College Costs: The Bubble About to Pop

Ran in to a pair of articles describing the ever-increasing costs of college as a type of bubble. It shares many of the same characteristics in terms of psychology on the part of those paying bubble prices, the use of debt, the inevitable buyers' remorse and subsequent shakeout, and so on.

Article from earlier this summer: Higher education's bubble is about to burst

College has gotten a lot more expensive. A recent Money magazine report notes: "After adjusting for financial aid, the amount families pay for college has skyrocketed 439 percent since 1982. ... Normal supply and demand can't begin to explain cost increases of this magnitude."

Consumers would balk, except for two things.

First -- as with the housing bubble -- cheap and readily available credit has let people borrow to finance education. They're willing to do so because of (1) consumer ignorance, as students (and, often, their parents) don't fully grasp just how harsh the impact of student loan payments will be after graduation; and (2) a belief that, whatever the cost, a college education is a necessary ticket to future prosperity.

Bubbles burst when there are no longer enough excessively optimistic and ignorant folks to fuel them. And there are signs that this is beginning to happen already.

Same author, recent article: Further thoughts on the higher education bubble

Well, advice number one - good for pretty much all bubbles, in fact - is this:  Don’t go into debt. In bubbles, people borrow heavily because they expect the value of what they’re borrowing against to increase. In a booming market, it makes sense to buy a house you can’t quite afford, because it will increase in value enough to make the debt seem trivial, or at least manageable - so long as the market continues to boom.

But there’s a catch. Once the boom is over, of course, all that debt is still there, but the return thereon is much diminished. And since the boom is based on expectations, things can go south with amazing speed, once those expectations start to shift.

Right now, people are still borrowing heavily to pay the steadily increasing tuitions levied by higher education. But that borrowing is based on the expectation that students will earn enough to pay off their loans with a portion of the extra income their educations generate. Once people doubt that, the bubble will burst.

So my advice to students faced with choosing colleges (and graduate schools, and law schools) this coming year is simple: Don’t go to colleges or schools that will require you to borrow a lot of money to attend. There’s a good chance you’ll find yourself deep in debt to no purpose. And maybe you should rethink college entirely.

And here's a nice chart showing college costs versus housing and CPI courtesy of Mark Perry:

People simply wouldn't pay what they pay for college if they actually had to save and earn the money. It's all about enabling bubbles with debt.

Combatting the high costs of college with... Loans?!?

One of the amazing things about college costs is that they go up, year after year, faster than inflation. I suspect this is due primarily to the ever-increasing ratio of administrators to teachers, and the pension and healthcare costs associated with all these non-student-facing folks, but that's neither here nor there. The fact is that college is becoming so expensive people cannot possibly save for it or work their way through it.

So, how does the government help? Pressure schools to reduce costs (like they do with some industries)? Encourage non-traditional education or alternatives to 4-year schools? Naw... They offer to loan students money. Lots and lots of it. Take a look at this chart:

Careful, that's not a ten-year chart, that's a two-year chart.

See this blog entry for some good information on this topic.

Colleges can keep raising prices, despite the recession, because the government keeps lending students more money to pay them.
According to a report cited by Anne Marie Chaker in the Wall Street Journal on Thursday, the government will lend students $75.1 billion to pay for college this year, up a spectacular 25 percent compared with last year.
But the extra credit isn’t benefiting students. It’s just inflating the price of their education, burying them under a bigger pile of debt despite stagnant wage growth and poorer employment prospects.

And remember, student loans are not discharged in a bankruptcy. Indentured servants had it better...