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The Higher Education Bubble: It's About to Burst (mjperry.blogspot.com)
47 points by ca98am79 on Aug 31, 2010 | hide | past | web | favorite | 83 comments

Because higher education is so very strongly tied to government funding, much more so than housing, I think the end of the higher education bubble (the existence of which I do recognize) will look very different from the end of the housing bubble. We're not talking about a salable asset, here: I can't sell you my degree, after all.

So we can generally agree that the higher ed bubble will burst, but I don't see exactly how, or what repercussions that will have.

Well, the housing bubble was leverage based and the higher education one is less so, especially since higher education loans cannot be discharged in bankruptcy (pretty much only in death, right?).

And as you note an education is not terribly fungible.

I agree with your last point: when, how and the shape of the fallout is quite unclear. We can perhaps see some clues at the edges, as some of the more marginal institutions go out of business, e.g. Antioch College (surprise; you might liken it and its sector to the sub-prime and Alt-A mortgage sectors).

But it's still the case that a 4 year Bachelor's degree has replaced the high school diploma as a proxy for [whatever] and until that changes we're more likely to see various sorts of shifting instead of across the board collapse.

Camille Paglia (who's always worth listening to, says this "ultra right wing conservative" :-) suggests we make a major shift to the trades: http://news.ycombinator.com/item?id=1649709, e.g.: "The pressuring of middle-class young people into officebound, paper-pushing jobs is cruelly shortsighted."

> I can't sell you my degree, after all.

There is an interesting option. The degree should come with some option to force the university to buy it back at a discount. Say a person couldn't find that promised job after they got their degree, so they can force the university to buy back his diploma for 80% of the price he go it for.

All that student's course credits would be expunged. If they claim they have a degree from that university from then on, they would be charged with fraud.

I wonder how many people would sell back the diploma in return for the money back.

I'm not sure how that would work for a lot of development jobs. I know my first job looked at my degree but after that most places don't care. They want to see experience and will test you on your dev skills during the interview process.

So what I'm getting at is that after 3 jobs I could sell my degree back and say "don't need this anymore, thanks!". Now you'll probably say that you can't ask for a refund after your first job. But that sounds like a lot of verification work. And can you prove that the degree GOT me the job?

If most places only care about experience, then some sort of apprenticeship or internship programs should spring up by themselves. These are now done through partnerships between universities and companies, but is there really any value added by the university here?

Or, another possibility is that the degree only serves as a "necessary but not sufficient" marker. It increases the probability that you know your stuff, but only the first couple of jobs confirm that you learned anything. In which case yeah, selling your degree back to them would be bad.

Oh, these kinds of programs are starting to show up. But they still hand you a degree which is accredited in some way. For example, Neumont University is kind of like this. Its basically a University giving you a 4 year BS degree in 2 years. With a complete focus on coding, database design, architecture and processes. Its an interesting middle ground. But education acceleration comes at a price.

Unfortunately it is hard to just come out with an 'apprenticeship or internship' only type program today. You do still have people that want to see that nice piece of paper at first.

>Say a person couldn't find that promised job after they got their degree,

I attended a state school. I just checked the website and found no promises of a job. In fact the only pages that include the word "career" are the career services which is a free service to help students and recent graduates find work. I checked a few other area schools and they make no such promises either. Hardly a comprehensive poll but,

Where did you get the idea that colleges ever promised jobs after earning a degree?

> Where did you get the idea that colleges ever promised jobs after earning a degree?

Every single guidance councilor and parent across the country.

Why should universities be held liable for the ignorance (or perhaps naivety?) of guidance counselors and parents. College degree != guaranteed job, nor should it.

Oh, I agree, anyone with any intelligence shouldn't listen to them.

I'm not sure how old you are, but it's borderline brainwashing. My mother literally used to tell me "Work hard in school, so you can go to college, and get a good job." It's not hard to see why people think that way.

Their advertisement. It's an implicit promise.

Yes, some people go because they want to expand their horizons, learn more about the world, network, make friends. However most people go to be able to eventually get a job.

Exactly, which is very interesting. The number of schools that call themselves "Liberal Arts" schools is fascinating, especially considering that their focus is very opposite in that it is very much vocation/job preparation related, rather than liberal. The goals of liberal arts education is to create "free" people - educating people to become more introspective and understand the complexities of the world we live in, understand their role and responsibilities in society, and have clear understanding of ethics and morality in everything.

I attended a supposed liberal arts school and was NEVER informed of such goals or anything in the proximity. In addition, never did I feel that my schooling was geared towards or assisted in much of that.

> Their advertisement. It's an implicit promise.

Interesting you say that. Around here, the for-profit colleges and cook schools and whatnot all have fine print in their TV ads that say "XYZ School does not guarantee a job or job placement."

Maybe I'm insane, but I really wish that people didn't look at school solely as a mechanism for finding a job.

I want to go to school because I want to learn about things (and because I want access to their lab equipment and funding), not because I'm searching for a job.

I had a great philosophy professor in university who popped the whole higher education bubble for us in his very first class.

He explained in clear terms that we were basically in university as a government subsidy to industry. Not so long ago, businesses took fresh graduates and trained them. The concept of going to school for accounting or to learn film editing is a surprisingly young notion.

If universities have a core competency, it's in stimulating minds to grow and develop, far beyond mere technical instruction. But they spend almost all of their time on the latter, because that's what the market (and their government masters) demand.

A lot of people don't have the luxury of spending tens of thousands (or in some cases hundreds of thousands) of dollars and, more importantly, several years of earning potential to just "learn things."

That's not to say that all or most people don't want to "learn things". But they're smart enough to realize that they can't afford to do that. What they may want to do, though, is support themselves and possibly live something approaching a middle-class lifestyle.

Many students are smart enough to realize, as well, that if you can get a good job and financial security, you can afford to have free time to do things that interest you. If you're scraping by in a dead-end job, it's a lot tougher to have hobbies or do any other sort of self-improvement.

And so they go to college, because they've been told over and over again that college is 'the best investment you can make.'

In some cases, that advice is coming in good faith from older people who grew up when a 4-year college degree basically was a Golden Ticket into the comfortable middle class. In other cases, it's coming from 'admissions counselors' (aka 'recruiters') whose job it is to get signups in order to bring in Federal loan money. What you don't hear from either group is that a college degree appears to be a declining asset; as more people have them, the benefit of having one (in terms of standing out in the hiring pool) goes down, at the same time the cost on average has outpaced inflation.

It's a shitty situation all around, and I'm honestly not sure what the best advice is to give a young person today. But one thing I am sure of, and it's that the old canard about "study what you love, the job will follow" is a lie. If nobody will pay you to do what you love, don't pay a lot of money for a piece of paper that says you're an expert in it.

I guess it depends on the kind of school or degree. Higher education always meant to be tied with getting a job...

For this reason I have a hard time seeing a bubble for higher education (Masters and PhDs) but I can imagine it for these expensive professional/technical schools. Then again, I am not in the US so my perspective is likely very different.

There is absolutely a bubble.

You can't even get (or keep) a job teaching grade school without a Master's degree these days.

I graduated from a highly regarded journalism & filmmaking program and I have to say that as far as getting a career, it was actually a net negative. People who had gone straight from high school to internships or volunteer work were light-years ahead of people who had been wasting their time in classes. (I was one of the few who did both, so I wasn't as badly off.)

And yet they graduate several hundred people a year from this program, most of whom will never get a paying job in their field.

That's really interesting. Out of curiosity, why do you think it's so hard for you to get a job in the industry, despite graduating from a well regarded program? Or maybe to rephrase, since you didn't say didn't get a job, why is having a well regarded degree a negative?

I'm different -- by the time I graduated, I didn't want a job in that industry. I'm speaking about everyone else.

The arts degree glut is pretty simple. They train too many people for too few jobs.

In the case of communications and journalism, there are other issues. What they teach is largely irrelevant to the coming era of journalism. Furthermore, although technology skills are sine qua non, most of the time you spend is in classes, learning from people who can't get jobs in the industry. You have to beg and plead for even a little time with outdated equipment. (My degree was in the late 90s to early 2000s, so things may have changed now -- but can you imagine a worse preparation for the last decade then learning to cut tape on reel-to-reels? In a single week, on a home computer, you could get more experience using audio editing equipment than I did in an entire year.)

If you were truly fascinated by media studies then I'm not going to say it's a waste of time. But in all honesty we just don't need that many academics that study media.

Also, on the journalism side, the news industry is contracting and unionized, so it is highly unlikely you can get a career by traditional routes. Again, the better education would have been to throw up a website or blog in your spare time, or get a camera and start shooting something -- anything. Or offer to work for free at a local TV station right out of college. People who did this got jobs later. I happened to do that kind of thing too, and I could have leveraged it into a real job in that industry, but didn't because programming was more interesting.

Most of those kids enter the program with dreams of working on TV or film or making music videos and such. A smaller number actually want to be journalists.

Mostly, the closest they get to working in communications is doing PR or possibly advertising. Few of them are doing anything related to their degree after five years.

I don't want to put too many words in his mouth, but I think the point he's getting at is that there's an opportunity cost to education, above and beyond the (significant) direct costs.

If you spend 4 years studying something, that's four years you can't spend studying something else. If it turns out that you studied the "wrong thing", you are going to be four years behind the people who took the other path. So it's not hard to see how that education program could look like a net negative.

Yup. We knew that even going into the program.

There were people who were so into making films they'd shot music videos and such before their very first film class. Mostly these people were there for pro forma reasons -- they just wanted the piece of paper.

"If they claim they have a degree from that university from then on, they would be charged with fraud."

Then, one just would claim one haD a degree from that university. I don't think it would be feasible to outlaw all ways one could leak thatbonformation.

might want to put an age limit on that. I can see some situations where that would be a non-problem to do (e.g. retirement).

The thing he is missing is that the tuition bubble (as he should more accurately call it) was directly caused by the housing bubble. Need to pay $200K for your kid's tuition to an ivy league? Take a second mortgage on your house. Universities were only able to charge these outrageous prices because people were willing to pay it. Now that nobody has equity in their homes any more you can expect it to change.

There are economic rules about supply and demand that come into play here. The supply of available seats in an ivy league are limited, and when credit or money is virtually unlimited, the pricing gets ridiculous.

We can expect this to adjust itself in the next few years provided not enough people are willing or able to pay these outrageous tuitions.

Look at that second chart more closely; the education cost bubble started about a dozen years earlier than the housing bubble. And home equity wasn't and isn't the only source of funding, especially for the less wealthy.

How this post gets written without mentioning federal student loans and grants, I have no idea. It's not a coincidence that every tuition inflation graph you see starts around 1980.

I wonder if the US Gov funding model changed to one where the universities were given money to one where the students were given/loaned money to give to the university of their choice. The difference could be compared to inner-city school choice voucher programs.

You can certainly look at it that way, if you choose to. The thing is, this is a Pandora's Box situation. The noble goal of using federal grants/loans to make higher education more accessible results in institutions being able to charge more for it. Same number of schools (supply) + more potential students (demand) with more money in their pockets (ability to pay) = higher prices; if each student is charged more money, they need more federal aid to make up the difference. This goes on in a circle, up and up and up. But closing the box now would be too politically unpalatable for any politician to try it. The solution, if there is one, must be highly creative.

I agree and should have been much less implicit in my argument. Perhaps state universities once (< 80's) charged very little because they (1) got lots of money from the government with the mandate of providing affordable education and (2) students didn't have access to grants/loans to pay more anyway.

Now, the "price" is higher (which is used to create the graphs in the linked article), but the effective cost for the student hasn't increased quite as proportionally because he has a government voucher to use.

Greatly oversimplified, I know. We understand what someone means when he talks about the average price of a gallon of gas at a gas station, but we don't have a common definition for the "price" of education. Out of pocket not counting grants/scholarships? Do we discount the cost if the loans are at a below-market rate because of government guarantees?

Heck, even the gallon of gas "price" is hard to define. Marathon gives me back 5% on gas purchased with my Marathon card. What's my average price per gallon?

Word to all that.

Come to think of it, I've never personally seen a graph of tuition inflation with out-of-pocket payment, private loan payment, and federal aid payment all on top of each other, mapped over time. THAT would be a telling graph.

Students currently have access to "cheap money" (i.e. gov't secured loans) regardless of what school they choose.

The bottom line is that cheap money injected into an industry always raises that industry's prices. Housing, healthcare, education.

I fully agree that the cost of higher education is a little out of control, but it seems to me that you have to look at its historical value as well as its current value in order to determine whether there is a bubble. It seems to me that university educations were highly under-valued in the past, and so part of the price pressure is just coming from the realization that a university education is much more valuable than what it used to cost (and K-12 is even more valuable than that, but thankfully it's publicly supported).

There is also little reason to think that higher education should be bound to CPI in any linear way - there are lots of other quasi-economic influences that are perfectly valid, although greed does seem to play its part.

There's two ways to look at the issue. One is the question of value generated by the degree. If the degree adds a million dollars to your total income, it is natural for the education industry to try to capture more of that value. By that metric it all looks peachy.

In a free market, the relevant metric is something more like at how low a price you can bring the service vs. your competitors. It beggars the imagination to believe that the current price charged is the actual minimum price for the services that people are actually looking for. The question of the intangibles of the college experience is incidental, first because even those intangibles can almost certainly be had for much cheaper, and secondly because it isn't necessarily the case that people want them, regardless of how much you want people to want the same intangibles you do. In addition to the fact the intangibles could probably be had for cheaper, we have this Internet thing slowly but very, very surely eroding away the physical constraints of the old system.

They've been really shielded from the free market by easy subsidies and loans and the fact that the unaccredited competition was neither socially accepted nor able to be quite cheap enough to break through, but all of these things are suddenly changing. The costs to a startup or something of providing a college-quality education continues to drop, and the business scales fairly well. We're getting over the idea that college = good with the increasing evidence that it's not true, which will continue to open the door to non-traditional-college alternatives, some of which will begin to exceed their college breathren. The subsidies are likely to become harder to get and increasingly scary, as word of things like the non-dischargability of student debt in bankruptcy are increasingly well known. Every pillar propping up the current system is collapsing over the next few years at once.

As the college education market gets forcibly introduced to the free market, I expect the blood of the incumbents to flow freely. Like all bubble pops I can't predict exactly when it'll happen ("the market can stay irrational longer than you can stay solvent"), but I'm pretty confident about the outcome, based on the fundamentals.

(How confident? I am not planning my finances for my kids on the assumption that college is going to cost them each $50,000/yr in 2010 dollars. I computed it once and at current rates of tuition growth that's a reasonable projection for a 2-year-old and a not-yet-born. It's just physically impossible for a college-equivalent education to cost that much. So you might say I'm betting quite a lot on this analysis.)

I remember reading a number of years ago about how much it costs CalTech to educate one of its graduates, and it was something on the order of $300k/year. Granted, engineering and particularly of the intensity and small scale of CalTech makes for expensive students, but it's not true that tuition fees at many of these schools are wildly disproportionate to the amount they spend offering what they offer. Sure, many/most universities are heavy on luxury and have spending priorities that are not well-aligned to pure education, but the fact is they do offer something that cannot be had for less money - they rely on many many funding sources besides tuition in order to break even.

Here's an article about Florida universities - the costs are much more reasonable, at about $40k per graduate (all four years), but it's using 2005-ish figures, and that's an average, with degrees ranging from ~$21k to $250k+.


Of course, we're talking about a lot of 'intangibles' of the experience that are not directly related to the 'education', but for many/most applicants, the experience is a huge part of the decision about which school to go to, and so I feel it's reasonable to factor that in as a cost/expense that is not going away any time soon.

I fully agree that the free market and particularly alternatives to university will be a great influence over the next few decades - it will be a great advance once more people realize that a university education is not the best life decision.

"I remember reading a number of years ago about how much it costs CalTech to educate one of its graduates, and it was something on the order of $300k/year."

But that's not the question. With all due respect, it's not even all that interesting. If they had a million dollars to spend per student, by golly, they'd spend a million dollars.

The question is, how much would it cost in a competitive market? And given that engineers are the minority, how much should an English degree cost in a competitive market?

How much can you save by not even being on campus? By not using professors, which rhetoric aside you simply do not need for most courses? (I'd much rather see more professors doing more research and teaching grad-level courses.) How many teachers do you even need? Why are we paying people to do the moral equivalent of going to the front of the class and reading their notes? (With varying degrees of literalness.) And then paying them again to do it next year? And then paying hordes of such people to deliver the same classes to hundreds of institutions? To put it in HN terms, just how disruptive could you get while delivering the same basic product, or possibly even a better one?

"and so I feel it's reasonable to factor that in as a cost/expense that is not going away any time soon."

People say this a lot. I think people are culturally conditioned to say it. God forbid we radically rethink anything about education. But I think that you gave someone a choice of spending 20K/semester and living on campus, or spending 2K/semester and living where they chose and getting a degree just as good in the vast majority of ways, that not only would quite a lot of people made that choice ten years ago, but in the coming years, when money is going to be a lot tighter for the middle class, the 20K option is likely to just collapse. Just about the only thing holding it up right now is a whole lot of people like you who aren't willing to concede the possibility that quite a lot of the accouterments of college as we now know it are incidental to the the actual product.

Don't think with your standard cultural conditioning; think like a disruptive startup founder. The fundamentals of this industry are all wrong and it's going to burn. For better and for worse; disruptions are rarely all for the better. I'm not saying I celebrate every aspect of the change, but the fact that I think it's a mixed bag isn't going to change the absolute economic inevitability of the changes ahead.

It's surprising that a professor of economics would state that the "The college tuition bubble makes the housing price bubble seem pretty lame by comparison". If you're looking at the numbers alone yes the graph looks pretty scary. There are explanations outside of a speculative bubble for why a degree has gone up in value so quickly. Over the time of his graph the percentage of those seeking degrees has doubled (15%-30%), while home ownership has remained relatively flat (62%-68%). Prior to 1978 a good union job meant you were solidly middle class, in the 80s that changed you had to get a degree to be middle class. In the 90s it accelerates again as even non-union manufacturing jobs were shipped overseas (and foreign students shipped in).

The housing bubble was entirely speculative. It was stoked by the fed keeping rates low, later fear took over as people didn't want to be either 'priced out forever' or miss out on easy money.

As others have mentioned it's apples and oranges, you can not sell nor live in a degree; defaulting on your student loan will not render you homeless. The bubble and collapse in house prices is far more signigicant to the larger economy. The housing market is measured in trillions, student loans in billions.

Don't get me wrong tuition is way overpriced for what you get. A drop in tuition and house prices would do everyone good.

There is no bubble. The return on investment for a college education may be less than what it once was, but the net present value of a bachelor's degree is still positive. That's an economic argument predicated on the proposition that an education's function is solely to develop human capital, thereby increasing productive capacity of the person and enabling that person to earn more for their services relative to what they would have earned without a degree.

This, of course, ignores another significant component of economic behavior regarding education. Specifically, in addition to it's vocational value, education is a service purchased to meet the human need for self-actualization. When you see a human-interest article in the local news about a 70 year old grandmother who has just completed her bachelor's degree, you are seeing evidence of economic demand for education that has no vocational basis.

I am not saying that the existing trend of the cost of tuition outpacing CPI can continue indefinitely. Clearly it can't. However, it is a mistake to label the present circumstance as a bubble.

You mention that the net value of a bachelor degree is positive. I'm writing this on my phone so I don't have access to any numbers but I wonder what the spread (statistical dispersion) is. More specifically, it would be interesting to know whether a large proportion of graduates enjoy some net positive gains due to their degree or only a small minority enjoys out of proportion gains while the rest is losing somewhat.


Great non-linkable comment on the Examiner article discussed: "if you want a degree - go to the University. If you want an education - go to the library"

So odd. Even when I found the permalink to that comment ( http://www.washingtonexaminer.com/opinion/columns/Sunday_Ref... ) it still didn't take me (in Chrome dev build, at least) directly to the comment.

Technical explanation: The Disqus comments don't load until a second or two after the permalink's anchor jump (#comment-55003614) is attempted by the browser. So when the browser tries to jump to the comment, the comment isn't there yet.

It's an unfortunate side-effect. I wonder if Disqus could circumvent this by using a hashchange-type trick (referencing Ben Alman's BBQ jQuery addon).

And with the Internet the world's greatest library now has an annex in every home, office, vehicle or pocket with a sub-$500 device in it.

I don't know that the internet is the world's greatest library yet. In 5-10 years, when Google and Amazon have scanned every book in the world, maybe.

If Google and Amazon scan every book in the world, do you think they'll let you have the result for free?

How about we properly fund the public library system to do its job of maximally disseminating knowledge, which it can most cost-effectively achieve by buying those scans from Google or Amazon?

"besides, for a generation, the value of what they're buying has gone up steadily." From a purely financial perspective, has the value of higher education ever risen as fast as its costs?

Not as I recall; the really big gains where in the post-WWII GI Bill era, which began the really big shift on the supply side. I think by sometime in the '70s or '80s a substantial degree of saturation was reached ... and of course the '80s is when the costs suddenly detached from the rest of the economy (of course, you should check this against a more reliable inflation metric than what the necessarily biased US government puts out).

One would also want to look at when the 4 year college bachelor's degree replaced a high school degree. Why Johnny Can't Read was published in 1955; not too many years/decades after that it was widely recognized that a high school degree no longer signaled much of anything.

As a foreigner who never had to pay for his education (provided for free by the government), I find it disheartening to see that no one (even here) brings up the issue that everyone should have access to education. Some kid whose only fault was to be born in a poor family should have access to the same opportunities as another one born in a richer family. This is destroying the fabric of society if you ask me: poor people don't get educated and are getting poorer. Maybe you'll call my point of view 'socialist', who cares. It just makes me sad that everyone takes the fact that college tuitions cost hundreds of thousands of dollars for granted.

That's not really how it works. The more poor, the more financial aid is available. And one of the things we're implicitly calling into question is how many people need or even can benefit from a $200K college degree.

If you're just getting the new replacement for a high school degree, say the generic business degree, you can go to lower tier state colleges for quite reasonable sums of money.

"The more poor, the more financial aid is available". Why isn't everyone able to go to an ivy league school then? Your statement implies that by being poor, you get lots of free money, which is basically saying there's nothing below the middle class. I think _that_ is not how it works.

Also, what if you don't want just "the new replacement for a high school degree"? My point exactly: why should you have to shoot for a lower degree because you're poor?

Hga is right about the vast sums of financial aid being given to those with low family income by top schools. Everyone isn't going to an Ivy league school because (1) clearly there aren't enough spaces, and (2) everyone isn't admitted. We could discuss the structural features that contribute to 1 and 2 (mostly 2). But where I think we should be able to find agreement is that those who are admitted are cared for quite well. You might be surprised at how many of them did indeed qualify for, and receive, need-based aid.

I don't doubt a lot of money goes into allowing some people into ivy league schools. But why should that counterbalance the fact that if you're born poor then chances are you won't go to college, especially a good one? In the end, some especially gifted, smart or hard-working kids will make it, sure. But they'll be competing for the same financial aid. Why should those have to work any harder than the rest?

They're competing for the same financial aid, which is based on need. Admissions aren't tied to need, but aid is. Therefore, if you ignore the structural forces making it difficult for poor people in general, they get a big bonus:

(1) Ability to pay is ignored during admissions...

(2) ... but ability to pay totally determines what you'll be asked to pay.

For those who get admitted and are poor, it's an extraordinarily good deal. I'm still not seeing where (or if) we're disagreeing.

It's true that college admissions in the USA are extremely generous, but this is only to make up for the wild variations in the quality of primary and secondary education. Depending on your choice of parents (and where they live), you could be doing AP calculus with your own laptop, or not be able to read your high school diploma.

In many European countries, there is an aggressive policy of equalizing all education opportunity, from kindergarten to the Ph.D. level.

Comment on story: "Government schools are very expensive and normal people can't bear their expenses. I suggest that government should give some relief to the students" I'm no economist, but isn't that similar to being able to get easy credit? If the government is giving out more federal aid, the schools can keep (or even raise) these high prices. I don't know the solution for this bubble, but just throwing money at it doesn't seem like the solution to me.

No, you've identified the problem and its symptoms.

Let student loans be dischargeable in bankruptcy and watch prices "adjust".

What other asset-backed-security is tied to someone's life until they die or become physically incapacitated?

The problem here is that these are not asset backed, at least in the collateral sense. A house can be foreclosed on, a car repossessed. You can't take away the education someone's gained, although I suppose you could force schools' registrars to not confirm the granting of a degree, but that could still be proven in a variety of ways.

The concern is that too many would immediately declare bankruptcy after finishing their education, wait out the 7? years it takes to for that to fall off their credit report and then get on with their lives. Since few new graduates need serious credit for anything beyond cars....

Please substantiate the claim "The concern is that too many would immediately declare bankruptcy after finishing their education".

The loan is the asset, both in cases of student loans and mortgages.

Are you talking about derivative securities built on top of loans?

Well, I've been talking about the loans themselves, which by definition are not "assets": "Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset. Simply stated, assets represent ownership of value that can be converted into cash..." (http://en.wikipedia.org/wiki/Asset).

Therefore securities built on top of these loans, such as the pools you refer to in your link, are by definition not "asset-backed-securit[ies]". They are instead backed by e.g. the laws and regulations that make them non-dischargeable ... and I contend that's a major reason why they are non-dischargeable.

I don't mean to spam you with Sallie Mae links, but clearly you can see the heading of this page...


From one of the links: "... financial characteristics and servicing information related to the underlying student loan assets...."

The student loans themselves are assets (the fit the above definition), my point is that they themselves are not asset based like a house or car loan.

Sallie Mae's use of the term "asset" here might be slightly misleading, but being essentially part of the government they can get away with it.

I think there's a fallacy here. The housing market is not a monopoly, but higher education largely is. Universities do compete with one another for top talent, but as a group they also have a firm grip on the number of degrees granted. Technically this may actually be an oligopoly.

Until there is a viable alternative with the same reputation, how can students win the debate over prices?

Are you saying the 1000's of universities in the US, not to mention the 10's of thousands worldwide, are successfully colluding to drive up prices? That's a hard position to maintain. Universities do compete on price heavily, even if it's in the form of grants.

A large group of top-tier universities and colleges were caught colluding on financial aid packages. Their thesis was they didn't want the cost to the student and his family to bias the decision of which to accept, but one can also surmise that eliminating financial competition had additional motives.

Are you implying that need-blind admissions allows universities to increase tuition? The only two ways I could see raising tuitions as justified because of this is:

1. It costs more to provide grants to poorer students. 2. More competition (demand) and fixed supply increases the price of the good.

I'm unqualified to talk on the first point, and it seems kind of a stretch.

On the second point, I don't see how having more poor students lets you earn more. I suppose one possibility is that the government subsidy plays a huge role and the university is trying to tap into those funds. If not, I don't see how the increased demand would drive the price up. If you're admitting richer kids, they'd have the money to fork over anyway.

But I could just be missing something.

Well, here's just one example: not getting into financial aid bidding wars for particularly desirable students.

I'm not particularly interested in their justifications, more their real reasons. The biggest one for raising tuition per se is that it's entirely unrestricted money, they can spend it any way they want. The Federal government is pretty strict about where research overhead goes, and pesky alumni don't trust schools to do the right thing and restrict a lot of their donations (see this for why their concerns are entirely reasonable: http://en.wikipedia.org/wiki/Woodrow_Wilson_School_of_Public...)

I've googled on various terms ('collusion', 'price fixing', ...) but could only find some vagues references to the Justice Department 'conducting an investigation', and this was from 1989. No mention of any results or of any recent investigations. If you have other sources, please let us know. I know of no such cases.

Those words were my spin on the situation; the word you need to use is antitrust, e.g.: http://www.google.com/search?q=higher+education+financial+ai..., the first result being: http://www.nber.org/papers/w4998

Antitrust and Higher Education: Was There a Conspiracy to Restrict Financial Aid?

Dennis W. Carlton, Gustavo E. Bamberger, Roy J. Epstein

In 1991, the Antitrust Division sued MIT and the eight schools in the Ivy League under Section 1 of the Sherman Act for engaging in a conspiracy to fix the prices that students pay. [...]

Or http://www.highereducation.org/crosstalk/ct0106/voices0106-k...

"But what about the antitrust laws?" I was asked at the TIAA-CREF conference when I suggested this level of cooperation. Administrators cringe at the memory of the Justice Department's lawsuit challenging the agreement among the Ivy League colleges and MIT not to compete in calculating financial aid—or at least they use that litigation as a convenient excuse not to do anything. What they forget is that, alone among these schools, MIT stood up to the government, and in 1991 it won the case. The aftermath is telling: The Ivies didn't restore what was known as the "overlap" agreement, and the financial aid wars were revived.

Be careful in trusting the above, since the suit started in 1991, alhtough the Feds had been negotiating with the schools in question for some time before then (and I have a vague memory that some other schools may have been involved but punted before the lawsuit was brought).

Overlap is also be a very good search term, e.g. it found this press release: http://tech.mit.edu/Bulletins/ovrlp-pr.html


MIT, Justice Dept. Set Up New Way for Non-Profit Colleges To Cooperate on Need-Based Financial Aid

The U.S. Justice Department today agreed to dismiss the financial aid antitrust case against the Massachusetts Institute of Technology and establish a new way for non-profit colleges to cooperate on need-based financial aid to undergraduates, MIT announced.

MIT President Charles M. Vest told a news conference at MIT, "I am very pleased to annmounce that the U.S. Department of Justice has informed MIT it will drop the antitrust case it brought against the Institute nearly thre years ago."

He said the resolution of the case is in two parts:

- "First, the Justice Department will dismiss all of its claims against MIT.

- "Second, the settlement establishes guidelines under which colleges and universities can coordinate their financial aid practices in order to insure that their limited financial aid funds are awarded to qualified students solely on the basis of need."

It goes into a lot of details on the history of the case, e.g. the 8 other schools folded and signed a consent degree in 1991 while MIT fought and after a big win WRT to interpretation of antitrust law in the appeals court they and the Justice department quickly settled.

What is college, really? It's some combination of access to three things: information, feedback, and certification.

The internet totally took care of the information problem. It's no longer the role of a university to provide access, but to create new knowledge through research.

The internet helps take care of the feedback problem, and I think web-apps will keep coming that match people with each other to give feedback on their efforts. So colleges are in danger there.

The internet can also take care of the certification problem, because the value of the certificate (diploma) is pretty much completely tied to the brand value of the certificate-giver. I can see an online university establishing a name for themselves in the future.

Colleges should focus on things that the internet can't do, like providing spaces for people to meet up and learn together.

Regarding information, not quite. One of the few things I really missed immediately upon graduation was access to expensive databases like LexisNexis, JSTOR, ACM Digital Library. You'll be at a great disadvantage trying to conduct real research without such access.

I sometimes must ask a friend still in academia to download a PDF of some slightly older CS paper for me.

I also miss the wonderful university libraries. The public libraries are not nearly as good especially for more specialized matters.

Definitely true - I didn't think about access to proprietary databases or the excellent libraries.

I wonder if universities will have to go even deeper than they currently are to compete with the internet, or if the proprietary databases and large libraries will inevitably be made irrelevant by the internet.

You missed "discipline". College gives you deadlines, in case you're not the kind of person who can provide their own.

I totally agree and wrote a similar piece a few months ago, calling it "Wallowing in Education", http://www.melonakos.com/2010/07/25/wallowing_in_education/

I feel this tuition bubble is one of the primary drivers behind the healthcare mess. The still exploding cost of healthcare is so driven by the very high cost of healthcare services (office visits in the US are typically 5 to 10 times more expensive than in Europe for instance). Regardless of the role of insurance, this cost has two primary drivers: providers malpractice insurance and highly indebted doctors, nurses and other healthcare personnel who require salaries that are out of this world to stay afloat because of their student loans.

You can't sell your degree, so the price won't crash like it would after a normal bubble. But I expect we'll see an accelerating decline the number of people starting college over the next 10-20 years, during which time the price may drop on real terms and some schools will probably have to close.

Housing bubble was caused by mortgages, not houses.

Higher Ed bubble is caused by student loans, not degrees.

So this whole argument about "you can't sell your degree" is BS.

These educational loans are pooled together and sold as asset backed securities.

So, yes, if you have student loans, your degree can be sold, but probably not by you.

If you want in-depth analysis of why this is a completely mad bubble (hopefully with an imminent prick coming from the legislature or government rolling back the lobby-led liberalisation of the Bush years) you could do far worse than a fantastic hedge fund analyst's view; here's the summary http://www.businessweek.com/news/2010-05-27/eisman-of-big-sh... and here's the SUPERB presentation (on scribd) about the reasoning behind shorting certain for-profit ed stocks: http://www.marketfolly.com/2010/06/response-to-steve-eismans...

I agree this is a bubble, and is likely headed for a crash. It's hard not to be worried about what may happen then. In the best case, higher ed. would largely be replaced by something cheaper, but maybe just as effective. In the worst case it would herald the end of the middle class, as a generation gave up on the idea of maintaining the lifestyle their parents had. Only the rich (and a lucky few talented or favored poorer students) would be able to afford college.

Depending on the prevailing political situation, there might be government intervention to shore up the availability of higher ed., or not. Depends whether the Dems or Repubs are in charge when it blows.

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