Friday, June 11, 2010



Is there a higher education bubble?

I've read several commentaries recently asserting that we're in one. The bill of particulars usually includes some mix of the following:

- Enrollments in colleges and universities are the highest they've ever been.
- Tuition is the highest it has ever been, even after inflation, and it's increasing much faster than inflation.
- In the Great Recession, many new graduates are simply unable to pay back their impressively high student loans.
- Private lenders rushed into the student loan market a few years ago, covering the gap between what the government would lend and what colleges charged. As with the housing market, you can't multiply leverage forever.
- The payoff to college degrees declines as degrees become more commonplace. Some people respond to that by going for ever-higher levels of degrees, in a sort of credentialist arms race.

Rebuttals usually include some of the following:

- Recessions don't last forever. A temporary blip does not a long-term change make.
- The net payoff, in salary terms, for a college degree is still strongly positive.
- Some of the tuition increases are the result of public disinvestment (or "cost-shifting"), rather than out-of-control spending.
- In an information-based economy, some increased demand for education is rational.

There's merit in both sets of arguments, but they strike me as answering the wrong question. For what it's worth, I'd suggest that the error is in treating "higher education" as if it's one thing. It's actually a series of different things, some sustainable and some not.

At a really basic level, I'd divide degree-granting colleges into four groups: high-cost high-prestige, high-cost low-prestige, low-cost high-prestige, and low-cost low-prestige. The high-cost high-prestige places -- think Harvard and Yale -- will be fine. They have more money than God, and they sell exclusivity.

Low-cost high-prestige places -- the public Ivies, say -- will be fine if they can keep up their perceived quality. There's always a market for a good deal.

Low-cost low-prestige places -- community colleges leap to mind -- will be fine if they can shift the ground of conversation from prestige to outcomes. A community college that does a good job at the first two years of a degree (or a two-year occupational degree) is a great deal; students who graduate from locally-respected programs in Nursing or criminal justice can find good jobs (in normal times) at minimal cost. And if the cc does general education well, it can become the first half of a low-cost high-prestige program. For a kid who's basically talented but still unfocused, doing the first two years at a cc before transferring to someplace good can make a world of sense, and can greatly reduce student loan burdens. (Conversely, a community college that does a lousy job at the first two years has no compelling reason to exist.)

But then there's that pesky high-cost low-prestige sector. Not to put too fine a point on it, but these places are in very deep trouble. This is where the 'bubble' argument has real merit.

As a parent, I can see the argument for spending 50 grand a year to go to Princeton. I don't see the argument to spend 50 grand a year on St. Nobody College, or on Proprietary U.

The rising number of 18-year-olds, years of cheap credit, and then the Great Recession, combined to temporarily mask some of the issues in that sector. But as the recession recedes and the number of high school grads starts to drop again, these colleges will be exposed.

In the long run, this is probably a good thing. The model of high-cost low-return doesn't make a hell of a lot of sense, and this sector will be less able to weather storms than others. The tuition-driven non-profits don't have much cushion against bad times, and watering down their quality simply leaves them even less able to compete with the public sector. The for-profits are built on growth to an even greater degree than traditional higher ed is. When they're turning massive profits, they can grow at an astonishing rate. But when the profits slip, there's nothing left to hold them up. I saw this in my own time at Proprietary U in the late 90's and early 00's. In the late 90's, it grew at a breathtaking rate; in the early 2000's, it took a series of body blows. Since the for-profits are typically more specialized and run on a quarterly-return basis, they're subject to vertiginous swings of fortune. (Of course, one could always try to go upscale with a for-profit. I'm still waiting for this to be done right.) They're quick to build, and quick to dismantle. You heard it here first.

In the meantime, though, things could get ugly. Like the lions in winter I mentioned yesterday, these institutions won't go quietly into the good night. They'll go down swinging. And when they start swinging wildly, they'll do real damage.

In the best case, they'll latch onto other institutions to survive. I wouldn't be at all surprised to see more private colleges form two-plus-two partnerships with local community colleges in attempts to tap into the pipeline of cc grads. This is constructive, as far as it goes, and I'm happy to help it happen.

On the downside, though, I expect to see increasing liberties taken in the name of economic survival. Standards will be lowered, financial aid guidelines will be stretched, faculties will be adjuncted-out, students will be overtly catered to and covertly fleeced. All of which is terrible for the students, of course, but which will also exert downward pressure on competing institutions. It won't last forever -- death spirals don't -- but the process won't be pretty.

If we're smart, we could reduce the future damage by putting some solid controls on the current situation. The for-profits will do pretty much whatever they can get away with; if you want to limit the possible damage they could inflict, you need to improve (and enforce!) regulation. Among the nonprofits, moving away from unsustainable conceits like tenure and the credit hour and towards meaningful measures of actual learning is obviously necessary over the long term. There, too, I'd expect the process to be ugly, but necessity is a mother.

Or we could curse the sun for rising, hold our collective breath until we turn blue, and wait for the pop. Maybe this time will be different!

That's where bubbles come from.

Some good points, but just as you refuse to examine the economics behind your assertion about tenure at the CC level, your recommendation for more regulation is vague.

What sort of regulation do you have in mind? Do you think they can be applied specifically to for-profit universities? I personally suspect that the wide accreditation door they walk through was opened by the weakest of the non-profit public schools. Or are you arguing for something like the cost-benefit accounting that has been discussed, regulations that would be a function of tuition rates?

And who would develop those "meaningful measures" in your ideal college, the Dean or an adjunct?

PS - I am almost 100% sure that our CC would not need to charge any tuition if we got as much per freshman student taking English or Math from one of our tenured faculty as Flagship U gets for teaching English or Math with (mostly) adjuncts.
The strange thing about the $50k tuition at St. Nobody U. is that many (ok, a few) U's are on record as saying that that there is some correlation between sticker price and application volume. Strangely, the general public seems to think that the more you charge, the more exclusive you are, no matter what.

Now, maybe I missed something, but an argument supporting the "bubble" theory were the number of graduates simply unable to pay back their student loans. The following commentary, however, focused more on *parents* and not the student. Frankly, I don't care if St. Nobody U wants $50k/yr and some parent has that money in the bank. Supply and demand, fine. Parents who decide that's how they want to spend their hard earned money, fine.

The real bubble-related issue is the substantial amounts of student loan debt that students are incurring, prestige or no prestige. The economics of paying with borrowed cash are totally different than the economics of earned cash. We've all seen this.

Additionally, I'm not even sure that the great recession is to blame for students unable to pay their loans. If a student doesn't have a job, he's not going to pay his loans, recession or no recession. If we're looking only at students who have jobs, well, if tuition & student loan debt are are increasing at rates faster than inflation, then, well, that has nothing to do with the great recession. One point that DD makes to support my theory is the one about private lenders -- they rushed into the market a few years ago. IOW, students were taking on more debt prior to the great recession, but now we're going to argue that their inability to pay them back is "temporary"? I think not. In addition, we also have the commentary on how the BA/BS is the new HS Diploma, which drives down the value, and associated wages, of said degree. And this is a temporary phenomenon caused by the great recession? I think not.

High student loan debt is a problem, period. It's not a temporary side effect of the great recession, nor is it a problem strictly for low value high dollar schools.
I'll comment on the comment about students having ridiculous loans from their $50k education at St. Nobody U. I teach at a for-profit, and some of my students don't understand student loans. They think that if they have a 3% APR on their loans, they'll only be charged 3% interest on the life of the loan (as opposed to per year). They can't even conceive of interest that's compounded monthly. They're in for a huge shock in a few years!
The big question is whether or not we're going to continue our class warfare strategy of making HS degrees more and more useless.
You can't offer your college degree to someone else who thinks they can resell it to a third party using the next buyer's hopes of reselling even higher. No infinitely resellable asset, no asset bubble.
DD's referring inartfully to a boom/bust cycle, rather than a bubble. But your point is well taken., but question from a community college faculty member with no alternate source of insight!
I am a tenured and respected faculty member at a community college. I was reviewed by my Dean three months ago and have yet to see my written performance review. I e-mailed her twice last week, requesting respectfully that I be advised of the status of my review. It has now been a week since my first inquiry and she has not yet responded to my e-mails. Should I be worried about my position?

While completely unrelated to your topic, your thoughts on this subject would be quite helpful. Thank you.
"A trend will always continue . . . until it can't anymore . . ."

We will likely be moving to a model where interest accrues from the moment the loan is born (unsubsidized loans). The credit bubble temporarily hid the fact that the USA's postsec educ world (number of students participating in postsec educ, times sticker price, minus personal cash contributions to price from students/families) has grown way beyond the ability of the private credit markets to fund. What about direct loan, you say? Doesn't direct lending mean we don't have to worry about liquidity issues? Yes and no. The govt still has to budget for the costs and revenues years ahead of time, like a bank. And subsidized loans (where the student's interest is completely waived -- does not accrued -- during certain phases of the life of the loan) still are costly to the taxpayer, while unsubsidized loans are a significant moneymaker.

Unless the forces that caused the sticker price growth for postsec institutions during the past decades ended today, there will be pressure periodically in the future to increase annual and lifetime federal student loan borrowing limits. And those increases, if approved by Congress, will all be in unsubsidized loans. Keep in mind that the first year ("freshman") subsidized loan limit for dependent students didn't increase for three decades. Eventually we will get to the point where subsidized loans are such a small piece of the pie that they will be discontinued as future funding vehicles.

The larger issues is that access and choice issues will become less important than persistence, completion and graduation rates. There is tremendous waste in the process where the governments are subsidizing the 50 percent noncompletion rate. 50 percent of first-year students' pell grants could be argued to consist of "wasted" national resources. And states spend a lot to subsidize the costs of those students time in school. There will be pressure either (1) to spend a ton more money preventing attrition, (2) put in state and federal performance measures to incent improvements without spending any more money, or (3) we will transition to the non-USA model, where only a small, elite group can pursue postsec ed. Most likely, a totally-private model will develop on the side, where individuals and employers self-fund the training needed. (The model where so-called private career colleges get ninety percent of their funding from the U.S. Treasury is not a private sector model; at most it is a voucher model.)
Does anyone else remember back in the Dark Ages of the 1980s when the newly emerging hip stand-up comics joked about (not) paying their student loans?

Does anyone else remember back then when lots of people (in my region, it was always doctors) joked about not paying their loans back (despite a more-than-modest income)?

Anyone else remember when student loans could be discharged in bankruptcy?

Anyone else remember when scholarships paid for more than just a small percentage of what is actually needed to live on while in school?


As Anonymous above notes, if the free money that seems to be so easily disseminated to frosh nowadays from the government to students who have a 50% chance to flunk out, I am left wondering where this working class kid's government grants were in 1988.

Thanks to some hellish experiences in grad school, I now have an embarrassing amount of debt I will NEVER be able to repay...and it would have been a lot less if all that free-flowing money people keep mentioning is now going to flunkers had slid my way back in the day when I was an excellent student in undergrad at my local CC and local SLAC.
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