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Is there a higher education bubble?

October 5, 2010

One of the recurring themes at Instapundit is the coming crash of the higher education bubble. The theory being, I guess, that like the a 6200 sq ft McManison on the housing market suddenly college diplomas will be worthless, or worth much less than their cost.

My question is, Is that true?

Personally I don’t think so. It’s true that education costs are rising much faster than the rate of inflation, much like housing prices a couple years ago, but from what I have seen the increase in cost is mainly at private schools – both the “elite” Ivy league schools, and at schools like the University of Phoenix. The reason for the rise in cost however is different.

At the Ivy’s you are not really paying for the education – you are paying for access. With Harvard or Yale on your diploma you are essentially guaranteed access to jobs in the upper levels of government or access to those who take them. That is a valuable commodity and will always be so. The cost of those degrees for people who truly wish to capitalize on them is fractionally small compared to the future payoff.

On the other end of the scale are the for profit schools. These also provide access, but of a much different sort. They just get you past the idiot HR people, if you are lucky. Their cost is rising because a college degree has become a screening tool for almost every job and there is no access to the state run university systems for most of the people who attend these schools. The managers at these schools have recognized this and are churning out graduates in a very small number of fields very quickly, at very high cost to the student. Unfortunately in many (most?) cases the degrees are not worth the paper they are printed on. HR people have recognized this and quickly weed out UoP or ITT graduates. In these cases the cost is much hire than the potential payoff. Unfortunately the market has now been flooded with marginally qualified graduates of courses in Business Administration or Information Services. This does have an effect on the market in those fields but, in my opinion again, it will be self correcting and confined to those fields of study.

You can actually see this mechanism in effect in India at their Engineering schools. As more schools started pushing out more marginal graduates the degrees became devalued. From what I have read many of the schools of marginal quality have shut down. Ironically this actually pushed the value of their degrees up again as the supply of engineers on the market contracted. I suspect that sometime in the next 10 years the same thing will happen on the U.S.

Does that really qualify as a bubble or is it just a market at work?

Meanwhile in the middle of this you have state schools and private colleges, where costs are going up, but where there is a wide offering of degrees, and in general the quality of instruction is good. Again this is just my opinion, but these degrees will over their lifetime generate more in salary for their students than their cost (for example a 4 year engineering degree at University of Washington will cost (not counting room and board) about $24,000, at one of the satellite campuses slightly less. A Computer Science degree at Montana State is comparable in cost. That works out to about $500 per year over the course of a working lifetime, and demand for degrees of that nature is not going to decrease. If anything the coming trade war with China is going to increase demand as we start to shift some manufacturing back on shore.

So to answer my original question – is there a higher education bubble? No. There is a market imbalance that is going to encounter a correction soon.

3 Comments leave one →
  1. Bob Powell, Glen Allen, Va. permalink
    October 5, 2010 8:29 am

    Intresting commentary. Right on the money (no pun intented ) on the Ivy league schools.

  2. xbradtc permalink
    October 5, 2010 7:38 pm

    Well, one of the problems is that there are a lot of people that are somewhat surprised to learn that a liberal arts degree has very little earning power.

    Really? You thought all that Women’s Studies was going to get you a good job? Virtually the only thing a degree like that qualifies you for is a master’s program in that field. And all that qualifies you for is teaching in that field.

    I think in a lot of ways, that’s the general thrust of Prof. Reynolds point. True, he also discusses saturated markets like law schools (again, a field, that while in this case is useful, is in and of itself, non-productive) where what was traditionally seen as an entre into the upper middle class is now just another middle class job.


  1. » Pop goes tuition

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