Higher education bubble
Encyclopedia
The higher education bubble is a speculative boom and bust
phenomenon in the field of higher education
. According to the theory, while college tuition payments are rising, the rate of return
of a college degree is decreasing, and the soundness of the student loan
industry may be threatened by increasing default rates. College students who fail to find employment
at the level needed to pay back their loans in a reasonable amount of time have been compared to the debtors under sub-prime mortgages whose homes are worth less than what is owed to the bank.
In 1971, Time ran an article "Education: Graduates and Jobs: A Grave New World," which stated that the supply of post-graduate students was around twice larger than the expected future demand in upcoming decades. In 1987, U.S. Secretary of Education William Bennett
first suggested that the availability of loans may in fact be fueling an increase in tuition prices and an education bubble. This "Bennett hypothesis" claims that readily available loans allow schools to increases tuition prices without regard to demand elasticity
. College rankings
are partially driven by spending levels, and higher tuition prices are correlated with increased public perceptions of . Over the past thirty years, demand has increased as institutions improved facilities and provided more resources to students. Additionally, schools tend to enroll fewer students as they improve student offerings and increase prices. This suggests that it is in schools' best interest to increase tuition prices as much as possible, so long as financial aid ensures an ability to pay on the part of students and parents.
A 2009 article in The Chronicle of Higher Education
related concern from parents wondering whether it is worth the price to send their children to college. The Economist
in turn hypothesized that the bubble bursting may make it harder for colleges to fill their classes, and that some building projects will come to a halt. The Boston Herald
further suggested the possibility of mergers
, closures and even bankruptcies of smaller colleges that have spent too much and taken on too much debt. National Review
writer Dan Lips has proposed that the bubble's bursting may bring down higher education prices. Glenn Reynolds
wrote in the Washington Examiner
that those who have financed their educations with debt may be particularly hard-hit.
Further speculation as to the higher education bubble was the focus of a series of articles in The Economist in 2011.
s do not think the returns
to college education are falling. In a financial bubble, assets like houses are sometimes purchased with a view to reselling at a higher price, and this can produce rapidly escalating prices as people speculate on future prices. An end to the spiral can provoke abrupt selling of the assets, resulting in an abrupt collapse in price — the bursting of the bubble. Because the asset acquired through college attendance — a higher education — cannot be sold (only rented through wages), there is no similar mechanism that would cause an abrupt collapse in the value of existing degrees. For this reason, many people find this analogy misleading. However, one rebuttal to the claims that a bubble analogy is misleading is the observation that the 'bursting' of the bubble are the negative effects on students who incur student debt, for example, as the American Association of State Colleges and Universities
reports that "Students are deeper in debt today than ever before...The trend of heavy debt burdens threatens to limit access to higher education, particularly for low-income and first-generation students, who tend to carry the heaviest debt burden. Federal student aid policy has steadily put resources into student loan programs rather than need-based grants, a trend that straps future generations with high debt burdens. Even students who receive federal grant aid are finding it more difficult to pay for college."
Ohio University
economist Richard Vedder
has remarked on the PBS Newshour that:
away from state and federal funding over to students. This has mostly applied to public universities which in 2011 for the first time have taken in more in tuition than in state funding, and had the greatest increases in tuition. Implied from this shift away from public funding to tuition is privatization
, although The New York Times
reported that such claims are exaggerated.
Another proposed cause of increased tuition is U.S. Congress' occasional raising of the 'loan limits' of student loans, in which the increased availability of students to take out deeper loans sends a message to colleges and universities that students can afford more, and then, in response, institutions of higher education raise tuition to match, leaving the student back where he began, but deeper in debt. Therefore, if the students are able to afford a much higher amount than the free market
would otherwise support for students without the ability to take out a loan, then the tuition is 'bid up' to the new, higher, level that the student can now afford with loan subsidies. One rebuttal to that theory is the fact that even in years when loan limits have not risen, tuition has still continued to climb. However, that may not disprove this proposed cause: It may simply mean that other factors besides 'loan limit' increases played a part in the increases in tuition.
A third, novel, theory claims that the recent change in federal law removing all standard consumer protections (truth in lending, bankruptcy proceedings, statutes of limits, the right to refinance, adherence to usury laws, and Fair Debt & Collection practices, etc.) strips students of the ability to declare bankruptcy, and, in response, the lenders and colleges know that students, defenseless to declare bankruptcy, are on the hook for any amount that they borrow -including late fees and interest (which can be capitalized and increase the principal loan amount), thus removing the incentive to provide the student with a reasonable loan that he/she can pay back. Under this theory, it would be more profitable for the lender if the student defaulted (due to the increases in the amount of the loan after fees and interest are capitalized), and thus there is no free market
pressure-type motive for the lender or the college to help the student avoid default. This is especially true because the government, if it is the lender or guarantor of the loan, has the ability to garnish the borrower's wages, tax return, and Social Security Disability income without a court order. Some have called the Federal Government 'predatory' for making loans which will have such a high default rate, since the default rate for Student Loans is projected to reach 46.3% of all federal loans disbursed to students at for-profit colleges in 2008.
Economic and social commentator Gary North has remarked at LewRockwell.com
that "To speak of college as a bubble is silly. A bubble does not pop until months or years after the funding ceases. There is no indication that the funding for college education will cease."
Azar Nafisi
, Johns Hopkins University
professor and bestselling author of Reading Lolita in Tehran
, has stated on the PBS NewsHour that a purely economic analysis of a higher education bubble is incomplete:
Boom and bust
A credit boom-bust cycle is an episode characterized by a sustained increase in several economics indicators followed by a sharp and rapid contraction. Commonly the boom is driven by a rapid expansion of credit to the private sector accompanied with rising prices of commodities and stock market index...
phenomenon in the field of higher education
Higher education
Higher, post-secondary, tertiary, or third level education refers to the stage of learning that occurs at universities, academies, colleges, seminaries, and institutes of technology...
. According to the theory, while college tuition payments are rising, the rate of return
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
of a college degree is decreasing, and the soundness of the student loan
Student loan
A student loan is designed to help students pay for university tuition, books, and living expenses. It may differ from other types of loans in that the interest rate may be substantially lower and the repayment schedule may be deferred while the student is still in education...
industry may be threatened by increasing default rates. College students who fail to find employment
Employment
Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...
at the level needed to pay back their loans in a reasonable amount of time have been compared to the debtors under sub-prime mortgages whose homes are worth less than what is owed to the bank.
In 1971, Time ran an article "Education: Graduates and Jobs: A Grave New World," which stated that the supply of post-graduate students was around twice larger than the expected future demand in upcoming decades. In 1987, U.S. Secretary of Education William Bennett
William Bennett
William John "Bill" Bennett is an American conservative pundit, politician, and political theorist. He served as United States Secretary of Education from 1985 to 1988. He also held the post of Director of the Office of National Drug Control Policy under George H. W...
first suggested that the availability of loans may in fact be fueling an increase in tuition prices and an education bubble. This "Bennett hypothesis" claims that readily available loans allow schools to increases tuition prices without regard to demand elasticity
Price elasticity of demand
Price elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price...
. College rankings
College and university rankings
College and university rankings are lists of institutions in higher education, ordered by combinations of factors. In addition to entire institutions, specific programs, departments, and schools are ranked...
are partially driven by spending levels, and higher tuition prices are correlated with increased public perceptions of . Over the past thirty years, demand has increased as institutions improved facilities and provided more resources to students. Additionally, schools tend to enroll fewer students as they improve student offerings and increase prices. This suggests that it is in schools' best interest to increase tuition prices as much as possible, so long as financial aid ensures an ability to pay on the part of students and parents.
A 2009 article in The Chronicle of Higher Education
The Chronicle of Higher Education
The Chronicle of Higher Education is a newspaper and website that presents news, information, and jobs for college and university faculty, staff members and administrators....
related concern from parents wondering whether it is worth the price to send their children to college. The Economist
The Economist
The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...
in turn hypothesized that the bubble bursting may make it harder for colleges to fill their classes, and that some building projects will come to a halt. The Boston Herald
Boston Herald
The Boston Herald is a daily newspaper that serves Boston, Massachusetts, United States, and its surrounding area. It was started in 1846 and is one of the oldest daily newspapers in the United States...
further suggested the possibility of mergers
Mergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
, closures and even bankruptcies of smaller colleges that have spent too much and taken on too much debt. National Review
National Review
National Review is a biweekly magazine founded by the late author William F. Buckley, Jr., in 1955 and based in New York City. It describes itself as "America's most widely read and influential magazine and web site for conservative news, commentary, and opinion."Although the print version of the...
writer Dan Lips has proposed that the bubble's bursting may bring down higher education prices. Glenn Reynolds
Glenn Reynolds
Glenn Harlan Reynolds is Beauchamp Brogan Distinguished Professor of Law at the University of Tennessee, and is best known for his weblog, Instapundit, one of the most widely read American political weblogs...
wrote in the Washington Examiner
Washington Examiner
The Washington Examiner is a free daily newspaper published in Springfield, Virginia, and distributed in the Washington, D.C. metropolitan area. It is owned by Denver billionaire Philip Anschutz....
that those who have financed their educations with debt may be particularly hard-hit.
Further speculation as to the higher education bubble was the focus of a series of articles in The Economist in 2011.
Controversy
The view that higher education is a bubble is controversial. Most economistEconomist
An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
s do not think the returns
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
to college education are falling. In a financial bubble, assets like houses are sometimes purchased with a view to reselling at a higher price, and this can produce rapidly escalating prices as people speculate on future prices. An end to the spiral can provoke abrupt selling of the assets, resulting in an abrupt collapse in price — the bursting of the bubble. Because the asset acquired through college attendance — a higher education — cannot be sold (only rented through wages), there is no similar mechanism that would cause an abrupt collapse in the value of existing degrees. For this reason, many people find this analogy misleading. However, one rebuttal to the claims that a bubble analogy is misleading is the observation that the 'bursting' of the bubble are the negative effects on students who incur student debt, for example, as the American Association of State Colleges and Universities
American Association of State Colleges and Universities
The American Association of State Colleges and Universities is an organization of state-supported colleges and universities that offer degree programs leading to bachelor's, master's or doctoral degrees...
reports that "Students are deeper in debt today than ever before...The trend of heavy debt burdens threatens to limit access to higher education, particularly for low-income and first-generation students, who tend to carry the heaviest debt burden. Federal student aid policy has steadily put resources into student loan programs rather than need-based grants, a trend that straps future generations with high debt burdens. Even students who receive federal grant aid are finding it more difficult to pay for college."
Ohio University
Ohio University
Ohio University is a public university located in the Midwestern United States in Athens, Ohio, situated on an campus...
economist Richard Vedder
Richard Vedder
Richard Vedder is an American economist, historian, author, columnist, and currently a professor at Ohio University.-Biography:Born in 1940, Vedder earned his B.A. in economics at Northwestern University in 1962 and his Ph.D in economics at the University of Illinois in 1965. He has since studied...
has remarked on the PBS Newshour that:
Alternatives to bubble theory
A different proposal for the cause of rising tuition is the reduction of state and federal appropriations to colleges making them rely more on student tuition. Thus, it's not a bubble rather a form of shifting costsCost-shifting
Cost-shifting is either an economic situation where one group underpays for a service resulting another group overpaying for a service or where one group pays a smaller share of costs than before resulting in another group paying a larger share of costs than before...
away from state and federal funding over to students. This has mostly applied to public universities which in 2011 for the first time have taken in more in tuition than in state funding, and had the greatest increases in tuition. Implied from this shift away from public funding to tuition is privatization
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...
, although The New York Times
The New York Times
The New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...
reported that such claims are exaggerated.
Another proposed cause of increased tuition is U.S. Congress' occasional raising of the 'loan limits' of student loans, in which the increased availability of students to take out deeper loans sends a message to colleges and universities that students can afford more, and then, in response, institutions of higher education raise tuition to match, leaving the student back where he began, but deeper in debt. Therefore, if the students are able to afford a much higher amount than the free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
would otherwise support for students without the ability to take out a loan, then the tuition is 'bid up' to the new, higher, level that the student can now afford with loan subsidies. One rebuttal to that theory is the fact that even in years when loan limits have not risen, tuition has still continued to climb. However, that may not disprove this proposed cause: It may simply mean that other factors besides 'loan limit' increases played a part in the increases in tuition.
A third, novel, theory claims that the recent change in federal law removing all standard consumer protections (truth in lending, bankruptcy proceedings, statutes of limits, the right to refinance, adherence to usury laws, and Fair Debt & Collection practices, etc.) strips students of the ability to declare bankruptcy, and, in response, the lenders and colleges know that students, defenseless to declare bankruptcy, are on the hook for any amount that they borrow -including late fees and interest (which can be capitalized and increase the principal loan amount), thus removing the incentive to provide the student with a reasonable loan that he/she can pay back. Under this theory, it would be more profitable for the lender if the student defaulted (due to the increases in the amount of the loan after fees and interest are capitalized), and thus there is no free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
pressure-type motive for the lender or the college to help the student avoid default. This is especially true because the government, if it is the lender or guarantor of the loan, has the ability to garnish the borrower's wages, tax return, and Social Security Disability income without a court order. Some have called the Federal Government 'predatory' for making loans which will have such a high default rate, since the default rate for Student Loans is projected to reach 46.3% of all federal loans disbursed to students at for-profit colleges in 2008.
Economic and social commentator Gary North has remarked at LewRockwell.com
LewRockwell.com
LewRockwell.com is a 501 libertarian web magazine operated by Burton Blumert , Lew Rockwell , Eric Garris , and others associated with the Center for Libertarian Studies ; its motto is "anti-state, anti-war, pro-market"...
that "To speak of college as a bubble is silly. A bubble does not pop until months or years after the funding ceases. There is no indication that the funding for college education will cease."
Azar Nafisi
Azar Nafisi
Azar Nafisi, born ca. 1947, is an Iranian academic and bestselling writer who has resided in the United States since 1997 when she emigrated from Iran. Her field is English language literature....
, Johns Hopkins University
Johns Hopkins University
The Johns Hopkins University, commonly referred to as Johns Hopkins, JHU, or simply Hopkins, is a private research university based in Baltimore, Maryland, United States...
professor and bestselling author of Reading Lolita in Tehran
Reading Lolita in Tehran
Reading Lolita in Tehran: A Memoir in Books is a book by Iranian author and professor Azar Nafisi.Published in 2003, it has been on the New York Times bestseller list for over one hundred weeks and has been translated into thirty-two languages....
, has stated on the PBS NewsHour that a purely economic analysis of a higher education bubble is incomplete:
Additional factors
Other factors that have been implicated in increased tuition include the following:- The practice of 'tuition discounting,' in which a college awards financial aid from its own funds. This assistance to low-income students by the college or university means that 'paying' students have to 'make up' for the difference: Increased tuition. This factor becomes more pronounced in modern times, since more students nowadays are going to college, which means that there are less State and Federal grant funds available per student.
- According to Mark Kantrowitz, a recognized expert in this area, "The most significant contributor to tuition increases at public and private colleges is the cost of instruction. It accounts for a quarter of the tuition increase at public colleges and a third of the increase at private colleges."
- Kantriwitz' study also found that "Complying with the increasing number of regulations – in particular, with the reporting requirements – adds to college costs," thus contributing to a rise in tuition to pay for these additional costs.
Recommendations
Based on the available data, a number of recommendations to address rising tuition have been advanced by both experts and consumer and students' rights advocates:- Colleges and universities should look for ways to reduce costs of instructor and administrator expenditures (e.g., cut salaries and/or reduce staff).
- State and Federal governments should increase appropriations, grants, and contracts to colleges and universities.
- Federal, state, and local governments should reduce the regulatory burden on colleges and universities.
- The Federal Government should enact partial or total loan forgiveness for students who have taken out student loans.
- Federal Lawmakers should return standard consumer protections (truth in lending, bankruptcy proceedings, statutes of limitations, etc.) to Student Loans which were removed by the passage of the Bankruptcy Reform Act of 1994 (P.L. 103-394, enacted October 22, 1994), which amended the FFELP (Federal Family Education Loan Program).
- Cut lender subsidies, decrease student reliance on loans to pay for college, and otherwise reduce the 'loan limits' to limit the amount a student may borrow.
- Regulatory or legislative action to lower or freeze the tuition, such as CanadaCanadaCanada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
's tuition freezeTuition freezeTuition freeze is a government policy restricting the ability of administrators of post-secondary educational facilities to increase tuition fees for students. Although governments have various reasons for implementing such a policy, the main reason cited is improving accessibility for working-...
model, should be enacted by federal lawmakers:
- More research should be done: Recognized financial expert, Mark Kantrowitz, issued the following recommendations:
-
-
- "The National Center for Education Statistics should increase the frequency of the National Postsecondary Student Aid Study to annual, from triennial, in order to permit more timely tracking of the factors affecting tuition rate increases. Likewise, NCES (National Center for Education Statistics) should take steps to improve the efficiency of the data collection and publication for the Digest of Education Statistics, so that all tables will include more recent data. The most recent data listed in some tables is five years old."
-
-
-
- "The US Department of Education should study the relationship between increases in average EFC (Expected Family Contribution) figures and average tuition rates. In addition, it would be worthwhile to examine how historical average EFC figures have changed relative to family income when measured on a current and constant dollar basis for each income quartile."
-
- Lastly, in order to offset the costs of tuition, some colleges help students in job searches and job placement after graduation.
See also
- College tuition in the United States
- EdFundEDFUNDEdFund is the United States' second largest provider of student loan guarantee services under the Federal Family Education Loan Program . It is organized as a non-profit public benefit corporation. EdFund offers students and their families a wide range of information on the value of higher...
- Free educationFree educationFree education refers to education that is funded through taxation, or charitable organizations rather than tuition fees. Although primary school and other comprehensive or compulsory education is free in many countries, for example, all education is mostly free including...
- Higher educationHigher educationHigher, post-secondary, tertiary, or third level education refers to the stage of learning that occurs at universities, academies, colleges, seminaries, and institutes of technology...
- Higher Education Price IndexHigher Education Price IndexThe Higher Education Price Index is a measure of the inflation rate applicable to United States higher education; more precisely, the increase in costs in a defined basket of goods and services typically purchased by institutions of higher education...
- Post-secondary education
- Private universityPrivate universityPrivate universities are universities not operated by governments, although many receive public subsidies, especially in the form of tax breaks and public student loans and grants. Depending on their location, private universities may be subject to government regulation. Private universities are...
- Student benefitStudent benefitStudent benefits are transfer payments that are given to students for purposes of full-time study, and require progress in studies, or obtaining academic credits. Student benefits are found in countries where education is free of charge, e.g. Finland and Sweden...
- Student debtStudent debtStudent debt is a form of debt that is owed by an attending, withdrawn or graduated student to a lending institution. The lending may usually be a student loan, but debts may be owed to the school if the student has dropped classes and withdrawn from the school Student debt is a form of debt that...
- Student loanStudent loanA student loan is designed to help students pay for university tuition, books, and living expenses. It may differ from other types of loans in that the interest rate may be substantially lower and the repayment schedule may be deferred while the student is still in education...
- Student loans in the United StatesStudent loans in the United StatesWhile included in the term "financial aid," higher education loans differ from scholarships and grants in that they must be paid back. They come in several varieties in the United States:...
- Tuition agencyTuition agencyA tuition agency is a commercial organisation which specialises in introducing tutors to students requiring help in the academic area. Tuition agencies exist largely due to the problems parents and students face in finding a specialist who can help them with the study of one or more specific...
- Tuition centerTuition centerTuition center is a special term for private educational institutions; they are especially abundant and ubiquitous in Malaysia,India,The Middle East and Singapore. Many school teachers earn their supplementary income through tuition centers and agencies...
- Tuition fees
- Tuition freezeTuition freezeTuition freeze is a government policy restricting the ability of administrators of post-secondary educational facilities to increase tuition fees for students. Although governments have various reasons for implementing such a policy, the main reason cited is improving accessibility for working-...
External links
- "College, Inc.", PBS FRONTLINE documentary, May 4, 2010