The Education Bubble by Julie Morgan

The Education Bubble

From the Center for American Progress’s Julie Morgan | September 2011

Any parent of a seventeen year old can tell you that college is very different today than it was 30 years ago. Parts of it look much the same, of course. Many parents still pack up the minivan and drop their son or daughter off at Big State University with a tearful goodbye. But that car is more likely to contain a laptop, an iPad, and an iPhone than a hot plate and a stack of college ruled notebooks. And rather than writing a check for a year's tuition to the college bursar, due to escalating costs more and more families are signing promissory notes to begin a long-term relationship with lenders like Citibank or Sallie Mae.

For another group of students, college has changed even more dramatically. A working single mom would have found it nearly impossible to squeeze in night classes at the local community college a decade ago. Now that same mom can earn a college degree without ever leaving home.

Most of the changes in college over the past several decades can be summed up in one word: "more." College is simply more today than it was 30 years ago. There are more institutions. In 1989 there were about 3,700 postsecondary institutions in the U.S.; in 2009, there were 4,700. There are more degree programs, too. Occupations like medical assisting that formerly required no higher education at all increasingly expect applicants to have at least a postsecondary certificate, if not an associate degree.

The biggest “more” in higher education today, though, is more money. Between 1990 and 2009 alone, tuition and fees rose almost 275 percent. At the same time, median family income grew only modestly. Between 1979 and 2007, the median income of families with children went from $53,760 to $59,190.

To meet this enormous financial burden, families are taking on more and more debt. The average debt for bachelor degree recipients who borrow to pay for education is now $24,000. Federal and state governments are picking up a hefty tab, too. In 2011, the federal government will spend an estimated $34 billion on Pell Grants to supplement college costs for low-income students. And state governments spent a combined $186 billion on higher education in 2008.

As the individual and public investment in higher education grows, people are asking: what do we get for all that money? That's where things get really interesting. Because the answer is that it depends.

College value and the "average student"

No matter how many sensational stories you read about college graduates tending bar, working at the Gap, or cleaning toilets, you can rest assured that in general, a college degree pays off. In an excellent piece for The New Republic, Kevin Carey points out that journalists write the same "college isn't worth it anymore" article every time the job market turns bad.

In fact, Kevin dug up some of the subjects of these articles from previous economic downturns to see how they're doing today. Sally Cameron was a French and Arabic major who ended up a bartender after graduation in 1980 just to pay the bills. But thirty years later, she's a senior manager at an international development consulting company. Sounds like her college degree paid off.

There is also evidence of the value of a college degree that's not merely anecdotal. The average lifetime earnings of a college graduate are far greater than those of a high school graduate. According to College Board, college graduates tend to make about a million dollars more over their lifetimes.

In this age of $100 million lottery payouts and Real Housewives with multimillion dollar mansions, a one million dollar advantage may not sound like much. Especially when one considers that at least part of that wage premium would go toward paying back the debt a student accrued to pay for college.

But there's another way to think about the value of a family's investment in college. And that is to ask whether the returns one gets from the investment in college education are better than what they can get by investing tuition money in another way. According to the Brookings Institution, the benefit of a college degree amounts to an average return on investment of 15.2 percent per year. That’s more than any other common investment – double the average return to stock market investments and more than five times the return to corporate bonds.

No matter how you slice it, a college degree pays off - at least for the average student. But policy wonks and college access advocates need to remember that for families, the experiences of the mythical "average student" don't mean much. Especially when their son goes from proudly waving a diploma at graduation to a permanent resident of his parents' basement.

Despite the average payoff from college, there's still reason to think that students aren't getting as much value for their tuition dollars as they could. This idea is bubbling up from both the highest and lowest ends of the college degree spectrum.

The High End - Is Peter Thiel Destroying College or Envisioning its Future?

Peter Thiel, the billionaire founder of PayPal, noted libertarian, and minor character in The Social Network, is on a mission to prove that the investment in college isn't really worth it. Citing the growing reliance on debt to finance college education (student loan debt will likely top $1 trillion this year) and the fact that families tend to overestimate the value of college, Thiel claims that just like the housing market in 2007, higher education is a bubble that's about to burst.

Using the bubble analogy certainly turned heads. Americans are all too familiar with the devastation caused by the decline of the housing market, and we're loathe to see it happen again. But the higher education bubble is more a rhetorical device than an accurate analogy.

Many writers have described eloquently the flaws in the bubble theory. To summarize them here, college is a very different kind of purchase than a house. Widespread purchase of houses for inflated prices combined with a bad economy in which homeowners could not pay their mortgage debt caused the housing bubble to burst. When they could not pay, homeowners walked away from their mortgages and allowed banks to foreclose on their homes.

It's arguable that individuals are "purchasing" college degrees at inflated prices and that the depressed economy affects their ability to pay back loans, there are a few key differences. Only about 60 percent of students borrow to finance their college educations, compared to more than 70 percent for houses. The average amount borrowed is $24,000, compared to $214,000 for a house.

Perhaps most important, students cannot walk away from their student loan payments as they can a mortgage. There's no asset for the banks to foreclose and recoup their costs. And student loans are not dischargeable in bankruptcy - students who default on their federal loans will be haunted by wage, Social Security, even tax refund garnishment for years.

Peter Thiel may be a sensationalist, but he's no dummy. At the core of his argument is a valid point: Americans are blindly paying for college without considering whether they could get the same benefits for a lower cost. To prove this point, Thiel instituted the Thiel fellowship program, offering a start-up grant of $100,000 to 24 would-be college students who choose to forgo an education in order to start a small business.

One need only look at the list of Thiel fellows to realize that the success of the program will not prove that students do not need to go to college. The Thiel fellowship recipients (link) include students who began college at 14. It includes students who, at ages 19 to 21, are prepared to create affordable scientific instruments, to revolutionize human resources recruitment, or build solar panel rotating systems. These aren't just elite students. These are the smartest kids in the room, in every room they've ever been in.

The thesis of Peter Thiel's argument should not be that college isn't worth it, but that the smartest kids in the country do not need to go to college.

Let's think about what a college degree means. There are essentially four components to what students want and need from college: deep knowledge of a subject area, skills like communication, problem-solving, and the ability to analyze, socialization, and credentialing. Most students get all of these things tied up in a neat little bundle that we call the four-year college experience.

The Thiel fellows don't need all of these things. They already have deep knowledge in a subject area. And who needs a credential to show how smart you are when you can just bring the computer you built yourself into a job interview? Or better yet, when you've got a successful start-up company as a symbol of just how smart and capable you are? And a Thiel fellowship may not come with readily-packaged social opportunities, but it's more than likely that the fellows can find a way to replace this aspect of the college experience.

For these students, the value of a college degree is dubious. At a school like Harvard or Yale, they would pay $40,000 or $50,000 to get a credential that's a symbol of skills, knowledge and abilities they had before they enrolled.

Of course most students are not like the Thiel fellows. They need someone to provide them with deep knowledge, skills, socialization, and some form of credential to signal these abilities to employers and the rest of the world. But Thiel's work symbolizes an emerging questions: do students have to get all of these things from college?