This week’s extension of the Ace of Spades HQ podcast is up on the Podcast page.
Glenn Reynolds has an article in the Washington Examiner about how he believes the higher education bubble is about to burst. Perhaps not imminently, but fairly soon. Why? Because the value of the product doesn’t match its rising cost.
Reynolds talks about the dilution of the worth of a bachelor’s degree even while the price has risen exponentially. Something’s got to give.
But there’s no real incentive for institutions of higher learning to back off the price. Why? Because government has chosen to subsidize those prices by taking over the student loan business.
Sound at all familiar?
With no penalty for raising the price, colleges and universities continue to do so knowing full well that whatever they stick the student with that requires a loan they will get upfront. And if the the student defaults, we, the taxpayers, get stuck with the bill.
One of the big complaints about the Wall Street bailout from both sides of the political isle had to so with “privatizing profits and socializing debt”. That’s precisely what the current government loan program does as well.
Reynolds makes the argument that colleges and universities should be on the hook for the debt. After all they’re the institutions providing the product. Tying the price of the product to the worth of the product is such an old fashioned concept isn’t it? Instead this new-fangled way of doing business has led to bubble after bubble which the uninformed then try to pin on “market failure”.
In fact it is a government takeover of a market. There is no competition, no incentive to revisit pricing, no reason to worry about default. Charge whatever you like, make an outrageous profit and if the loan fails, stick the taxpayers with the cost.
Nice crony capitalist system if you can arrange it, huh?
We all know exactly how it will end up … with a big “pop” and a bunch of surprised politicians asking “how could this have happened?’
And the first words out of most of their mouths?
And what does that usually mean?
More government intrusion and control.
Then the cycle repeats.
Well you have to ask yourself what you get for the money when you purchase anything don’t you? I mean isn’t that how you make buying decisions for the most part? You weigh the advantage the purchase makes in your life and you figure out whether or not parting with your money justifies the supposed benefits.
In the case of higher education in this country, it’s my guess we passed the point of diminishing returns eons ago. A college degree just isn’t what used to be a few decades ago, but it costs a hell of a lot more. Jack Kelly fills us in:
Tuition and fees at colleges and universities rose 439 percent between 1982 and 2007. Median family income rose just 147 percent during that period.
Median household income has fallen 6.7 percent since June 2009. The cost of attending the average public university rose 5.4 percent this year.
Student loan debt recently passed $1 trillion. It’s now more than credit card debt. The average graduate of a four-year college owes $27,000.
So you have a cost that has risen far and away faster than inflation and median family income for, well, no good reason that I know of.
Oh wait, I said “good reason”. There is a reason. Can you say “subsidy”? That coupled with the myth that a college degree … any college degree … is worth its weight in future gold. But it appears that gold may be fool’s gold.
I love this description of what many institutions of “higher learning” have become:
College students don’t get much for their money. Nearly half learn next to nothing in their first two years; a third learn almost nothing in four, according to a report authored principally by Prof. Richard Arum of New York University.
"Students who say that college has not prepared them for the real world are largely right," said Ann Neal, president of the American Council of Trustees and Alumni. "The fundamental problem here is not debt, but a broken educational system that no longer insists on excellence."
Or even adequacy. "A college degree nowadays doesn’t necessarily signal that its holder has any useful work skills," said Charlotte Allen of the Manhattan Institute.
"For decades our schools have abandoned the teaching of basic facts and foundational thinking skills, and replaced both with leftish received wisdom and stale mythologies, all the while they have anxiously monitored and puffed up students’ self esteem," said classics Prof. Bruce Thornton of California State University Fresno.
I agree totally with Ms. Neal. There is no insistence on excellence. That’s not true of every institution out there, obviously.
However a look at the various new degree programs provides a peek into the priorities of the schools. To broaden and accept as many students as they can to also broaden the revenue stream they’re provided. The unique offerings are most likely not made to produce anything meaningful in academia and certainly not in the real world, but they do attract a certain type of student to such a degree program that is fully willing to buy into the myth that somehow a degree in gender studies is going to be useful and are willing to pay the big bucks demanded (even if that means borrowing them).
And, of course, government subsidizes the purchase, so there’s certainly no reason for the school to back off such a useless program or lower it’s price to something roughly equivalent to its utility in the real world.
What happens? Precisely what you’d think would happen. Its much like the housing crisis. Loans are given to people who aren’t really capable of college work. They leave with nothing or some marginal degree and huge debt.
Others graduate to find there are no jobs for them. Roughly 60 percent of the increase in the number of college graduates since 1992 work in low-skill jobs, Prof. Richard Vedder of Ohio University discovered. In 2008, 318,000 waiters and waitresses had college degrees, as did 365,000 cashiers and 18,000 parking lot attendants.
Because degrees have been so diluted and their worth so compromised over the years, they’re less and less of a guarantee of a good job and better wages.
But because government subsidizes education and distorts the market, guess what?
And, according to a study by the American Enterprise Institution and the Heritage Foundation, teachers are paid $120 billion over market value.
There is fraud at every level of the education system, thanks mostly to politics, said Herbert London, professor emeritus at New York University. Teachers and professors go along to save their jobs.
"They simply cannot say that college isn’t for everyone … or that rigorous exit requirements at any level do not exist," he said. "Hence, there is the clarion call for more money."
Of course they can’t. The gravy train is just too rich to quit.
And, you also need to understand what is actually happening in colleges and universities across the nation to appreciate the full impact of this market intrusion by government. Colleges, as mentioned, no longer demand excellence. Instead, they spend an enormous amount of time and effort teaching what a college student should have mastered before ever showing up at a university:
We spend about $10,600 per pupil in public schools, 377 percent more, in inflation-adjusted dollars, than we spent in 1961. Yet among students who go to college, 75 percent require some remedial work.
If you managed to catch some of the protests in WI that included teachers and caught the spelling on some of their signs, the stats above wouldn’t particularly surprise you. We spend more on education today and and get even less than in the past. What you have to remember is that at every level it is either run by or subsidized by government.
Now at every level, we’re seeing the results of that sort of intrusion, aren’t we? A dismal record of extraordinarily expensive non-achievement. And nothing is going to change or improve in that regard as long as government stays in charge and subsidizes the growing bubble with your money.
But you’ll never hear that said, will you?
You might have read one of the increasingly frequent stories (like this solid essay in n+1) about a student loan bubble. The basics:
- College is widely believed to be the ticket to success. Degree-holders are more likely to be employed and they make more income than non-holders.
- Many people tried to take refuge from a lousy job market by going to college, and the recession also pinched state budgets, forcing schools to raise tuition.
- Consequently, the amount of student loan debt has exploded toward $1 trillion, eclipsing even consumer credit. Since student loan debt is impossible to discharge even in bankruptcy, it was widely considered safe for lenders, and was securitized much in the same fashion as mortgages.
- As punishing as the rules for paying student loans are, those saddled with the debt have been unable to pay—many fresh graduates aren’t competitive candidates for still-scarce jobs. Only 40% of student loans are being actively repaid. So lenders are starting to pull out.
Over the longer term, the growth in college costs has far outpaced inflation for decades (“Since 1978, the price of tuition at US colleges has increased over 900 percent, 650 points above inflation”), while the added-income value of those degrees has not grown at nearly the same pace. The oft-quoted statistic that college graduates make $1 million more over a lifetime is misleading (it doesn’t take into account years of foregone income, for one thing), and there’s reason to suspect that much of the real discrepancy is due to correlation: students who have what it takes to pass through the filter of college admissions and stick it out are likely the kind of people who would make more money over their lifetimes anyway.
But is that enough to call it a bubble?
First, no one can really walk away from student loan debt like they can walk away from a mortgage, so many currently nonperforming loans can be expected to perform again when employment picks up.
Second, even if many people lose faith that a college degree is worth the price, tens of millions of kids have been groomed for college from a young age, and it’s true that employers still use college degrees as a significant signal of value.
That faith is unlikely to collapse overnight, and even if it did, it would take time for businesses to adjust. Employers would have to start signaling a greater interest in other factors that prospective employees could substitute for accredited colleges.
Even entry-level jobs have college-educated competition, so how is a young adult to invest his time and credit, other than jumping on the subsidized college bandwagon?
- Take a risk on going unemployed for a stretch?
- Work for free? (He’d still have to compete with college students.) Aside from internships, working for less than the minimum wage to establish one’s value as an employee is generally prohibited.
- Try to convince employers that alternative forms of study are as valuable as college experience?
These are luxuries many can’t afford. There are federal guarantees for college money, but the closest thing a young adult can get to a subsidy for entrepreneurship or job hunting is the welfare state safety net if he fails. The college path is blazed, even if it is the scenic route.
So for now, the lack of alternatives will help ensure there’s no big “pop” but a few marginal shifts:
- Young adults will try to attend cheaper schools, work through college, and take on less debt.
- Creditors will be less generous with student loans while repayment rates remain low.
- And colleges will get by on less money than they planned to have.
As much as we need greater competition in postsecondary education, and better alternatives for young adults to build and signal their value, no student loan “bubble” will do the job. It isn’t a bubble if the air has nowhere to escape.