Higher Education: The Next Asset Bubble?

Education, Featured — By on April 19, 2011 6:35 am
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Academics point to parallels between the housing crisis and the current U.S. higher education system

NEW ORLEANS, La. – Academics and business leaders claim that the Student Aid and Fiscal Responsibility Act (SAFRA), passed last year, has not corrected the underlying problem within the student loan system. Specifically, lax lending standards and artificially low interest rates for government subsidized loans exacerbate tuition increases, while academic achievement has remained stagnant.

SAFRA eliminated federally subsidized loans, instead using all federal student loan funding for direct loans. But continued easy money policies and growing applications provide little incentive for the government or universities to keep college tuition in check.

Dr. Richard Vedder, professor of economics at Ohio University, says that higher education is in a “bubble situation”, indicated by “its price [rising] sharply, fueled by cheap federal loan and grant money while the return on investment has fallen.”

Peter Thiel, who anticipated the Dot-com Bubble of 2000, also claims that a higher education bubble has replaced the housing bubble.

“A true bubble is when something is over-valued and intensely believed. Education may be the only thing people still believe in [in the U.S.].”
According to The Economist, the cost of a private college has soared thirteen-fold over the past 40 years, while household incomes have grown at only half that rate. Also, college tuition has risen twice the rate of inflation and four times the rate of wage growth.

Dr. Dan D’Amico, professor of economics at Loyola University, says higher education is one of the main areas that has been absorbing inflation over the past several decades. However, “It doesn’t seem like it can go much farther – but that doesn’t mean the education bubble has to pop, it might just stagnate.”

A 2008 study from the Center for College Affordability and Productivity concluded that the cause of the housing collapse was artificially low interest rates, as a result of Federal Reserve policy and lax lending standards. Consequently, between 2000 and 2006 housing prices increased by 90 percent. The same driver exists for higher education, the study reported, and “both phenomena can be attributed to government policy, specifically the guarantees provided for student loans.”

Since the federal government guarantees student loans, when a student defaults the federal government pays the loan originator the balance of the loan plus interest. The government then hires a collections agency to recoup its money and adds a 25 percent collections fee on the defaulter, which benefits both the lender and the federal government. Universities also benefit, since they receive their tuition regardless of whether a student pays his debt or finishes his degree. Naturally, tuition prices increase in line with the amount that prospective students can borrow.

Student loan debt has now outpaced credit card debt, at $829 billion versus $826 billion. From 2004 to 2005 alone, student debt increased by 30 percent. And a majority of undergraduates owe $20,000 in student loans, up 108 percent in a decade, while 45 percent of college graduates from the class of 2009 earned less than $15,000 in 2010.

Concurrently, students are defaulting at an alarming rate: 25 percent of all government loans default, 30 percent of community college loans default, 40 percent of two-year college loans default, and for-profit schools have a 43 percent default rate.

Although student loans are defaulting faster than home loans at the height of the housing crisis, a 2005 decree from the Bush Administration stated that student loan debt could not be dissolved through bankruptcy proceedings. The only other scenario where this “no-escape” clause exists is debt from criminal acts and debt from fraud.

Dr. Michael Poliakoff, policy director for the American Council of Trustees and Alumni, agrees that the current system is flawed, and states that, “A better system would provide grants and loans to students based on both need and merit, with a sliding scale of support” corresponding to GPA, SAT/ACT, AP credit, and academic hours taken while in school.

He continues, “Similarly, high loan-default rates should be factors in eligibility to continue receiving Title IV funding: this would be a disincentive for institutions that accept students who are not college ready and ensure that they ultimately feel the consequences of loan defaults.”

Dr. Poliakoff also cited a Richard Arum and Josipa Roska study showing that many students show little signs of cognitive growth during their college careers. He also mentioned a second study from the Organization for Economic Co-Operation and Development showing that, per pupil, the U.S. spends twice the average of other industrialized nations on higher education.

Robert Ross is a researcher and social media strategist with the Pelican Institute for Public Policy. He can be contacted at rross@pelicaninstitute.org, and you can follow him on twitter.


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  • http://pulse.yahoo.com/_V2F7WUNRKOTXT5JKUI4QTJZC6U David

    Education is a huge bubble which is going to explode. College treasurers have been concerned for a few years now about the ‘tuition wall’, which is the point when tuition becomes so high that parents cannot or will not pay it. Federal financial aid policies have created a tuition bubble by giving more financial aid to students who attend more expensive colleges. If federal higher education spending is cut back this year (very likely), the collapse may begin.

    I graduated from a private liberal arts college in 1999, at which time the billed costs (tuition, fees, room and board) were $29,000, and 75% of students received financial aid. Now, the school costs $52k, and 97% of students there receive financial aid. If federal financial aid is reduced, students will drop out of these overpriced colleges, and many private and proprietary schools, including my alma mater, will likely go under.

    Much like the housing collapse, many people will say that it can’t happen. Oh, but it will! I think for the average American, the education collapse will be a good thing, as college prices will finally drop just as housing prices have dropped. Furthermore, I think it lead to more government funding of public colleges, and more government oversight of what goes on at colleges. Both reforms are very necessary.

    • http://eonlinebusinessdegree.org Business Graduate

      David,

      I totally agree with you as I’ve been kind of calculating college expenses and how they been increasing, at exponential level here lately. And I’m pretty much just like you say with the housing decline from the crazy astronomical prices they used to have we should also see with education.

      It’s interesting how they’ll take something good like education and turn it into a monopoly money game.

      Great post and yes reforms are very necessary.

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  • Pingback: New study shows 45% of college graduates earn less than $15,000/year, while tuition costs have risen 2x the rate of inflation, and 4x the rate of wage growth « Economics Info

  • http://twitter.com/BillDyszel Bill Dyszel

    An inaccurate statement: “45 percent of college graduates earn less than $15,000.”

    That should read “45 percent of college graduates in the class of 2009 earned less than $15,000 in the year 2010.”

    Not good news, to be sure, but not as drastically bad as stated.

    • http://twitter.com/RealRobRoss Robert Ross

      Mr. Dyszel,

      You are correct, and thank you for raising your concern. We have made the adjustment to better clarify the statistic. Additionally, here is the full reference:

      The Richard Arum and Josipa Roska study, cited in a New York Times interview, was for students who graduated in the 2009. “Since graduating, 60 percent have full-time jobs, nearly 36 percent have moved back home to live with either their parents or relatives and nearly one-tenth are carrying more than $60,000 worth of debt. Of those who have jobs, more than two-thirds were making less than $35,000 a year and 45 percent were earning $15,000 or less.”

      Robert Ross

  • http://pulse.yahoo.com/_MZ5AN5PGSPYNC52HCPUM5IITIM John

    Schools, Colleges and Universities have been taking both students and taxpayers for “a ride”. 40% of the students accepted by Colleges are not equipped to do College Level work.

    The Higher Education curricula have been dumbed down with socio-baloney majors like A, B, and C Studies (useless nonsense). Graduates of our Colleges and Universities with the exception of those equipped to handle real Academic Material learn ABSOLUTELY NOTHING or ALMOST NOTHING in two or four years. And they end up in debt that they can’t pay off -EVER.

    The bubble, OF COURSE, is about to burst! A majority of last year’s Harvard graduating class STILL don’t have jobs. Law schools have been lieing to their students for years about the great future in the legal profession. Time to take a breath and regroup. Higher education is going NOWHERE. It’s Bernie Madoff in a cap and gown.

  • http://profiles.google.com/russ.armstrong O. R. Armstrong

    The ruling party provides low interest loans to low-income people and students, both of whom are bad credit risks, in order to purchase their votes. When those borrowers, as expected, default, the bill is paid by the other half of the population that pays taxes. It worked in 2008.

    • http://www.facebook.com/profile.php?id=100002493528004 Sky Somethin

      What you seem to ignore is the fact that they can’t escape the loan once they default, so instead now the government siphons money off them til the end of time. This sucks money out of everybody, but as always the money funnels itself back to the college, who then give the people who supply the college with their supplies most of it, often large corporations. This then goes to it’s owners, only further fueling the split between the richest fraction of a percent and everyone else.

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  • Anonymous

    You could not bankrupt out of student loans well before the 2005 law. Your statement is misleading.

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  • Anonymous

    My heart goes out to all those sociology professors.

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  • http://profiles.google.com/edstittle Ed Stittle

    This article makes sense. Education is a growing bubble that will soon burst. Especially as most loans are to students who has poor or non existent credit histories. I came this site by searching google for help with my essay for Finance, so if anyone else has done the same http://www.assetbubble.net provides some useful info.

  • JST Books

    now a days for higher studies you have to spend a lots of money . so you can take loans for higher studies. and make your education safe secured loan

  • http://www.studentloaninfo.org/blog/ student loan

    Correct statement “45 percent of college graduates earn less than $15,000″

  • brad jack

    Nowadays education are very important for any one.The Law schools have been lieing to their students for years about the great future. So it can provides a loan for the education.
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    In my opinion, higher education, to become the biggest problem, the next generation in this blog post, you have to discuss some very important educational center and a point about education loans.

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    Now a days higher education is the most important for everyone. The system of imparting higher education should be such that after
    completing education in college, the youth should not be dependent
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  • Alex 03

    You are taking student loan for your children education. Join your children for higher education courses to make a able for high post employer. You can earn more and more money and can clear your debit.   further education

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  • lumbse smith

    To get best and higher education is going in competition. To get best knowledge students are going in tuitions and leaving their school classroom. Today this education becomes a bigger bubble and best profitable business for all. Higher people are demanding high fees and student are paying it but think what about the student who didn’t have that much of money?
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    Obviously, that young people signed up for web based qualification software don’t need if you can on the school education loan degree.

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    That i thoroughly consider everyone mainly because We sorts of assessing university or college payments together with that they happen to be rising, for rapid point at this point nowadays. Together with I will be practically just like you mention when using the construction refuse within the wild astronomical price tags these useful to own we must at the same time look at utilizing learning.

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    Your taking over bash supplies preferential financial products for you to low-income men and women along with individuals, the two involving to whom are generally undesirable credit history challenges, so as to invest in his or her ballots. While those people individuals, as you expected, default, your invoice can be paid for with the other half in the inhabitants that will makes sense income taxes. The idea labored throughout 2008.

  • http://www.senfordhighschool.com/ High School Diploma

    You could not bankrupt out of student loans well before the 2005 law. Your statement is misleading.

  • http://www.trident.edu/ Trident Online University

    I do think that the price of education is reaching a tipping point and it may potentially burst at some point, similar to what happened in the real estate market. It’s important that a higher education is accessible to all.