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Thursday, March 8, 2012

The Higher-Education Bubble

I've been meaning to post on this topic for a while and, as luck would have it, a number of articles have come out recently to make it easier on me to explain.

Simply put, college tuition costs are out of control. The result of which is putting a generation of students under a mountain of debt. Many students exit college with a debt in excess of $100,000 (equal to a home mortgage).

A recent article in the Washington Post (citing a Federal Reserve study) puts this in perspective by stating that student loan debt has surpassed both auto loan and credit card debt.
Student loan debt stands at $870 billion nationally, surpassing the nation’s outstanding balance on auto loans ($730 billion) and credit cards ($693 billion), according to Grading Student Loans, which is not a formal report so much as a scholarly blog post published by the economists at the New York Fed.

It comes at a time of heightened awareness of the student debt crunch. Last fall, President Obama took executive action to cap monthly loan payments at 10 percent of discretionary income, down from 15 percent previously. Obama has challenged colleges to help students manage their debt by keeping costs down.

One-third of the national student-loan balance is held by people ages 30 to 39, and another third by people older than that, signifying that only a small share of college graduates manage to retire their loan debt while still in their 20s.

I will present the report’s other key findings in bullet form, to make for easy reading:

• Student loan debt is rising at a time when other debt is flat or even declining. From the second to the third quarter of 2011, the nation’s loan balance grew 2.1 percent, from $852 billion to $870 billion.

• Fifteen percent of all Americans with enough of an economic pulse to have credit reports have outstanding student-loan debt. Two-fifths of people under 30 have loan debt, and 25 percent of those between 30 and 39.

• $85 billion in student loan debt is “past due,” and of that total, three-quarters is owed by people over 30. More than five million borrowers have past-due student loans.
(Washington Post via The Consumerist)

This chart from the New York Times further illustrates the rise of (state school) tuition costs and compares it to the costs of consumer items, gasoline, and even the dreaded medical industry:

(NYTimes via Neatorama)

However, the author foolishly attributes the rising costs to the reduction of federal and state aid. (This misguided blunder could be due to the fact that she is colleagues with the vaunted Keynesian economist, Paul Krugman). If this were true, why did costs continue to rise so sharply throughout the prosperous mid-nineties? Surely the publicly funded budgets of these institutions hasn't been in a free fall since 1985.

There is a reason for all of this, and it has to do with a little something called "supply and demand".


Yes, the most basic of economic concepts still holds true for something as large and complicated as college tuition costs. The capacity (supply) of colleges has not kept pace with the influx of students (demand for college). Much like the notorious housing bubble, we're in a higher-education bubble. The federal government has made student loans too easy to obtain. As was done in the housing market, the government has created a system that promotes debt and enables people to spend well past their means.

The effects of the housing bubble collapse were the result of that little bump in home prices (see how it's reverting back to coincide with the Consumer Price Index [but still artificially inflated by government intervention]?). I can't even fathom the repercussions once the tuition bubble bursts.

All this is not to say, "poor people shouldn't go to college". In fact, the socioeconomic gap appears to be widening exponentially is the topic of a Charles Murray op-ed in the New York Times.

Among his points:
• "...drop the SAT in college admissions decisions. The test has become a symbol of new-upper-class privilege, as people assume (albeit wrongly) that high scores are purchased through the resources of private schools and expensive test preparation programs."

• "replace ethnic affirmative action with socioeconomic affirmative action. This is a no-brainer. It is absurd, in 2012, to give the son of a black lawyer an advantage in college admissions but not do the same for the son of a white plumber."

• "Finally, we should prick the B.A. bubble. The bachelor’s degree has become a driver of class divisions at the same moment in history when it has become educationally meaningless. We don’t need legislation to fix this problem, just an energetic public interest law firm that challenges the constitutionality of the degree as a job requirement.(NYTimes thanks to Kuong)

The highlighted section of the last bullet-point is important. The perceived value of attending college is raising costs. If prices weren't so inflated, more students would be able to attend college and not come out of it all with massive debts.

Additionally, the socially fabricated necessity to put every person in college is further driving costs up. Not everyone needs to go to college and not everyone is suited to go to college. While I do believe closing the gap in education will lead to closing the socioeconomic gap, tiered economic structure is the nature of a capitalistic society.

The effects of belittling of other career paths, such as trade schools, over the past couple decades can be seen clearly in two examples:

One: As was just reported in tonight's edition of NBC's 'Nightly News' and previously reported on CNN, there is a shortage of skilled manufacturing workers. Not jobs, workers.

While it may be true that many workers may have abandoned the manufacturing and machining trades as jobs have gone overseas; this, in part, can be attributed to the fact that these trades have been undervalued as more people view higher education as a necessity to get a job.

Two: Despite the fact that a college grad may earn more over their lives, they are actually making less than they did a decade ago.

Per an Economic Policy Institute study, via The Consumerist:
"To the graduating class of 2012: All that money you or your parents have spent or borrowed to pay your tuition for the past few years? It's not getting the same return on investment it did a decade ago.

According to the folks at the Economic Policy Institute, the average inflation-adjusted wage for male college graduates aged 23 to 29 was $21.68/hour. That's an 11% over decline over the last ten years. And while wages for females in the same age and education group are only down 7.6% during that same time period, women still make significantly less on average ($18.80/hour).
" (The Consumerist)
And illustrated in the the follow graph:
(via Zero Hedge thanks to maezl)

This decline of salaries, coupled with rapidly increasing school costs, further exacerbates the debt problem.

And with the government showing no signs of actually cutting spending (don't get me started on entitlement programs...), it seems the only thing certain for college graduates is debt and more debt.

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