Bach Seat

The story seems oddly familiar. During any bubble, 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 cost 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.

Are we talking about the housing market or the higher ed market? Yes

In an Op/Ed piece on the Washington Examiner, Glenn Harlan Reynolds, a professor of law at the University of Tennessee explains that College has gotten a lot more expensive. The professor cites a Money magazine report, “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.” Based on those facts, the professor says consumers would balk at paying for higher ed except for two things according to Mr. Reynolds.

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.

Mr. Reynolds concludes, “Bubbles burst when people catch on and there are no longer enough excessively optimistic and ignorant folks to fuel them. There’s some evidence that people are beginning to catch on.” The Washington Examiner says that student loan demand is going soft, and students are expressing a willingness to go to a cheaper school than run-up debt. The Washington Post reports that one-quarter of students who took out federal loans to attend for-profit colleges defaulted within three years of starting repayment, according to a new federal analysis. Things haven’t collapsed yet, but they’re looking like the housing market looked in 2007. So what happens if the bubble collapses? Will it be a tragedy, with millions of Americans losing their path to higher-paying jobs?

Maybe not. College is often described as a path to prosperity, but is it? A college education can help people make more money in three different ways.

1. It may actually make them more economically productive by teaching them skills valued in the workplace: Computer programming, nursing, or engineering.
2. It may provide a credential that employers want, not because it represents real skills, but because it’s a weeding tool that doesn’t produce civil-rights suits as, say, IQ tests might. A four-year college degree, even if its holder acquired no actual skills, at least indicates some ability to show up on time and work as instructed.
3. A college degree, at least an elite one, may hook its holder up with a useful social network that can provide jobs and opportunities in the future.

While an individual might rationally pursue all three of these, the professor says that only the first one, actually added skills, produces a net benefit for society. The other two are just distributional, about who gets the goodies, not about making more of them. Yet today’s college education system seems to be in the business of selling parts two and three to a much greater degree than part one, along with selling the even-harder-to-quantify “college experience,” which as often as not boils down to “four (or more) years of partying.”

Just if there are any doubts that the higher-ed market is broken, the costs of higher-end has outpaced even the totally dysfunctional healthcare market.

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In a mature industry like higher education, real competition usually comes from the outside. The next educational revolution will be on the internet, online coursework, and the work of “edupunks“