Education Bubble Part 2

More of this is hitting the news. This video gives more details of the education bubble. To me the big question is this, is the free market being prevented from equalizing the student loan debt situation because student loans are not bankruptable? If bankruptcy is the great “do-over” allowing citizens to recover from untenable financial situations and return to society in a productive role, then are we just crippling students by not allowing them to participate in this mechanism available to the rest of society? Maybe the OWS crowd wouldn’t be so angry if they had the ability to recover from the fateful decision of picking a major with no economic prospects. In any case, I think there is a reasonable argument to be made that if we are willing to forgive debt to countries in Africa, we ought to consider giving at least the bakruptcy option (which is not without consequences) to our own young people.

 

The Education Bubble

I’ve been talking about this for about 3 years. I’m glad somebody finally picked it up. The AP reported on a financial bubble in education last week. There have been a slough of stories percolating about this, such as Generation Jobless: Is An Ivy League Diploma Worth It?, and some spinoffs of ridiculous comments made by unemployed Occupy Wall Street lemmings, like What’s Your Kid Getting From College? 

There are also some debates about what constitutes a REAL economic bubble, as if anyone caught up in it cares about the precise definition of the hyperbolic media parlance. Personally, I’m more interested in the similarities of the big bubbles, Dot.com, real estate, and now education. In all three cases, it appears that a disconnect arose between price and value. Specifically, the price inflated way beyond the intrinsic value of the underlying asset. With the Dot.coms there was a belief that traditional valuation methods based on old-fashioned metrics like assets or earnings were passe and companies could be valued for cyberspace intangibles like website visitors or stickiness. With the real estate bubble home prices were artificially inflated due to massive pull-through demand generated by collateralized mortgage obligations, fueled by investor cash that had fled the market in the Dot.com crash looking for something “safer” that financiers didn’t understand… real estate.

So, how does education—and more particularly student loan debt—look like these previous bubbles? Well for starters, the price and the underlying value are way out of whack. Tuitions have escalated around the country in the midst of the financial crisis, its ensuing recession and remaining aftermath. How is that possible? Do people have more money to spend on education? No. Has the value of education gone up? No. In fact, the opposite is true. New graduates are now competing with candidates that have both degrees and experience, but who now find themselves part of the massive ranks of unemployed Americans vying for available positions.

Any hope that this climate might change soon dwindles in the face of politicians like Harry Reid who showed such a profound misunderstanding of economics that he was recently quoted as saying millionaire job creators are like unicorns, they don’t exist. Seriously, what an out of touch tool.

Despite any political despair, the question remains, why would tuitions rise in the face of declining economic operators? Demand is down, supply is up, and yet the price climbs. This simple analysis betrays the disconnect and the evidence of a bubble.

Disconnects like this also alert us to other symptoms of a problem. If the economics are breaking down, then too is the value this education is providing to society. But in the face of this evidence, the powers that be continue to raise the cost of traditional education and use their influence to prevent new entrants into the market. I am not about to prognosticate about how this bubble will resolve itself. One thing preventing it from popping is the un-bankruptability of student loan debt. However, depending on election results this coming year, someone may get wise to the idea that if we are going to forgive debts we would be just as well to forgive them to our citizens as to developing nations in Africa or Asia. And when we do, education will rapidly return to its fair-valued price. In other words… pop.