AEI’s Michael Barone wrote recently about the higher education bubble, which could also described as a “low-interest education loan bubble” to reflect the government’s role in subsidizing higher education, similar to its role in subsidizing homeownership. The topic has been receiving a lot of attention lately, and there is even now a Wikipedia listing for “higher education bubble.”
That attention is timely and well-deserved because the higher education bubble is following the same unsustainable path of the 1990s tech bubble and the more recent housing bubble. And like those previous bubbles, Barone and others are predicting that the higher education bubble is about to burst (see commentary from Instapundit blogger Glenn Reynolds and PayPal co-founder Peter Thiel).
The chart above helps to graphically illustrate the potential seriousness of the higher education bubble by showing annual index levels for overall consumer prices, new home prices, and college tuition and fees back to 1978. Between 1978 and 1997, home prices increased annually at about the same rate as general prices, but then appreciated at a faster pace over the next decade. In the ten-year period starting in 1997, home prices increased by 68 percent, or more than twice the 29 percent increase in overall prices, and that home price appreciation caused an unsustainable housing bubble that burst in 2007 and contributed to the financial crisis of 2008-2009.
During that same 1997-2007 decade that home prices increased by 68 percent and created a housing bubble, college tuition and fees rose even higher—by 83 percent. In fact, college tuition and fees have never increased by less than 73 percent in any ten-year period back to the 1980s. And in the decades ending in 2009 and 2010, college tuition increased by more than 90 percent. The still-inflating increases in the price of higher education are starting to make the housing bubble look pretty tame by comparison.
Like the U.S. housing bubble and all previous bubbles in history, the dramatic increases in college tuition in relation to both overall prices and home prices illustrated in the chart above makes it seem inevitable that the higher education bubble will have to someday burst. As Barone concludes, it’s another example of “how well-intentioned public policy and greedy providers have produced a bubble that is about to burst.”