The “Education Bubble”: my oh my, what a mess we have made for our young people

Higher Education Bubble: College Tuition Doubled Over the Last 10 Years vs. +52% for Medical Care

Talk of an “education bubble” is becoming more common these days, and as usual, there are a variety of ways you can look at the issue: as primarily about economics, or academic institutions, or government subsidies, or the impact on the future for our children, or “how in the hell did tuition became so unbelievably expensive over the last 30+ years”.

It’s a mess, and it’s complicated, and there is plenty of blame to pass around.

The “Occupy” protesters of the last few months have often pointed to twenty-somethings with large debt loads and few job prospects as one of the issues they want fixed. Even though I can make fun of dirty hippies with the best of ‘em, the reality is this: they do have a point that this system is pretty f**ked up. Something has gone horribly, massively wrong with a system that used to work pretty damn well.

Some choose to put the blame squarely on students for taking on huge debt to pay for a questionable career choice, before even entering the working world. And I suppose you can do that, if you want, but the job of preparing kids for life belongs to the parents and elders. If a kid wants to major in Women’s Studies and is OK with borrowing $45k per year to finance it, that is a good time to say “no, but have you thought about chemical engineering?”.

It is so sad, and was so avoidable. And it seems to me that parents and teachers, along with other adult leaders in the lives of our nation’s children, should have recognized the fundamental insanity of all this a long, long time ago. While I’m happy to lay much of the blame at the feet of government intervention in the form of cheap credit, screwing up financial markets and causing a bubble of over-priced goods just like they did with the mortgage bubble, I can’t honestly ignore the consumer side of this equation. If enough people decided 10 years ago that tuition was already insanely overpriced, which it was, and found more creative ways to help finance their child’s career and launch them into adulthood, then we wouldn’t be here today.

So while on most days I criticize government intervention, today is not that day. Today is the day we look at parents, teachers, guidance counselors, and everybody else that is supposed to represent the child’s best interests.

How is it that parents have decided it was wise to spend — or counsel their kids to borrow — $30-50k a year to get an undergrad degree? It just barely makes sense to spend or borrow that much to get an MBA, which brings a pretty solid expectation of increased future earnings for those who already have a good job. It makes sense for a doctorate with a big future income stream attached, like an MD or, until recently, a JD (law degree).

The brutal truth is that there are just not that many jobs in the world that can amortize away loan payments on $120-$200k and still leave a young adult with any kind of life. Write this down on your refrigerator or something, and commit it to memory. The math just doesn’t work.

So how did we get to a point where adults in the working world essentially ignored the huge financial risks being taken on by our children? And for an education of continually declining quality? In order to work properly, markets require back pressure on prices from consumers to say “no, sorry, that’s too expensive”. If parents and students, instead, treat college as a “must have” no matter what the cost, then costs will go up forever, or until the bubble bursts. It looks like we’ve now reached that point.

From where I sit, it sure looks like college-obsessed Baby Boomer parents helped skew the market, with government help, by focusing so much on college for their kids: their college savings accounts set up the day the kid was born, and their Baby Mozart CDs, and their preschool and pre-K choices that treat kids like little genius students instead of kids, all the way through to hiring tutors and taking practice SAT exams multiple times and applying to 50 schools. Obviously they had good intentions, at least most of them, but it still distorted the market for products and services related to getting a college degree, and created huge demand. But Finland and other educational systems do not obsess over all these things, and they let kids be kids, but they have high expectations in the classroom and recognize the importance of variety and getting away from textbooks by going outside and letting kids explore the real world. So obviously, this is do-able.

University administrators, not being stupid, recognized this increased demand (and favorable credit conditions, driven by government subsidy) and raised tuition. Because that’s what you do when marginal demand for your product goes up faster than supply. And they raised it again, and again, and again. But parents and teachers and other adult leaders of children failed to push back, never stopped to think “hmmm, that is possibly too much money”. Result: college tuition has outpaced inflation and every other measurable cost over the last 30 years. Nearly everything else got cheaper, but not college. What, did the cost of producing students go up somehow, fast enough to double over ten years? I think not.

No, it’s a simple case of supply and demand. Parents and educators helped drive demand too high by overemphasizing college as the only answer to the “where am I going” question, and it was one very significant factor in the rising tuition rates of the last 30 years.

The point here, in case I haven’t made it forcefully enough yet, is that before the last 20-25 years, school was affordable with a few sacrifices, which meant that (1) parents could often afford to pay for much of it, sometimes all of it, and (2) borrowing to pay for it was not a big risk, especially for a lucrative major, but even for other majors too. Which meant that many young people were able to prepare for their future by working fairly hard in school, getting a degree, with only a minor degree of risk and offset against future earnings, especially those of us who chose the hard sciences. If you majored in Sociology instead, and ended up working in customer service or whatever, you could still manage the payments, even though it might have taken the full ten years. It wasn’t financially ruinous.

But that world does not seem to exist any more. Getting a degree costs much more than it used to, doubling in just the last ten years, and ten times what it cost 35 years ago. The world of opportunities that existed for today’s parents — back in 1972 or 1985 or even 1994 — just do not exist today for their kids. It costs too damn much and does not make economic sense as an investment in the future, except for a few majors. College kids today, many of them, graduate with the equivalent of a mortgage on their backs.

Parents – please ask yourself some hard questions. Do you really believe that college today is worth $150 or $200k for four years? Pretend you are a venture capitalist: would you lend that much money to this particular person with a business plan of majoring in Sociology? No, my dear venture capitalist, I believe you would not.

But you might, if that student was going to study Chemical or Nuclear engineering. Computer Science, especially with a Finance double major, yes, you will make a killing. Have at it. A few other hard sciences, possibly.  Maybe the occasional teaching job (but this could change, with the public and political pressure increasing on teachers’ unions). But what else? Sociology? Psychology? Women’s Studies? Please. It would be quicker to throw the cash on a wood pile, pour gasoline on it, and toss a lit match onto it. Even Pre-Med almost doesn’t make sense at that tuition rate, because of the huge additional loans waiting for you in Medical School, and the risks today inherent in the medical field (cost of insurance, especially).

The business plan matters. The choice of major matters. The world has changed, and parents, teachers, guidance counselors, and everybody else who is charged with shepherding children into early adulthood years needs to take a good look around, with both eyes wide open, and see how the world is today, instead of assuming it is the same as it was when we were that age.

Something important that used to work quite well is now broken, and entire generations of our children are unwittingly in the line to pay the bill. I think we, as the adults in the equation, need to take more of a leadership role.

I have three kids, all of them plenty bright and capable of doing excellent school work and succeeding just fine in life. But the old recipe – “hard work + moderate financial risk = good future” – is not all that relevant any more. And I am trying to figure out what to tell them.

Links:

4 comments
  1. Let’s see. The national economy demands an educated workforce, but then fails to pay for the education.

    The profits from the increased productivity of the educated workforce go instead to the wealthiest five percent of the population — the ones who own the “passive” income.

    I think you see where this is going.

  2. So, because the economy demands an educated workforce, that necessarily obligates the government to pick up the tab for it? Why would you think that?

    Education is an asset not just for the economy in aggregate, but for the individual too, who enjoys better economic advantages in life because of it, and is therefore expected to pay for much of it. That system worked fine for a long time, until it became insanely expensive to get lesser-quality education. That’s the problem – the educational quality is declining, and is just average, while the expense for that education is rising and already much too high, even for a great education. Recent graduates enter the job market with a debt load that is so high, there are just not enough high paying jobs to absorb it.

    The need for an educated workforce is driven by high educational achievement in other nations and schools around the world, who then send their best and brightest here to take jobs for which they are simply better qualified compared to U.S. college students – because universities do not challenge our students any more, to any large degree. It’s our own damn fault for lowering standards by bowing at the Altar of Tolerance and Diversity, while the rest of the world pushed forward as before, insisting on actual standards and discipline and achievement, just like we used to do before the academy got stupid.

  3. And jobs still aren’t paying what they used to, relative. Been declining the past four decades, for that matter.

  4. As the child of two “college obsessed baby boomers,” I completely agree, and I reject the notion that the national economy is “demanding” a college-educated work force. Like many of my friends, I found that college wasn’t proving the type of education and opportunity that I was conditioned to believe by my past teachers, parents, mentors, yet unlike many of my friends, I decided to stick with it and graduate instead of working for a while and then going back. What happened was about half a dozen of my friends who were not “in demand,” as you say, ended up working for Microsoft, Motorola, Apple etc., and still others started businesses which are thriving today.

    Education is great, for those who are ready for it and who are realistic about what a college education in 2010 and on realistically does for someone. Even with a legitimate degree from a good school means relatively nothing without REALLY good grades, meaning the top 10% (or less at smaller schools…sorry) AND outside work experience that is RELEVANT, meaning that taking “jerk-off” jobs during the summer doesn’t count as “relevant”.