Is College the Next Bubble?

Last Updated May 4, 2011 4:31 AM EDT

With the housing bubble well and truly popped, economists and investors are on the look out for the next overinflated asset. And PayPal co-founder Peter Thiel thinks he's spotted it -- college. The venture capitalist's opinions, aired recently in Techcrunch, have set off a firestorm of debate on the Internet. So what did Thiel actually say? It's a long piece and well worth a read in its entirety but, in essence, Thiel argues that,
the bubble that has taken the place of housing is the higher education bubble. "A true bubble is when something is overvalued and intensely believed," he says. "Education may be the only thing people still believe in in the United States. To question education is really dangerous. It is the absolute taboo. It's like telling the world there's no Santa Claus."
Like the housing bubble, the education bubble is about security and insurance against the future. Both whisper a seductive promise into the ears of worried Americans: Do this and you will be safe. The excesses of both were always excused by a core national belief that no matter what happens in the world, these were the best investments you could make. Housing prices would always go up, and you will always make more money if you are college educated.
Thiel has made plenty of converts to his belief that college is over-valued. For example, on Business Insider Larry Doyle takes a meaty (and somewhat terrifying) look at the numbers and concludes Thiel has grounds to be alarmed. Among his findings:
  • The average senior graduated with $24,000 in outstanding loans 2009 and last August, student loans passed credit cards as the nation's largest single largest source of debt, closing in on $1 trillion.
  • Since 1978, tuition at US colleges has increased more than 900 percent, 650 points above inflation. Housing prices, by comparison, rose only 50 points in the same time period.
  • According to Richard Rothstein at The Economic Policy Institute, wages for college grads outside of finance have stagnated or diminished.
  • Housing-backed securities trading is down but trading in those backed by student loans (Student Loan Asset-Backed Security or SLABS) has not declined and they are still considered safe investments.
If you're thinking that college in general might be a bubble but that gold standard, sensible degrees like an MBA remain a solid investment, check out Michael Ryall's piece in the HBR's The Conversation blog in which he relates how he was converted to the bubble view for MBA programs. The benefit just doesn't justify the cost, according to Ryall, who notes, that "the topics covered in many first-year microeconomics MBA courses, for instance, are a subset of those contained in Section III of Economics for Dummies... at a 250:1 cost ratio, students had better be getting something more for their money. It's not clear that they are."

But not everyone is jumping on the college-is-a-bubble bandwagon. Among the dissenters are Anya Kamenetz at Fast Company, who writes that while college may not pay off for the well-connected, go-getting children of affluent families, it is still a huge boost for families further down the economic ladder. She also notes that bachelor's degrees are not exactly oversupplied with less than 30 percent of Americans receiving one.

But even Kamenetz isn't entirely thrilled with higher education, noting (as Doyle does) that the case for a bubble is clearest when it comes to for-profit institutions like The University of Phoenix and Kaplan. She writes:
Dogged by persistent allegations of financial fraud and misleading recruitment, as well as increasing regulatory pressure from the federal government, the industry, a darling of the venture market just three years ago, has been weathering diving stock prices over the past year. These colleges, which enjoyed a decade of soaring enrollment with little or no oversight into the quality of education they provide, really do deserve the title of subprime.
That's a fair bit of evidence to digest, but what's your conclusion, is college education a bubble? And if you think the value of higher education is out of whack with its cost what's to be done? I, personally, would hesitate to recommend skipping college to a middle-class kid, as I don't see a ton of attractive career alternatives. Do you?

Read More on BNET: (Image courtesy of Flickr user tlindenbaum, CC 2.0)
  • Jessica Stillman On Twitter»

    Jessica lives in London where she works as a freelance writer with interests in green business and tech, management, and marketing.

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