The Education Bubble II

Last month I posted about how educational subsidies are a significant factor in driving up the cost of higher education. I asserted that we are building a bubble of false value similar to what happened in the housing market. I did not think myself a good enough prophet to accurately forecast how this would play out.

Perhaps it is important to understand why people seek a college degree. It is generally understood—and is heavily promoted by the higher ed establishment—that the chief purpose of getting a college education is to improve one’s career prospects. Although some have suggested that this shouldn’t be the top reason for going to college, spending $50,000 to $150,000 and four to six years of one’s life to improve one’s academic understanding without expecting to be compensated throughout one’s career is simply unrealistic for the vast majority. The fact is that most people pursue a college education to improve their career prospects and — whether they admit it or not — to enhance their social status.

Writer Joshua Fulton adds some fuel to the arguments in my post with this article on the Ludwig von Mises Institute website. Fulton begins by explaining the role a “free” university education is playing in the unrest in Tunisia and Egypt. After noting that nothing provided “free” by the government is actually free, Fulton cites the incredibly high rate of unemployment among college graduates (especially recent graduates) in countries like Tunisia and Egypt that heavily subsidize higher education.

There simply isn’t enough demand for what these graduates are trained to do. Their less educated counterparts have fared far better as far as employment goes. They are performing jobs for which demand exists. Few of these are high paying jobs. But a job that pays something is better than no job at all. Fulton notes that those that are angry, idle, and well educated have played a significant role in many revolts at least since the French Revolution.

While the U.S. isn’t currently running in the same realm as Middle Eastern countries that fully fund college education, “we are headed in the same direction.” Fulton writes:

“From 1997 to 2007, full-time enrollment in US tertiary education increased 34 percent. The average college student graduates with $24,000 in debt, a 40 percent real increase from 1997. In 2008, only 57 percent of students enrolled in a four year college graduated within six years. The unemployment rate for 16 to 24-year-olds is 52 percent. The underemployed as a group may be as large as the unemployed in America. For example, in 1970 only 3 percent of mail carriers had a bachelor's degree, while today the number is 12 percent.”

Fulton explains that government aid promotes higher ed inflation. This is not dissimilar from the way subsidies skewed the housing market.

Only 40 percent of student loans are actively being repaid. Since government picks up the tab on defaulted student loans (that are subsidized via low interest rates already), the system is rife with perverse incentives. Lenders feel free to give loans to those that would otherwise be considered a bad risk. Debtors that have been pushed into this trap while still very young feel less obligated to pay. For-profit universities are among the greatest benefactors of this taxpayer largess.

When it comes to student debt, many of the benefits are privatized while many of the costs are socialized. That’s a bad system.

As we continue along this trajectory, we will eventually cross the point where education consumers perceive that the cost of the average college degree outweighs its value in the labor market. When that happens the education bubble must burst as did the housing bubble when a similar realization hit that market.

As I said in my previous post, I don’t know if the bubble will rapidly collapse or will slowly deflate. I’m not prescient. But the day of reckoning must come. It will no doubt result in a lot of pain.