

Higher Education: The Next Big, Bad Bubble - byrneseyeview
http://www.byrnehobart.com/blog/higher-education-the-next-big-bad-bubble/

======
gyardley
Tuition is rising because loans are heavily-subsidized by the government, and
universities (especially for-profit universities) are taking advantage.

It's a simple business model - spend a ton on ROI-positive marketing
(especially online CPA marketing), get people who can't really afford it to
take out huge student loans which they only qualify for thanks to Title IV,
get the vast majority of your revenue directly from the government. Saddled
with massive debt and useless degrees, the students increasingly default, but
that's not the universities' problem - the risk lies solely with the students
and the government.

If you want to short education, you could short companies like Apollo Group
and ITT Educational Services, as well as the online marketing companies that
service them, like Quinstreet. But this is risky, because the bubble's only
going to burst when the government gets around to changing policies.

~~~
rdtsc
> But this is risky, because the bubble's only going to burst when the
> government gets around to changing policies.

Out of curiosity, how would the govt change their policy to improve the
situation? Should they just stop subsidizing the loans? Or should they let
students declare bankruptcy if their promised dream job doesn't matterialize
when they graduate?

I think regulating the deceptive marketing should also be considered. There is
a huge discrepancy between the advertised ROI and actual ROI. People should be
made aware of the actual ROI of a college degree. Then a lot less will be
willing to spend $100K to get a piece of paper after 4 year that turns out not
to help them much after all.

~~~
yummyfajitas
_Out of curiosity, how would the govt change their policy to improve the
situation?_

Not subsidizing the loans would be a good idea. Another proposal would be
enforcing some transparency/separability.

For example, the govt could demand that colleges break down there costs more
granularly than they do - $X for instruction, $Y for the gym, $Z for student
activities, etc. They could also demand that all such fees (besides
instruction) are optional to the student, and that subsidies only apply to
instruction. Colleges waste a LOT of money on irrelevancies, and such a
mechanism could reduce some of the waste.

~~~
tokenadult
_For example, the govt could demand that colleges break down there costs more
granularly than they do_

The government already does do this, in mandatory reports to the federal IPEDS
database. And a private foundation has published the information on a user-
friendly website, so that even if colleges don't report to the public directly
how they spend their money, discerning members of the public can find this out
by looking it up.

Compare

[http://www.collegeresults.org/search1b.aspx?institutionid=18...](http://www.collegeresults.org/search1b.aspx?institutionid=182290)

to

[http://www.collegeresults.org/search1b.aspx?institutionid=16...](http://www.collegeresults.org/search1b.aspx?institutionid=166027)

for example.

~~~
yummyfajitas
Nice database, but not remotely as granular as what I'm proposing. I want
colleges to break down all the excludible services and students can pick and
choose among them. I.e., a menu of some sort:

    
    
        Class/credits $x
        Computer lab access $?
        Yacht Club   $?
        Student Theatre  $?
        Intramural sports   $?
        Latino Center    $?
        Annual Rock Concert $? (Not made up)
        Career services   $?
    

The govt should subsidize only class/credits, and any colleges accepting
subsidies must allow students to pick and choose among the rest. I.e., if you
don't want to use computer labs or the gym, you don't have to pay for them. A
lot of the cost of college is caused by colleges wasting money on unnecessary
frills, and the system I propose would create a downward pressure on the cost
of frills.

(Another major component of cost is waste/fraud/abuse/administration, but I
don't see an easy way to eliminate that.)

~~~
pmichaud
I once worked at a software company where a big deal has been made for
software + hardware. It was a lot of hardware, and the software was maybe 10%
of the overall cost, which was approaching $1million.

Then the company backed out and said they just wanted the software.

All of a sudden, our software became 90% of the overall cost, and hardware was
10%.

All your idea would accomplish is making the credits super expensive and the
extras super cheap.

~~~
yummyfajitas
I realize that, I probably should have mentioned that the govt would randomly
audit college expenses, and their books would have to be made public. If they
get caught playing stupid games, no more subsidies.

(We could also create incentives for student whistleblowers too; if the
college is caught cheating, they must refund all the students they
overcharged.)

------
chime
> 1\. The price of college is continuing to rise faster than the rate of
> inflation.

Then maybe inflation isn't taking everything into account? My health insurance
cost is rising faster than inflation too. So is health care cost and nearly
every service that requires labor and cannot be imported/outsourced. Doesn't
that tell you that the true rate of inflation could be much higher than the
publicized rate? Rate of inflation includes lots of goods that can be cheaply
imported. But you cannot import enough cheap labor with PhD degrees. And these
are not included in calculating the rate of inflation.

~~~
kiba
The regulatory framework and special interest groups are probably causing a
negative feedback loop.

That, and the AMA don't like to add more doctors.

Also, if we could get rid of the general education requirement, and focus on
what Doctors actually need, as opposed to the idea of a liberal education, we
could lower the cost of eduction by 2 years equivalence?

This would also lower the cost for other majors too.

~~~
kylemathews
I don't Doctors without a liberal education. Most of them are narrow-thinking
enough as it is.

~~~
kiba
_I don't Doctors without a liberal education. Most of them are narrow-thinking
enough as it is._

Would a liberal education really change a Doctor's mind? Seriously?

Most of them are just hodgepodge of fact for doctors to remember and then
forget when they get their degrees.

------
krschultz
This argument is increasingly common, but it misses the actual truth. Sure the
difference in salary shrinking will increase the amount of time it takes to
pay off the degree, but that is not the whole story.

1) Unemployment rates are inversly propertional to education level. The worst
hit by the recession were those without college degrees. Who is going to bet
that trend reverses in the near future? If anything the college grads are just
going to suck up high school grad jobs they are overqualified for.

2) Type of job/ceiling. A lot of times you can get the same job with or
without a college degree (see: Sales Representative), but the college degree
usually means a better compensation structure and pathways up in the
organization, even if the salary is not a huge difference for the first 10
years eventually the HS degree will reach a ceiling. I've even seen this in
accounting between those that are CPAs and those that just have accounting
degrees, or at upper level executives who have MBAs vs those that don't.

3) The cost numbers in these articles are invariably screwed up. $200,000 for
a college degree? If you are actually price sensative go to a county college
for 2 years and then a state school for 2 years. Total cost would be <$60,000
for the whole thing. In most states you would even have your choice of
multiple schools.

My theory was that you should go cheap on the undergrad, if the name of the
school matters so much, just go there for graduate school. I'd hire a guy with
a grad degree and a state school over a really top shelf undergrad

(hence, state school for me and I just got hired at my job along with a bunch
of guys who paid 4x or more for private engineering schools)

~~~
timwiseman
_My theory was that you should go cheap on the undergrad, if the name of the
school matters so much, just go there for graduate school. I'd hire a guy with
a grad degree and a state school over a really top shelf undergrad &_

In technical fields, I agree with you. Having a degree often matters to get in
the door and avoid hitting ceilings, as you pointed out. But skill in your
actual job and (for better or worse) skill in networking and relationships
will win out over pedigree in the long run without problem.

It seemst that the situation is different in liberal arts fields though. My
wife is a history major and because of her I have many acquantances in the
liberal arts. They are all very worried about pedigree, and it sounds like
employers looking for that type of employee is also very worried about
pedigree. I suspect this is because it is harder (not impossible but harder)
to measure productivity and skill in liberal arts than it is in engineering
and related technical fields.

------
brlewis
Better returns might come from ensuring that everyone gets a good kindergarten
education.

~~~
protomyth
Technically, better money spent is testing children for developmental
disabilities in the pre-kindergarten years (0-5) and spending the money to
"fix" at that time is a better first step. A problem found in kindergarten
might end up costing the government in excess of a million dollars can
sometimes be fixed for less than $100,000 if known about earlier. For example,
hearing problems can be worked around earlier in life to allow proper
development.

------
nphase
I hate to sound callous, but this is just an effect of more people going to
college today than in decades before. Yes, obviously I want everyone to
succeed in life and have a college degree and do well, but obviously this
can't be the case. In decades past income disparity (since we're speaking in
terms of ROI) existed partly because of the availability and accessibility of
the college degree.

Back when degrees were scarce, they were rewarded. Now that everyone and their
dog is getting one, it doesn't mean very much. Friends of mine are graduating
college and going straight back home to live with their parents. And this is
happening in droves. The degree is no longer a differentiating element of
their resume.

Don't get me wrong, I'm glad that on a whole, are becoming more educated
(let's ignore the fact that this statement has no evidence behind it, and is
purely an assumption). That is a good thing. But inflation rarely goes
unpunished.

Disclosure: I'm a college dropout, and happily so.

------
sprout
Personally I think looking at higher ed is looking at the wrong side of the
equation. We're not in an education bubble, but a "bunge"[1] if you will - the
opposite of a bubble - with regard to labor prices.

In other words, people aren't overpaying for education, businesses are
underpaying for human talent.

[1] [http://www.johnkay.com/2008/07/02/metaphors-in-free-fall-
the...](http://www.johnkay.com/2008/07/02/metaphors-in-free-fall-the-anti-
bubble-named/)

~~~
yummyfajitas
Why do you believe talent is underpaid?

~~~
sprout
The top 10% of Americans hold an ever-increasing share of American GDP. So I
suppose to be a little finer-grained, upper echelons of society overpay
themselves and underpay the majority of the labor market, even as they benefit
from the fruits of a highly educated labor market.

~~~
yummyfajitas
How does the top 10% receiving an increasing share of GDP imply that the
bottom 90% are underpaid? If the top 10% are also _creating_ an increasing
share of GDP, then that would imply that everyone is being properly valued.

~~~
sprout
That's a tautology though. You're using the method of apportioning
contribution to GDP (wages) to prove that GDP is being properly apportioned.

There's evidence of your position, but it's hardly obvious. Personally I
believe it to be incorrect.

~~~
yummyfajitas
I'm not asserting that wages are being properly apportioned - I'm just
pointing out that the fact that the top x% get a greater portion of GDP is not
evidence that talent is underpaid. It could easily be the case that the top
10% is the most talented, and the talent gap/rewards for talent have
increased.

Income inequality is simply not evidence either for (or against) the claim
that talent is underpaid, at least not without information on the distribution
of talent.

------
timwiseman
This article make some very interesting points, but I think it speaks a little
too broadly at points. It does not sound like there is an overall education
bubble, but rather a bubble in liberal arts education and particularly liberal
arts education from lower tiered schools.

Even the article points out that engineering majors, especially those from
highly ranked schools are doing quite well and that does not appear to be
changing. Even on his point in signalling, it may be that having "a degree"
will come to mean less and less, but it is unlikely that having "a degree from
Harvard (or other prestigious school)" will mean less anytime soon.

------
jdavid
"But what we can change are the policies that subsidize college. Student loans
should be drastically curtailed, especially for the "at-risk" groups (which
are also the fastest-growing). Loans to students at for-profit schools have an
appalling 40% default rate. While I can't find data for degrees, I suspect
that hard science graduates default more rarely than social science graduates
(except for education, where the compensation is nothing if not reliable)."

Are you really suggesting that we take away this opportunity from the dis-
advantaged?

I may not be willing to give 99% of bumbs money, even for food, but i am
completely willing to give money to the government no-matter the cost to make
sure that everyone has a chance to seek knowledge. I am almost of the opinion
that there is no greater thing a country can do, than to provide a proper
education to everyone within it's boarders. ( regardless of race, creed,
gender, nationality, or citizenship ) let the world come here to learn, let
the world compete to come here to get an education.

yes, we need to make hard decisions in the coming years, but limiting access
to knowledge is not one of them.

------
pneill
What’s the purpose of an education?

I ask this because it’s central to the topic. Is it to get a job or is it just
to learn? If it’s the former, then we can have an ROI conversation, but if
it’s the later then ROI doesn’t really apply.

FWIW, I worked in higher education for over 10 years, and I can assure you
that universities don’t think it’s their mission to train students for the
workplace.

~~~
byrneseyeview
To the extent that a degree doesn't have some kind of return, it's
irresponsible to lend people money as if it works as collateral. Imagine
someone with an income of $25,000, borrowing $150,000 _to buy art_.

------
neutronicus
Universities certainly seem to employ a lot more people outside of the
businesses of education and research than they used to. Correct me if I'm
wrong, but I don't think college used to have "diversity programs
coordinators," "counseling and psychological services," and a paid intramural
sports infrastructure, to say nothing of steadily larger dorm rooms and
increasingly common private bathrooms. My parents teach at a small liberal
arts school, and they say that landscaping has skyrocketed out of nowhere into
a pretty expensive part of their budget. They also say that they are under
constant pressure to hire more "diversity professionals" from regulatory
bodies.

A university is a meal ticket for a lot of people, not necessarily just
professors, and once some people find a meal ticket, especially one as
intertwined with the public sector as higher education, good luck getting them
out.

------
steveplace
Everytime someone talks about college being a bubble, people get offended
because they think the thesis says their degree is not as valuable.

That is not the point-- you've got 3 different angles: the opportunity cost vs
future income, the actual market price of college debt (think mortgages), and
uni tuition vs. overall demand.

I know this because I talked about this last year and caught a lot of flak for
the argument. My thesis can be seen here: <http://bit.ly/bUCfec>

~~~
byrneseyeview
Excellent post.

------
lsc
Fewer and fewer people have been going to school for the money for a while
now. My sister has a degree in fine art. I don't think anyone rationally
expected that to raise her earning power.

~~~
wmf
That's fine, but the problem appears when people borrow money to finance such
a hobby, not realizing (or not caring) that they'll never be able to repay.

------
sliverstorm
So long as sciences and social sciences are lumped together as 'a college
degree', the advantage and profit associated with a science degree will prop
up the expectations of a social sciences degree.

It really does make sense for an experimental physicist to go to college. No
matter how bubble-y it may be right now, there aren't many with just a high
school degree.

~~~
lsc
ah, but i would argue that if you are trying to maximize your income, becoming
an experimental physicist is a horrible idea. You need a whole lot of
education, and if you drop out before your PhD, it's all pretty much wasted.
I've got a guy who does work for me sometimes who has both a math and a
physics undergrad... neither of those degrees gets you a job. My understanding
is that even if you do make it to a PhD you are looking at making about as
much as a computer programmer or sysadmin with an undergrad or no education.

~~~
yummyfajitas
Not in my experience. In general, employers seem to view my math degree as
more or less equivalent to a CS degree. I know for a fact that "PhD dropout"
is good enough to get you in the door for quant jobs at many banks/hedge
funds. Tech startups don't seem to mind either if you demonstrate that you
actually like to code and aren't ivory tower (i.e., use grep rather than build
your own regex parser).

~~~
nkassis
Not my experience either considering I have a Math degree and had no issue
finding a job as a software developer. In fact, I've noticed that the Math
degree makes managers think of you as smarter. There is a perception of Math
degrees as being harder than most other degrees. (I personally think EE is the
hardest one out there.)

------
absconditus
I thought that this was going to be about a slightly different topic.

"Though students at for-profit schools accounted for less than 10 percent of
U.S. higher education students overall, they soaked up almost 25 percent of
federal student aid in 2008-2009 and contributed 44 percent of the federal
loan defaults, according to both Eisman and an independent report by Senator
Tom Harkin, Chairman of the Health, Education, Labor and Pensions Committee."

"The Apollo Group, for instance, parent company of the familiar University of
Phoenix and the largest for-profit education company, received $1.1 billion in
federal loans and grants in 2009, Eisman said in his written testimony to the
committee. However, of that total, only 99 million -- or, about 10 cents on
the dollar -- went towards instructional costs. The rest, Eisman claimed, was
spent on marketing and executive salaries."

[http://www.3quarksdaily.com/3quarksdaily/2010/07/is-
forprofi...](http://www.3quarksdaily.com/3quarksdaily/2010/07/is-forprofit-
education-the-next-subprime-mortgage-crisis.html)

------
dugmartin
I think government subsidized four year research universities will be
overtaken in the US by the community college system which will start to offer
four year degrees. We can't afford to pay for professors that might teach one
or two classes per semester.

In non top tier private colleges more and more non alumni revenue generating
study areas will close. It won't make sense to anyone to spend $200k to get an
undergraduate degree in education where you can expect to make $40k per year.
Very top tier private colleges won't be hit as hard as their student bodies
trust funds will absorb the cost.

------
nkassis
Maybe they could make the schools partly responsible for false advertising and
high costs. Also, there is a serious lack of oversight of universities.
Accreditation is a joke now days. There is such a divergence of curriculum
amongst reputable schools and it gets worse for the new profit schools.

I'm glad I only had to pay 5K a year compared to others dealing with 10-20K
tuition cost for school no even close to the top tier universities in the US.
Harvard charging 20K is ok considering the rep you get just having a degree
from there. But random private school X? not so much.

------
TravisLS
From the end of the article: "I haven't found a way to short higher education
as a whole. If you can think of one, let me know." Any ideas?

~~~
kenjackson
Actually there's a pretty simple way. Start a guaranteed tuition plan. Parents
can pay you today's tuition cost for their child to go to college in 5-18
years. If higher education drops then you make money. If they continue to go
up, then you lose money.

You probably need to set aside a pretty sizable chunk though in the very
possible scenario that college costs continue to rise.

~~~
byrneseyeview
Wouldn't you want to take the opposite trade? To guarantee someone else's
tuition at a flat rate (or a flat rate plus interest) and then pay for their
classes at the market rate once they get to school?

~~~
wake_up_sticky
That's what he said. The parents would pay you a flat rate (today's tuition)
and you would pay their kid's tuition 10-15 years from now. Assuming the
bubble burst before then, you would make the difference in price between
today's tuition and the tuition of the future.

~~~
byrneseyeview
Yes, you're right; I misread it. Thanks!

------
gojomo
Is there a business opportunity providing a new signaling
credential/certification that hasn't been as diluted as "a college degree"?

(An organization providing such a service would face a lot of temptations to
get in on the traditional higher ed gravy train, while it lasts, but its
ultimate success through the crash would depend on it staking out a different
identity. It would probably also need a strong culture of elitism -- drawing a
lot of detractors, and possibly lawsuits once its certifications get used in
employment decisions.)

~~~
byrneseyeview
There are professional accreditations that work something like that. e.g. the
CPA, CFA, bar exam, etc. Those tests usually require you to get some kind of
education before you take them, but the actual qualification is granted based
on test scores.

------
GrandMasterBirt
We need difficult college courses which yield degrees. Its quite simple,
really. If the course is hard and fruitful, very few unmotivated people will
get through it. And a motivated person is sure to succeed (at least much much
much more likely). This way having a degree REALLY will mean something. If
10/1000 graduate from this program, you graduating means that you really did
accomplish something great. Also we need a way to snapshot your success. In
other words if the school dies, it should not diminish what you did in school.
There should be a way other than the name of the school to indicate that you
passed through the blazes of academic hell and came out triumphant.

~~~
wake_up_sticky
I agree, with the caveat that it shouldn't be done on a curve. College should
be much harder than it is, but it should be theoretically possible for
everyone in a class (of super-geniuses) to graduate.

------
Ardit20
Bubbles are not visible when you are in them. So I guess it is a good bet that
when many are saying something is bubbling, it probably isn't.

~~~
byrneseyeview
They are, almost by definition, invisible to the _participants_. But you can
call a bubble during the bubble, as many people did during the tech bubble or
the real estate bubble. It stays a bubble as long as they (or at least their
financial bets) are in the minority.

~~~
Ardit20
I do not think anyone predicted the 2007 crash besides whoever is in the
business of predicting crashes. The Prime Minister of the United Kingdom then
declared that he had eradicated the cycle of boom and bust. We all felt that
it could only get better. Now if some guy is so smart, then perhaps there is
something very wrong with our system of selecting the top banker, which is the
governor of the Bank of England in this country.

I would like however to suggest that higher education is very different from
estate or technology. Higher education is slightly more like electricity or
clean water. It is a necessity. The universities may charge however much they
like, as may companies which provide electricity, because people simply have
to bear it.

Someone who is interested in exploring the world, even if that may be through
such a low field as you suggest of sociology or psychology or indeed
philosophy, will still be willing to take the grants that states provide in
order to fulfil such desire. They think and so they may be right that they
will indeed die and the aim as long as they live is to explore the reality of
the life that they do choose to live. What is the nature of people, how could
we be governed better....

What I am suggesting is simply that there is no bubble in education nor can
there be. Whatever the number of people that are educated so the better it is.

Education you see is very different to an eighteen year old than to someone
who has gone through life so well perhaps and has the freedom to provide us
his wisdom through the internet. That eighteen year old perhaps your have
forgotten does not actually quite know yet who he is or the nature of reality.
Higher education provides him a good grasp of that.

What I would be much more worried of is the hierarchy in education, the only
place where it is feasible and desirable for a communist system to be
implemented in as far as providing all with the same standard of teaching and
holding them all to the same standard.

As for bubbles, there are no bubbles here. Nor will there ever be. Bubbles
happen in the for profit sector. Not in the most basic service besides food
and water that humans require.

~~~
byrneseyeview
No, there were lots of people who don't explicitly predict crashes, who still
called this one. Michael Lewis' _The Big Short_ is a fun overview. _The
Greatest Trade Ever_ is also good; the protagonist of that one is a merger
arb, not a doom-sayer. And of course, countless people sold when they found
prices too high.

It seems very obvious to me that the establishment has to buy into it for a
bubble to exist. Prices peak when optimism peaks, so you'll necessarily be
able to point to people in authority who were too optimistic. The only
alternative to that is a) for prices to undershoot rhetoric (arbitrage
opportunity!) or b) for prices to never go down (result: buying is a safe bet,
causing a bubble, leading to a crash).

 _What I am suggesting is simply that there is no bubble in education nor can
there be. Whatever the number of people that are educated so the better it
is._

This is what we call a "Bubble mentality". No P/E too high; it's the Internet!
No collateral too poor; it's the ownership society! You clearly don't believe
that; you would not be happy if, e.g., we were starving because every farmer
decided to finish his Masters in English lit. There is a _right_ amount of
education, and it is not _an arbitrarily large amount_. What I'm pointing out
is that by every measurable quantity, we're paying more and more for something
of less and less value.

 _Education you see is very different to an eighteen year old than to someone
who has gone through life so well perhaps and has the freedom to provide us
his wisdom through the internet. That eighteen year old perhaps your have
forgotten does not actually quite know yet who he is or the nature of reality.
Higher education provides him a good grasp of that._

Not sure what you're trying to say. I'm 23.

Education is beneficial. That doesn't mean it's worth trading anything of
value for any extra amount of it. It is precisely this kind of thinking that
leads to other bubbles.

