Thursday, September 16, 2010

The College Bubble Just Keeps Floating Around

by Jonathan Robe

There has been quite a bit of discussion recently about a ballooning "higher education bubble" (or, if you prefer, a "tuition bubble"), and some are warning that this bubble could soon collapse and burst, with serious economic consequences.

Of course, none of this discussion should surprise us. The threat of an imploding tuition bubble is, after all, something CCAP's Andrew Gillen warned about over 2 years ago and which Forbes, The New York Times, and The Chronicle of Higher Education all discussed to some degree soon after that CCAP report came out. CCAP also has recently discussed this issue in a YouTube video.

Back in June of this year, Glenn Reynolds wrote an excellent column in the Washington Examiner about the college bubble. Since then, Mark Perry mentioned it on his own blog and at the Enterprise Blog, and The Economist picked up the story. Michael Barone wrote another column on the subject for the Examiner and Matthew Shaffer added his thoughts at Phi Beta Cons, as did Paul Rahe over at and Peter Wood for the National Association of Scholars, as well as many others for various outlets.

It’s easy to see the growing concern about the tuition bubble: the burden of paying for college tuition has grown significantly over time. As this chart shows, from 1976-2008, average undergraduate tuition at 4-year year schools has gone from about 10% of median household income to nearly 25%. In other words, a typical household would have to pay a quarter of their annual income today to send one child to college. And that doesn’t even touch room and board costs or other living expenses.

At its most basic level, the tuition bubble reflects a widespread misallocation of resources and distortions of incentives. Resources which would otherwise be allocated by individuals and the public towards alternative uses are being devoted to higher education because individuals are told that it is in their best interest to obtain a college degree and the public is told that we need to push hard for increasing higher education in order for the U.S. economy to remain a world economic leader. However, there is now some evidence suggesting that many are beginning to see that higher education is not all that it has been cracked up to be.

I think part of the reason that the tuition bubble continues to persist (even during a particularly sluggish economy) is directly related to peculiar nature of higher education. First, demand for higher education can increase substantially during recessions as more people opt for going to school to either develop a new set of marketable skills or to wait out a poor job market. Since the supply of higher education is fairly static (or even shrinking slightly), this leads to increases in prices even during recessions. Furthermore, it has been very easy for students and families to rack up huge debts in an attempt to pay for college, and additional third-party payments (particularly from government agencies) tend to further blunt the effects of rapidly rising costs.

I suspect that, while the collapse of the tuition bubble is perhaps inevitable, it may not happen for a while, particularly because a college education is still widely and highly regarded. The collapse can also be temporarily postponed due to the pervasiveness of third party payments and the deep coffers of many of the highly respected schools. (According to the most recent NCES statistics from 2007, 63 institutions of higher education held 58% of all college and university endowment wealth in the U.S.; those same 63 schools received 44% of all federal research grants for colleges and universities.) If demand for college education falls fast (putting schools in a tight spot), it is quite possible that we will see a renewed push for massive higher ed bailouts, resulting in heavy federal intervention to prop up these schools despite growing concern about the government’s own long-term fiscal outlook. Throwing even more money at schools in this way ultimately won’t prevent the bubble from collapsing; it will only make the collapse more painful, and, as David French observes, will impact colleges disproportionately.

UPDATE: Don't forget the bubble talk that's going on also at EduBubble.

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