Higher education bubble

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The higher education bubble is a speculative boom and bust phenomenon
in the field of higher education.
According to the theory, while college tuition payments are
rising, the rate of return of a
college degree is decreasing,[1]
and the soundness of the student loan industry may
be threatened by increasing default rates.[2]
College students who fail to find employment at the level
needed to pay back their loans in a reasonable amount of time have been compared
to the debtors under sub-prime mortgages
whose home are worth less than what is owed to the bank.[3]

In 1987, U.S. Secretary
of Education William Bennett first
suggested that the availability of loans may in fact be fueling an increase in
tuition prices and an education bubble.[4]
This "Bennett hypothesis" claims that readily available loans allow schools to
increases tuition prices without regard to demand
elasticity. College
rankings are partially driven by spending levels,[5]
and higher tuition prices are correlated with increased public perceptions of prestige.[6]
Over the past thirty years, demand has increased as institutions improved
facilities and provided more resources to students.[7]
Additionally, schools tend to enroll fewer students as they improve student
offerings and increase prices. This suggests that it is in schools' best
interest to increase tuition prices as much as possible, so long as financial
aid ensures an ability to pay on the part of students and parents.

A 2009 article in The
Chronicle of Higher Education related concern from parents wondering
whether it is worth the price to send their children to college.[8]
The Economist in turn
hypothesized that the bubble bursting may make it harder for colleges to fill
their classes, and that some building projects will come to a halt.[9]
The Boston Herald further
suggested the possibility of mergers,
closures and even bankruptcies of smaller colleges that have spent too much and
taken on too much debt.[10]
The National
Review proposed that the bubble bursting may also bring down higher
education prices.[11]
Glenn Reynolds wrote in
the Washington
Examiner that those who have financed their educations with debt may be
particularly hard-hit.[12]

Further speculation as to the higher education bubble was the focus of a
series of articles in The Economist in
2011.[13]

Contents

1 Controversy

1.1 Alternatives to bubble
theory

1.2 Additional
factors

1.3 Recommendations

2 See also

3 References and
notes

4 External
links

Controversy

Study comparing college revenue per student by
tuition and state funding in 2008 dollars.[14]

The view that higher education is a bubble is controversial. Most economists do
not think the returns to college
education are falling.[15]
In a financial bubble,
assets like houses are sometimes purchased with a view to reselling at a higher
price, and this can produce rapidly escalating prices as people speculate on
future prices. An end to the spiral can provoke abrupt selling of the assets,
resulting in an abrupt collapse in price — the bursting of the bubble. Because
the asset acquired through college attendance — a higher education — cannot be
sold (only rented through wages), there is no similar mechanism that would cause
an abrupt collapse in the value of existing degrees. For this reason, many
people[who?]
find this analogy misleading. However, one rebuttal to the claims that a bubble
analogy is misleading is the observation that the 'bursting' of the bubble are
the negative effects on students who incur student debt, for example, as the American
Association of State Colleges and Universities reports that "Students are
deeper in debt today than ever before...The trend of heavy debt burdens
threatens to limit access to higher education, particularly for low-income and
first-generation students, who tend to carry the heaviest debt burden. Federal
student aid policy has steadily put resources into student loan programs rather
than need-based grants, a trend that straps future generations with high debt
burdens. Even students who receive federal grant aid are finding it more
difficult to pay for college."[16]

Alternatives to
bubble theory

A different proposal for the cause of rising tuition is the reduction of
state and federal appropriations to colleges making them rely more on student
tuition. Thus, it's not a bubble rather a form of shifting costs away from
state and federal funding over to students.[17]
This has mostly applied to public universities which in 2011 for the first time
have taken in more in tuition than in state funding,[17]
and had the greatest increases in tuition.[14]
Implied from this shift away from public funding to tuition is privatization, although
The New York
Times reported that such claims are exaggerated.[17]

Another proposed cause of increased tuition is U.S.
Congress' occasional raising of the 'loan limits' of student loans, in which
the increased availability of students to take out deeper loans sends a message
to colleges and universities that students can afford more, and then, in
response, institutions of higher education raise tuition to match, leaving the
student back where he began, but deeper in debt. Therefore, if the students are
able to afford a much higher amount than the free market would otherwise
support for students without the ability to take out a loan, then the tuition is
'bid up' to the new, higher, level that the student can now afford with loan
subsidies.[18]
One rebuttal to that theory is the fact that even in years when loan limits have
not risen, tuition has still continued to climb.[19][20]
However, that may not disprove this proposed cause: It may simply mean that
other factors besides 'loan limit' increases played a part in the increases in
tuition.

A third, novel, theory claims that the recent change in federal law removing
all standard consumer protections (truth in lending, bankruptcy proceedings,
statutes of limits, etc.) strips students of the ability to declare bankruptcy,
and, in response, the lenders and colleges know that students, defenseless to
declare bankruptcy, are on the hook for any amount that they borrow -including
late fees and interest (which can be capitalized and increase the principal loan
amount), thus removing the incentive to provide the student with a reasonable
loan that he/she can pay back.[21][22]
Under this theory, it would be more profitable for the lender if the student
defaulted (due to the increases in the amount of the loan after fees and
interest are capitalized), and thus there is no free market pressure-type
motive for the lender or the college to help the student avoid default. This is
especially true because the government, if it is the lender or guarantor of the
loan, has the ability to garnish the borrower's wages, tax return, and Social
Security Disability income without a court order. [23]
Some have called the Federal Government 'predatory' for making loans which will
have such a high default rate, since the default rate for Student Loans is
projected to reach 46.3% of all federal loans disbursed to students at
for-profit colleges in 2008.[24][25]

Additional factors

Other factors[26]
that have been implicated in increased tuition include the following:

The practice of 'tuition discounting,' in which a college awards
financial aid from its own funds. This assistance to low-income students by
the college or university means that 'paying' students have to 'make up' for
the difference: Increased tuition. This factor becomes more pronounced in
modern times, since more students nowadays are going to college, which means
that there are less State and Federal grant funds available per
student.

According to Mark Kantrowitz, a recognized expert in this area, "The
most significant contributor to tuition increases at public and private
colleges is the cost of instruction. It accounts for a quarter of the
tuition increase at public colleges and a third of the increase at private
colleges."

Kantriwitz' study also found that "Complying with the increasing number
of regulations – in particular, with the reporting requirements – adds to
college costs," thus contributing to a rise in tuition to pay for these
additional costs.

Recommendations

Based on the available data, a number of recommendations to address rising
tuition have been advanced by both experts and consumer and students' rights
advocates:

Colleges and universities should look for ways to reduce costs of
instructor and administrator expenditures (e.g., cut salaries and/or reduce
staff).[27][28]

State and Federal governments should increase appropriations, grants,
and contracts to colleges and universities.[29][30][31]

Federal, state, and local governments should reduce the regulatory
burden on colleges and universities.[32]

The Federal Government should enact partial or total loan forgiveness
for students who have taken out student loans.[33][34][35][36]

Federal Lawmakers should return standard consumer protections (truth in
lending, bankruptcy proceedings, statutes of limitations, etc.) to Student
Loans which were removed by the passage of the Bankruptcy Reform Act of 1994
(P.L. 103-394, enacted October 22, 1994), which amended the FFELP (Federal
Family Education Loan Program).[37][38][39]

Cut lender subsidies, decrease student reliance on loans to pay for
college, and otherwise reduce the 'loan limits' to limit the amount a
student may borrow.[40][41][42]

Regulatory or legislative action to lower or freeze the tuition, such as
Canada's tuition freeze model,
should be enacted by federal lawmakers:[43]

More research should be done: Recognized financial expert, Mark
Kantrowitz, issued the following recommendations[44]:

"The National Center for Education Statistics should increase the
frequency of the National Postsecondary Student Aid Study to annual, from
triennial, in order to permit more timely tracking of the factors
affecting tuition rate increases. Likewise, NCES (National Center for
Education Statistics) should take steps to improve the efficiency of the
data collection and publication for the Digest of Education Statistics, so
that all tables will include more recent data. The most recent data listed
in some tables is five years old."

"The US Department of Education should study the relationship between
increases in average EFC (Expected Family Contribution) figures and
average tuition rates. In addition, it would be worthwhile to examine how
historical average EFC figures have changed relative to family income when
measured on a current and constant dollar basis for each income
quartile."

Lastly, in order to offset the costs of tuition, some colleges help
students in job searches and job placement after graduation.[45]

See also

College
tuition in the United States

EdFund

Free education

Higher education

Higher
Education Price Index

Post-secondary
education

Private
university

Student benefit

Student debt

Student loan

Student
loans in the United States

Tuition agency

Tuition center

Tuition fees

Tuition freeze

References and
notes

^
Bursting the Higher Ed Bubble, The Week, May 27,
2009, http://theweek.com/article/index/96989/Bursting_the_Higher_Ed_Bubble

^
Monica
Brady-Myerov and Sonari Glinton, The
Education Bubble, wbur.org, http://www.wbur.org/specials/education-bubble

^
Bell, Steven (05/06/2010),
As
the higher ed bubble nears bursting what is the potential impact on
libraries?, Library Journal, http://www.libraryjournal.com/article/CA6728003.html

^
Our Greedy Colleges, The New York Times, Feb. 18,
1987, http://www.nytimes.com/1987/02/18/opinion/our-greedy-colleges.html

^
How U.S. News Calculates the College Rankings, US News and World
Report, 2010, http://www.usnews.com/education/articles/2010/08/17/how-us-news-calculates-the-college-rankings

^
Estimating the Payoff to Attending a More Selective College:
An Application of Selection on Observables and Unobservables, Dale, S.
B. and Krueger, A. B., NBER, 1999, http://www.irs.princeton.edu/pubs/pdfs/409.pdf

^
The Credits that Count: How Credit Growth and Financial Aid
Affect College Tuition and Fees, Ley, K. and Keppo, J., SSRN,
2011, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1766549

^
Joseph Marr Cronin and Howard E. Horton (May 22, 2009), Will Higher Education Be the Next Bubble to Burst?,
The Chronicle of Higher Education, http://chronicle.com/article/Will-Higher-Education-Be-the/44400

^
The higher education bubble, The Economist, June 11,
2009, http://www.economist.com/blogs/lexington/2009/06/the_higher_education_bubble

^
Fitzgerald, Jay (May 31,
2009), Higher-education bubble could burst next, Boston
Globe, http://news.bostonherald.com/business/general/view.bg?articleid=1175836

^
Popping the Higher-Education Bubble, National Review,
March 15, 2010, http://article.nationalreview.com/427786/popping-the-higher-education-bubble/dan-lips

^
Glenn Harlan Reynolds
(August 8, 2010), Further thoughts on the higher education bubble,
Washington Examiner, http://www.washingtonexaminer.com/opinion/columns/Sunday_Reflections/Glenn-Harlan-Reynolds-Further-thoughts-on-the-college-tuition-bubble-100216064.html

^
Higher Education, The Latest Bubble? The
Economist, April 13, 2011

^ a
b
"Trends in College Spending 1998-2008" (PDF) Delta Cost
Project

^
Claudia Goldin, Lawrence F. Katz (2008). The
Race Between Education and Technology. The Belknap Press of Harvard
University Press.

^
Hillman, Nick (2006). "Student Debt
Burden, Volume 3, Number 8, August 2006". American
Association of State Colleges and Universities. http://www.aascu.org/media/pm/pdf/v3n8.pdf.

^ a
b
c
"Public Universities Relying More on Tuition Than State
Money", The New York
Times 2011/01/24

^
"Federal Student
Loans: Patterns in Tuition, Enrollment, and Federal Stafford Loan Borrowing Up
to the 2007-08 Loan Limit Increase". gao.gov. 2011.
http://www.gao.gov/products/GAO-11-470R.

^
"Student Loans in Bankruptcy". lawyers.com. 2011. http://bankruptcy.lawyers.com/consumer-bankruptcy/Student-Loans-In-Bankruptcy.html.

^
"Student Loan Bankruptcy Options". money-zine.com. 2011. http://www.money-zine.com/Financial-Planning/College-Loan/Student-Loan-Bankruptcy-Options.

^
"Student Loan Bankruptcy Options". money-zine.com. 2011. http://www.money-zine.com/Financial-Planning/College-Loan/Student-Loan-Bankruptcy-Options.

^
"Student Loans in Bankruptcy". lawyers.com. 2011. http://bankruptcy.lawyers.com/consumer-bankruptcy/Student-Loans-In-Bankruptcy.html.

^
Dvorkin, Howard (2010). "Student Loan Debt Surpasses Credit Card Debt-What to Do?".
foxbusiness.com. http://www.foxbusiness.com/personal-finance/2010/09/20/student-loan-debt-surpasses-credit-card-debt.

^
"46 Percent Of Federal Loans Paid To For-Profit Institutions Will
Go Into Default". huffingtonpost.com/AOL.com. 2010.
http://www.huffingtonpost.com/2010/12/23/46-percent-default-rate-o_n_800283.html.

^
Turner, Katrina (2010). "Subject: Default Rates for Cohort Years 2004-2008".
ifap.ed.gov. http://ifap.ed.gov/eannouncements/122010CDRlifetimerate2010.html.

^
Kantrowitz, Mark (2002). "Research Report: Causes of faster-than-inflation increases in
college tuition". FinAid. http://www.finaid.org/calculators/tuitionanalysis.pdf.

^
Kantrowitz, Mark (2002). "Research Report: Causes of faster-than-inflation increases in
college tuition". FinAid. http://www.finaid.org/calculators/tuitionanalysis.pdf.

^
Watts, GordonWayne (2011). "Higher-Ed Tuition Costs: The ‘Conservative’ view is not on
either extreme". ThirstForJustice.net. http://thirstforjustice.net/Higher-Ed-Tuition-Costs.html.

^
Kantrowitz, Mark (2002). "Research Report: Causes of faster-than-inflation increases in
college tuition". FinAid. http://www.finaid.org/calculators/tuitionanalysis.pdf.

^
"Affordable Higher
Education: Student Debt". U.S. PIRG. 2011. http://www.uspirg.org/higher-education.

^
"Fight
to Protect Students and Taxpayers Moves to Senate! - House Voted to Slash Pell
Grants and Block Gainful Employment Rule". ProjectOnStudentDebt.org.
2011. http://projectonstudentdebt.org/update_3711.vp.html.

^
Kantrowitz, Mark (2002). "Research Report: Causes of faster-than-inflation increases in
college tuition". FinAid. http://www.finaid.org/calculators/tuitionanalysis.pdf.

^
Applebaum, Robert (2009). "The
Proposal". ForgiveStudentLoanDebt.com. http://forgivestudentloandebt.com/content/proposal.

^
Watts, GordonWayne (2011). "Higher-Ed Tuition Costs: The ‘Conservative’ view is not on
either extreme". ThirstForJustice.net. http://thirstforjustice.net/Higher-Ed-Tuition-Costs.html.

^
"Real Loan Forgiveness". ProjectOnStudentDebt.org. 2011. http://projectonstudentdebt.org/initiative_view.php?initiative_idx=8.

^
"Take
Action for Real Loan Forgiveness!". ProjectOnStudentDebt.org. 2009. http://projectonstudentdebt.org/update_61909.vp.html.

^
Collinge, Alan (2011). "Private
Student Loan Bankruptcy Bill... The 4th Attempt".
StudentLoanJustice.org. http://studentloanjustice.org/action-room.htm.

^
Watts, GordonWayne (2011). "Higher-Ed Tuition Costs: The ‘Conservative’ view is not on
either extreme". ThirstForJustice.net. http://thirstforjustice.net/Higher-Ed-Tuition-Costs.html.

^
"Bankruptcy Relief for Private Student Loan Borrowers
Advances". ProjectOnStudentDebt.org. 2010. http://projectonstudentdebt.org/update_91610.vp.html.

^
"Affordable Higher
Education: Cutting Lender Subsidies". U.S. PIRG. 2011. http://www.uspirg.org/higher-education.

^
Watts, GordonWayne (2011). "Higher-Ed Tuition Costs: The ‘Conservative’ view is not on
either extreme". ThirstForJustice.net. http://thirstforjustice.net/Higher-Ed-Tuition-Costs.html.

^
"Commission: Private Loans are Not the Solution!".
ProjectOnStudentDebt.org. 2006. http://projectonstudentdebt.org/update_8706.vp.html.

^
"Commission Calls for "Reduced Debt Burden" -- Time for Education
Department to Act". ProjectOnStudentDebt.org. 2006.
http://projectonstudentdebt.org/update_81806.vp.html.

^
Kantrowitz, Mark (2002). "Research Report: Causes of faster-than-inflation increases in
college tuition". FinAid. http://www.finaid.org/calculators/tuitionanalysis.pdf.

^
"Top 10 Job Placement Colleges: INFORMATION AND TIPS ON
INTERNSHIPS AND PAID INTERNSHIP". CollegeTips.com. 2011. http://www.collegetips.com/college-money/college-job-placement.php.

External links

"College, Inc.", PBS FRONTLINE
documentary, May 4, 2010

U.S. Dept.
of Education

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