every field and
not at every school.

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nestlequ1k
Seems more like an arms race to me. The people who sit out might save some
money, however they could also be left out in the cold when even mcdonalds
starts requiring college educations (because they can).

