Carpe Diem, Society and Culture, Education

The higher education bubble is starting to deflate

bubble

Instapundit blogger and law professor Glenn Reynolds has written quite a bit about the “higher education bubble” and released a book last year with that exact title. Following Glenn’s recent visit to the Atlanta Fed to discuss the higher education bubble, Jimmy P. blogged about it yesterday here.

The chart above is an updated version of one I have featured before on CD (it also appears in Glenn’s book), and which helps to visually understand the seriousness of the higher education bubble. The chart compares: a) college tuition and fees annually in current dollars from 1978 to 2012 based on data from the Department of Education for all institutions of higher education, b) the CPI for medical care, c) the median sales price for new homes, and d) the CPI for all items. All variables have been converted to an index series that equals 100 in the base year of 1978 to allow for a comparison of relative increases over time in the four variables.

In current dollars, average college tuition and fees have increased from $984 during the 1977-1978 school year to $10,111 for 2011-2012. That 10.28 time increase in nominal tuition over the last 34 years is reflected in an increase in the chart’s college tuition index from 100 in 1978 to 1,028 in the chart (see blue line). On an annual basis, college tuition has increased more than 7% per year, which is almost double the 3.8% rate of increase for consumer prices on average (see orange line in chart). In contrast, prices for medical care have increased by 5.8% per year since 1978, and the median price for new homes has increased by only 4.4% per year on average. That last comparison is key, because we had an unsustainable housing bubble followed by a painful and disruptive correction, caused by increases in home prices that were relatively inconsequential compared to the increases in college tuition.

Here’s an excerpt from the Atlanta Fed’s Macroblog about Glenn’s recent presentation there (with a link to a video):

What’s the endgame? Well, he [Glenn] expects that when the bubble bursts, there will be less “dumb money” to be gained, students will demand a higher return on investment, and schools will ultimately be forced to adapt. According to Reynolds, colleges have two different strategic choices: increase the value of the education for the current cost, or lower the cost of providing the current level of value. And he expects the most common response will be the latter, likely involving technology such as MOOCs (massive open online courses) and other innovations in teaching methods.

When any bubble bursts, there are some casualties. In this case, it may be that some colleges do not survive once market discipline has been unleashed. Given the statistics above, you might think that it would be the small liberal arts colleges that will suffer the most, but in this video, shot during the visit to Atlanta, Reynolds argues that these colleges may actually gain from the coming shakeout.

Reynolds indicated that there is change in the air, but it’s coming slowly. The bubble may not have burst, but he sees it deflating. He noted, “A lot of people hope it will pass. They’ll muddle through without dramatic changes. And frankly I hope they’re right. But I don’t think they are.”

9 thoughts on “The higher education bubble is starting to deflate

  1. I’m of the view that big name colleges are selling a “brand’ that is way beyond the generic “education”.

    you can trump that if the big name college also has a big name sports (or multiple) program(s).

    They’re selling something that people want.

    It’s like when a person buys a car. Most do not want a plain jane corolla. They want something that has style and makes a statement.

    The big name colleges are selling the education equivalent of “Tide” or “Crest” or “Chevrolet” and judging from the demand and the every increasing tuition increases, I’ll believe things change when demand falls away.

    we’ve have a passel of predictions. When I see big name colleges start to drop in enrollment, I’ll believe it.

    • Drops in big name college enrollment would be the last effect that you’d see. I guess you can wait for that before you believe it, but that is like believing a bucket is being filled with water only after it is overflowing. Then again, it’s a step in the right direction when Mr. LarryG starts believing in the blatantly obvious.

  2. A major part of the increase in college fees & tuition is due to the fact that state legislatures are reducing the government support for colleges.

    • big ed-

      i do not think so.

      then why are prices soaring even more at the private universities?

      the real source of this is massively subsidized student loans intersecting with far too many scholarships.

      when 50% of students get aid, then those who can pay have to pay a lot more.

      i am still quite close with some of the faculty from my high school (a Connecticut boarding school). they see this as a HUGE problem. fess were $14k when i was there. they are $52k now. much of this is due to scholarships. while that sounds good on paper, it has a nasty effect: the middle class gets shut out. if you are rich or poor, you can go, but if you are in the middle, no way. there is no way my parents would have been able to afford it if it has cost this much.

      in the college arena, this means running up debt. you take out student loans.

      that’s going to get MUCH worse. affordability provisions cap payments to 10-15% of income in excess of 150% of the poverty line.

      suddenly, you can go get $300k education and then get a $25k job at a nonprofit and pay back ZERO (as your first 25k in income is exempt)

      it also makes students totally price insensitive.

      if you make 50k, you can be made to pay back $2500 a year for 25 years, then, it’s over and the rest is forgiven.

      that’s $63k.

      so what do you care if the university charges $60k a year or $600k?

      it’s all the same to you. the cost gets shunted to joe taxpayer.

    • That is true as far as it goes. But only because costs have risen too high.

      Let’s say I have a product that is worth and used to sell for $500 and be subsidized for $250 (half). Now, the same product is still worth $500, but the cost has risen to $1000. To keep the out of pocket “cost” the same, there is a concomitant raise in subsidy to $750. A subsequent “cut” in subsidy to $500 raises the out of pocket “cost,” but the increase is still 100% a result of the bubble.

  3. Yep I see that chart too, don’t look like it is slowing down to me.

    Online courses currently have some very very good offerings. Google, ” the young persons indispensable guide to choosing the right major ” Really online classes are to get around the entrenched politically correct disaster many colleges have become. MOOC’s are not the answer in itself. While currently efficient, MOOC’s could also succumb to the kind of dis-functionality common in many colleges. In fact it could get worse as even more worthless courses of study and politically correct indoctrination could be thrust on an unsuspecting native student, and worse the poor student has to pay for this. As long as there is loads of easy money and generous debt forgiveness, thanks morganovich, this distortion can continue to grow. It would well serve politicians to be the perceived source of debt forgiveness. Joe taxpayer is irrelevant as the Fed can print unlimited amounts of money indefinitely, that is until people loose confidence.

    The truly more accurate term is the mis-allocation of resources. The answer to how it will end is knowing how this bubble will get called out.

    • I just think higher ED is selling a product not much different from TIDE or Chevrolet and they are going to sell it for the maximum price people are willing to pay for it.

      no magic here.. just simple marketing …

      there is no question that the middle class is not going to be sending their kids to the high-priced spreads like they used to given the collapse of housing values to provide 2nd mortgage funds for college, etc.

      the bigger question for online is whether or not, for instance, if someone has an online degree in say… Civil Engineering – if there will be a path to legitimate certification and hiring.

      Until that happens, online is not going to be considered a serious BS type degree for hard sciences and engineering, etc.

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