Home > Economics > Higher education is a bubble that needs to burst

Higher education is a bubble that needs to burst

College is overrated

This Obama quote about college irritates me a lot:

After graduating high school, all Americans should be prepared to attend at least one year of job training or higher education to better equip our workforce for the 21st century economy. We will continue to make higher education more affordable by expanding Pell Grants and initiating new tax credits to make sure any young person who works hard and desires a college education can access it.

This is not unique to Obama, in fact every presidential candidate mentioned how they are going to expand the federal loans for college or something to that effect.  Rather this overarching obsession over college is infuriating. Many colleges promote the fact that “people with college degrees will make a million more dollars in their lifetime than those without”. I won’t breakdown why that implied causality is so silly, but lets move on.

College bubble ~ Housing Bubble

Remember in the early 2000’s when everyone was saying “invest in housing, its a sure bet!” Switch housing to college and you’ll realize how eerily similar they can be. Or when you remember how the government says it needs to, “make housing affordable” you realize we are on the same path to financial instability when we decide to make “college affordable”

I would argue there are huge parallels to our recent financial crisis

1.) You apply and pay to go to college/trade school etc. (You invest tens of thousands in cash on the latest and sexiest financial instrument)
2.) Well except, you don’t have the money to pay for said school, so you ask for a loan (Not actually having tens of thousands, you use leverage to pay for said instrument)
3.) Federal loan approves, informing you that your education will empower you with a job to service this debt later in life. (Loans approved on the basis of “housing prices rising”/”growing economy”)
4.) Colleges collect their share of the dough (Banks collect their fees for guiding you through this nonsense)
5.) You get hit with thousands of dollars in debt, the real world hits you with a paltry job, government promises of increased returns is a mirage (We all know what happened here, housing prices didn’t go up, the economy didn’t grow, BDK got laid off)

College has terrible returns

Notice how the money trickles down to everyone, well except to the people it needs to trickle down to. Much like housing is subsidized (mortgage interest is a tax write-off, home-buying tax credits etc.), so is college (federal loans, tax-free debt issuance, non-profit status etc.).Corporations, I mean colleges, will respond to incentives, and when the government says we will pay you money if you teach our kids something, people will do it; just not well….

But the problem has deeper effects than hurt feelings: the 54% graduation rate means that around 46% of all money used to finance college tuition results in no degree. Which means that financially speaking, the spectacularly high dropout rate boils down to a spectacularly bad investment.

Here’s another problem, when the government gives an unequivocal and categorical stamp of approval for “higher education” its almost like rating agencies dumping a “AAA” rating on terrible bonds. We all assumed it was a sure thing when Moody’s told us that, when its got the backing from the damn Federal government of course we will label it a worthy investment. Much like the label of AAA can make bonds are more pricey (in the form of a lower yield), this promotion causes colleges to be more pricey (in the form of higher tuition). Couple that with the fact that there is a lot of easy money in the form of federal loans in this sector, this demand can also artificially drive up the price of college. Kind of like how housing prices rose when we all bought them with our own glut of low-interest money. Much like the financial crisis people are finding out they aren’t really getting a super-safe investment, but one that carries an obscene amount of risk with a shaky return.

If you are reading this, you are probably not a representative of the population as a whole

Now you say, BDK you went to college, and so did I and we are doing pretty damn well. No? Well, true but I would also argue this is not as important as you think for many reasons.

1. ) Much of my college experience was largely irrelevant to my financial success (although I am unemployed). I moped around a lot; with most of my days spent farting and playing video games in my dorm. When difficult classes came I hunkered down and learned how to work hard, I gamed the system and dropped or Pass/Failed the class. For this, I earned a respectable GPA. Many of my peers, spent more time damaging their livers in a week than they did actually studying. The bank that I worked at (supposed to be a nice job) proudly lauded the fact that people of so many different majors were able to succeed. While that diversity might be nice, I think the bigger story might be most of the stuff you learned in college was not all that relevant. You take into account grade-inflation, soft degrees and

2.) I got a scholarship that immensely reduced what I had to pay for school. Paying interest on over hundred thousand dollars versus paying it out on a few ten thousand dollars can be a huge difference. This becomes more pronounced when you go to a school and end up with a job you could have had right out of high school.

3,) Some of you doctors and engineers might say “WTF, I worked my butt off!”. College actually does help certain people; especially people who are training for a position in high demand.  Problem is, objectively not everyone is smart enough to be a doctor or an engineer. Most of the people reading this blog probably should have gone to college, that’s not the argument I am debating. It’s just that the majority of people aren’t preternaturally gifted to get 30+ MCAT scores or understand advance physics principles. I am not saying we should say screw ’em, but I don’t think miring them in debt to feel good about ourselves is the right solution either. Reality tells us that a lot of people are wholly unprepared for college. Many students are unable to handle the workload of college. But our insistence on universal higher education is terrible for somebody who can barely pass high-school material. Much like “affordable housing credits” Freddie and Fannie subsidies brought about a higher default rate, freely disbursing loans to anyone regardless of their aptitude will only increase dropout rates. Thus I am not talking about you specifically, but those out there who got totally screwed by colleges. Look I think most of my friends made out well after college (not implying causation here), perhaps even a majority of students can definitely evaluate the costs and benefits and say the same. But there remains a large chunk of people who are getting totally f’d by this system we promote so heavily and insist on everyone to join.

4.) College serves for most others looking for jobs largely as a signal to employers. As mentioned before most majors don’t learn direct applicable skills. Now I am not sure this is worth the opportunity cost in 4 years and 200k. While certainly college is a great experience to meet friends and explore new horizons, it certainly isn’t a necessary condition for either. I almost think by indirectly driving up the price of college we are creating vicious cycle in which job-givers are raising the bar for prospective employees unnecessarily (Prisoner’s Dilemma?). Not sure why sustained work experience in a low-wage position couldn’t serve a similar and less expensive signal. If you are worried about smarts, how about a job-related test and interview?

Verdict?

I don’t think nobody should go to college, its just that we have vastly overrated its usefulness. While telling someone to work in a vocation is not sexy it is more realistic solution for many. As for college itself, we shouldn’t be passing out these loans as freely as we are. Perhaps the government could see a student’s performance in school before it dishes our some dough to a student to continue his studies. As I said before, by making these loans so easily available, we are also driving the price of the college up. Big picture, whenever the government places its hands on stuff there are a ton of unintended consequences. I wonder if the default rates on student loans is gonna increase to the point where it becomes nationally painful, especially amidst our economic slowdown.

What do you do in any Ponzi scheme when money starts running low? INVITE MORE PEOPLE!!! What do you do in any Ponzi scheme when money starts running low? INVITE MORE PEOPLE!!!
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  1. JJ
    March 22, 2010 at 10:20 am

    Good article. I agree on the whole. But my argument would be that college is similar to business school. You drop the money(IF YOU HAVE IT) for the people/connections/friends that you meet. Those, in essence, lead to the jobs/opportunities that follow beyond college, rather than anything you know or know how to do. 😛

  2. March 30, 2010 at 4:36 pm

    I couldn’t agree more. Most people are paying down debts they’ll never catch up with while occupying a job that wont help them get there. All because they felt they needed to go to school to fulfill some cookie cutter bullshit lifestyle. I wrote something kind of similar on this

    http://retortnation.com/2010/03/30/to-hell-with-college/

  3. Jason
    June 17, 2010 at 4:40 pm

    I agree with most of your points; however, you didn’t follow througn on this thought: “If you are worried about smarts, how about a job-related test and interview?”

    In most cases, a job-related test is legal suicide due to Federal law interacting with Supreme Court cases from the last fourty years. Any employer that makes employment decisions based on a test that has a “disproportionate impact” on any “protected classes” faces a massive litigation risk.

    What you propose is what would be ideal–a test that accurately predicts success by the prospect in the vacant position. If education provides value, than educated prospects will score better. If it doesn’t, than people without an education will be able to score well and get a job. Such a test would be a much more efficient signal to employers because it would be able to be much more detailed than the limited information passed on by third-parties that one finds on a typical resume and thus facilitate a better analysis.

    However, yet again, the government has imposed a regulatory burden that makes the economy function much more inefficiently than it would otherwise. If you start to add up some of these costs, you will find that very likely LARGE percentage of our GDP is wasted on less than optimal allocation of resources like this education bubble. If a smart person could, instead of wasting four years of earning power and four years of tution could intead study up on their own, go takes some tests, and get a job that way, everyone would be better off due to this increased economic output by the employee and due to the employee better allocating their own wealth to whatever they choose.

    It’s very easy to see, if one analyzes the history of government regulation over the past century or so to see that much of the “progress” that we’ve made is simply running in the hamster-wheel of government regulation.

    The most ironic thing about this situation is if the socialists, progressives, and nannies had never had their way this country over the past century than our country would be much wealthier and the welfare of even the poorest would be much greater than it is today; instead, they have achieved the opposite of their stated desires. Of course, though, if you’re a cynic (or right, depending on the evidence) than one may argue that they have achieved their real desire, which is not increasing the general wealfare but is instead one thing above all others: power.

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