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.