Bubble

All of us watched as the housing market heated up from 2003 to 2006. People speculated, flipped houses and bragged about their obscene profits, got low cost loans that they were unqualified to pay back, and finally, the looked on in horror as the housing bubble burst. The result in 2010 is severe housing price deflation but still no buyers, and the worst real estate market in history.

Glen Reynolds writes about another “bubble” that has been expanding for the past 30-plus years and may soon burst. He writes:

It's a story of an industry that may sound familiar.

The buyers think what they're buying will appreciate in value, making them rich in the future. The product grows more and more elaborate, and more and more expensive, but the expense is offset by cheap credit provided by sellers eager to encourage buyers to buy.

Buyers see that everyone else is taking on mounds of debt, and so are more comfortable when they do so themselves; besides, for a generation, the value of what they're buying has gone up steadily. What could go wrong? Everything continues smoothly until, at some point, it doesn't.

Reynolds is talking about the “higher education bubble.” Quoting Money magazine, he notes that "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."

Young people often leave college with six figure debt and a degree that has increasingly less value in a contracting job market. The question is, when will consumers begin to realize this and push back? When will parents (who sometimes pay) and students (who incur the debt) begin to ask whether $30 – 40,000 yearly costs can be justified economically? When will alternative forms of skill-based education begin to become a commonly chosen option. When will a paradigm that is tied to 18th and 19th century learning approaches be replaced with something cheaper, more convenient, and better?

It’s ironic that many “elite” universities tend to deemphasize skills based learning (e.g., engineering, nursing, accounting, pharmacy) that actually add value to society and instead emphasize softer liberal arts learning that although worthwhile, adds little real value. And yet, these elite schools often cost considerably more than those who emphasize more pragmatic education. They are, in essence the designer handbags of the education establishment—hip and attractive and worn by all the “right” people, but grossly overpriced and actually little better than a broad spectrum of educational alternatives.

If the past few years has taught us anything, it’s that bubbles cannot continue to expand indefinitely. The education bubble is no exception.