Popping the Higher Education Bubble
For some time now, with an eye on the level of student debt, Glenn Reynolds and others have been arguing that we have a higher education bubble on our hands no less serious than the real estate bubble that set off the Great Recession. Reynolds and the others who have taken up the theme are surely right. Federal subsidies in this sphere, like those provided via Fannie Mae and Freddie Mac in the other sphere, have distorted the price signals, encouraged young people to assume debt that they can never handle, and left colleges and universities free to spend as if there were no tomorrow. What cannot continue won’t.
“The biggest question about the bubble,” Peter Wood observes, “is what will pop it. The incredibly high prices colleges and universities are charging for undergraduate-degree programs combined with the rapidly decreasing cachet of the baccalaureate degree, high rates of underemployment among college graduates, and the insupportable levels of student-loan debt make a ‘market adjustment’ unavoidable.” He argues
that among the factors most likely to precipitate the crash is the disaffection of families earning over $100,000 a year. Many of these families have seen the value of their home equity fall but have, with hard effort, kept their noses above water during the recession. The income bracket of $100,000 to $250,000—called “HENRYs” in marketing parlance, for High Earners who are Not Rich Yet—are a key sector for colleges and universities. These are the folks who borrow to the hilt to afford overpriced college tuitions. The bracket above the HENRYs, those earning over $250,000, are another key to higher-education finance. There are only about two million such families, but they are the top-end consumers of expensive colleges. Their willingness to pay top dollar is what signals to the HENRYs that the tuitions must be worth it.
Wood suggests that “there is a growing collection of sharp objects—the jackknife of online education, the hatpin of tax increases, the razor of state budget cuts, and the dart of public disenchantment—that threaten the whole thing.” The sharpest of these objects, he contends, are likely to be the Obama tax increases – the tax on dividends and capital gains included in Obamacare and the expiring Bush tax cuts, in particular.
State taxes are going up because the states have to balance their budgets. Sales taxes are increasing, as in the various state decisions to force Amazon.com to collect sales taxes. But the key tax increases will come in the form of the increase on marginal rates that will follow the end of the Bush-era “tax cuts.” President Obama wants the rates to kick in for individuals earning $200,000 per year and families earning $250,000 per year.
There are roughly two million American families that are in that income bracket. They would face several new taxes: a three-percent increase to 36 percent on income up to $398,350, and a 39.6 percent rate on income beyond that; and new higher rates on capital gains and dividends. The capital gains tax will jump from 15 percent to 23.8 percent. These increases won’t much bother the superrich, but they will hit the prestige-minded affluent families who drive the bubble pretty hard. They will also pay, as of January 1, a .9 percent increase in the payroll tax to support Medicare—and as yet an unknown set of costs imposed by the new health-care system.
This is apt, Wood thinks, to have a huge impact.” In the ecology of higher education, these families are the sequoias. They provide the canopy and the shade in which much of higher education flourishes. That is, they pay those high tuitions for their children to attend the supposedly elite institutions, and in so doing they validate the principle for everyone else that those extraordinary high prices are legitimate. The family earning $100,000 a year and willing to scrape and borrow to pay tuition does so in confidence that it is buying something that is worth a lot. And much of that confidence arises from seeing that the (relatively) wealthy are willing to pay for it too. Taxing away the financial optimism and security of the affluent will very likely change the behavior of the not-so-affluent too. And those relatively wealthy folks are going to feel a lot less so by this time next year.”
So, irony of ironies, it will be Barack Obama and his assault on the investing class that brings down higher education. The man who wants damned near everyone to go to college so that they can become more like him will, if he is re-elected, be the fellow who stands in their way. As Margaret Thatcher once observed, the trouble with socialism is that sooner or later you run out of other people's money.
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Aug '12
Re: Popping the Higher Education Bubble
Part of the problem with the student debt issue is so many students are going to school and studying subjects that have little, or no, marketable value. Despite their higher learning, they fail to understand that if you spend 4 or 5 years being essentially unproductive, it is going to cost you.
May '10
Re: Popping the Higher Education Bubble
So can we have a win/win -- a Romney win and a higher-ed bubble burst? Hope so.
May '11
Re: Popping the Higher Education Bubble
As usual, I agree wholeheartedly with Dr. Rahe.
I have discussed the situation with my wife (and heatedly, with a few liberal family members), that the expiration of the Bush Tax Cuts will be the end of our daughters' college savings. It depends upon which on-line tax calculator or estimates as to how much in deductions we will have available, but the numbers will not work for us. We are not wealthy, so we operate at the margins, and marginal rate changes are a big deal for us. When the tax cuts expire, our remaining income will cover expenses and a small bit of personal savings. The Bush Tax Cuts have effectively been our daughters' savings fund, and we will not be able to save for college next year.
Given the deplorable state of higher education, maybe this is not a bad thing?
May '12
Re: Popping the Higher Education Bubble
Outstanding analysis Dr. Rahe. I hope if I am ever hospitalized recovering from a serious illness I can think/write with such clarity.
The divisive nature of gov't intervention will ultimately pop the bubble. As others point out the expected salaries relative to debt level makes it almost pointless for many to pursue higher education, but do so anyway. When the debt can't be re-paid and the bailout is passed on to those who didn't get the education the cultural shock will end this insanity and leave a mark on a generation or two.
Re: Popping the Higher Education Bubble
ConservativeFred: As usual, I agree wholeheartedly with Dr. Rahe.
I have discussed the situation with my wife (and heatedly, with a few liberal family members), that the expiration of the Bush Tax Cuts will be the end of our daughters' college savings. It depends upon which on-line tax calculator or estimates as to how much in deductions we will have available, but the numbers will not work for us. We are not wealthy, so we operate at the margins, and marginal rate changes are a big deal for us. When the tax cuts expire, our remaining income will cover expenses and a small bit of personal savings. The Bush Tax Cuts have effectively been our daughters' savings fund, and we will not be able to save for college next year.
Given the deplorable state of higher education, maybe this is not a bad thing? · 1 minute ago
Look into Hillsdale -- a better education for a lot less money.
Apr '12
Re: Popping the Higher Education Bubble
Amazing that parents do not value a college education through the lens of a discounted cash flow method. Pretty easy to do on Excel. Set up a string of cash flows into the future (yearly college costs and the expected income from resulting job) then discount those future cash flows to a present value. I'd use a discount rate of 10%, just to throw a dart at the discount dart board. If the present value is positive then it could be a good education investment. This approach might detour parents from financing a Philosophy degree from an Ivy League school and focus the student toward more lucrative career paths.
Jun '10
Re: Popping the Higher Education Bubble
My first semester's tuition at the University of Maryland back in 1975 ran something like $400. Of course, this was back in the day before colleges felt the need to hire diversity officers, speech code enforcers, and special administrative assistants to the Department of Flapdoodle and Humbug. The tuition bubble only encouraged the hiring of more useless bureaucrats without improving the quality of higher education. One could be forgiven for believing it was a deliberate attempt to spread the tentacles of Big Government into yet another American institution, and increase the number of pigs sucking on the government teat.
Dec '11
Re: Popping the Higher Education Bubble
Lord, save us from people who intend to study something practical.
Jun '11
Re: Popping the Higher Education Bubble
Leaving glossy CNC machine collateral and manuals around the house...hoping my son gets the hint.
Dec '11
Re: Popping the Higher Education Bubble
This is actually playing a factor in my decision making. I intend to goto an Online grad MBA program at a top name college this winter.
I am going to apply to UNC Chapel Hill and Indiana U. Both are tied at #19 as far as graduate business programs in America. UNC wants 91K flat rate for their program which I can take up to 3 years. IU wants 60K and its charged per the credit hour as is normal, they will also let me extend it up to 5 years and I am a better fit for their program. So, in light of the impending bubble I am inclined to go with IU as if tuition starts falling I can take advantage of that, and if it rises a bit, I am still well to hte better than if I had gone to UNC.
Jun '11
Re: Popping the Higher Education Bubble
@Guruforhire: I heartily endorse the Kelley School. Hired two grads and > 10 interns (MBA and MSIS). Super career services approach as well.
May '12
Re: Popping the Higher Education Bubble
I don't know if I will be able to say this properly & clearly but here goes ...
I would rather see the higher education "Pop" - enrollment in overpriced colleges & universities fall, especially in majors that don't yield a sufficient return (I love being as erudite as I am by that BA in English was a waste of money), because more people realize that the student loans are a mortgage without a house that you can short-sell (and at least get moving expenses) if the venture yields poor gains.
I would rather not see the bubble "Popped" .
"Popped" suggests an intervention by someone other than the people who have the greatest interest in seeing this tragic cycle come to an end - the students and their parents, who have to pay the bill.
The bubble was created by government intervening in the college market. Government intervening again to try and end what it has created in a way that does not hurt is inane.
It would be like trying to stop the home foreclosure crisis in a way that keeps the people who bought the houses (many did not, distrusting the terms).
Which is:
Impossible.
Insane.
Idiotic.
Nov '11
Re: Popping the Higher Education Bubble
One thing I worry about are the requirements through government and society to require more and more professions to have expensive and time-consuming college degrees. I don't have a college degree, but if I were enter my profession today I would be prohibited as I do not have a college degree. Educational-wise, anyone with half a brain, an 8th grade education, some minimal talent, and lots of practice and hard work could do my job, but that will not be allowed now. Such requirements cause certain professions to become quite Anglo and dynastic, passed down from father to son. I am always struck my Mark Steyn's observation that if you look out across America you will see that it was built by Americans with an 8th grade education, yet today we go to school twice as long and are incapable of building almost anything that our ancestors did.
May '10
Re: Popping the Higher Education Bubble
As I try to find a way to finance my kids education, I have come to the conclusion that I'm just screwed.
I had a child born 11 weeks premature. Even though I had insurance it was only 80%. That 20% I was liable for wiped my savings and required a 2nd mortgage.
Now, if I co-sign and my kids default, the government tells me they can take my Social Security.
If you suddenly never hear from me again, check the cardboard box under the Interstate bridge...
Edited on August 10, 2012 at 3:53pmJun '10
Re: Popping the Higher Education Bubble
AUSon is in grad school studying Economics. With a combination of us doing without stuff (along with few vacations) and his scholarships, we have not had to borrow any money to get him through school. It took years of planning on our part and achieving on his to do this. I don't know how anyone with younger children will be able to pull it off.
I always mourned the fact we did not have more children. I still do but am glad I don't have to figure out how to pay for more college.
Dec '11
Re: Popping the Higher Education Bubble
Cool. I have coworkers in indiana too. I have a career I am enjoying, there is unfortunately no such thing as an old engineer, so...... at some point I need to be an old E/S/M VP of something. I figure I have 37-38 more years of work ahead of me, so I need to have a plan to transition from technical to management.
I am also the demographic norm for their program, a person in a technical field with 12-14 years of experience and a military background.
I appreciate the endorsement.
Sep '10
Re: Popping the Higher Education Bubble
Guruforhire: This is actually playing a factor in my decision making. I intend to goto an Online grad MBA program at a top name college this winter.
I am going to apply to UNC Chapel Hill and Indiana U. Both are tied at #19 as far as graduate business programs in America. UNC wants 91K flat rate for their program which I can take up to 3 years. IU wants 60K and its charged per the credit hour as is normal, they will also let me extend it up to 5 years and I am a better fit for their program. · 47 minutes ago
Wow! That much per year for an online degree program -- no brick and mortar involved! No wonder so many institutions (including mine) are scrambling to develop their own online programs. This may be one way to get a softer landing after the bubble bursts.
Just fyi--not trying to change your decision--if you move to North Carolina for a year and establish residency, you can get the in-state tuition rate at Chapel Hill. At least, that's how it used to work when I was there.
Jul '12
Re: Popping the Higher Education Bubble
I recall that tuition for General College at the University of Minneosta was free in '64 when I graduated from HS although there was a student activity fee that had to be paid.
If I were just out of HS, I would probably enroll in a trade school and give myself an education in the humanities. After all, what is the alternative? Crushing debt, indoctrination and unemployment.
I was lucky. I went to a well-regarded, four-year, church-affiliated, residential, liberal arts college. The $1,900/year my grandfather paid covered everything including room and board. And the education was genuine.
May '12
Re: Popping the Higher Education Bubble
There are some people who were lucky enough to get their education when an education was an education and affordable.
Any thoughts on how on-line courses will change the industry?
NRO 's Phi Beta Cons has discussed this.
Dec '11
Re: Popping the Higher Education Bubble
I prefer online education. I am a man of my generation, and putting information in front of me in the medium I prefer makes my life better in every way.
Without online education I would never have been able to realistically pursue higher education, and because I travel 50-66% of the year, I certainly wouldnt be considering it now.
Besides collaborative technologies is my trade, online education and other video and media network/web based tools pays for my mortgage.