Friday, January 21st, 2011

The Education Bubble

I have not always been a Peter Thiel fan—the PayPal founder and Facebook investor's politics and ideas are complicated and sometimes they stem from what I would consider psychological projections (see: affirmative action, although even in that case I totally agree with his embracing a larger concept of "diversity"!)—but honestly, I am on board with about 75% of this extended interview with him in the National Review. One idea in particular is extremely valuable, and we will all be talking about this a lot in the next decade: that America has group-hallucinated itself into an education bubble.


Education is a bubble in a classic sense. To call something a bubble, it must be overpriced and there must be an intense belief in it…. [W]hen people make a mistake in taking on an education loan, they’re legally much more difficult to get out of than housing loans. With housing, typically they’re non-recourse—you can just walk out of the house. With education, they’re recourse, and they typically survive bankruptcy. If you borrowed money and went to a college where the education didn’t create any value, that is potentially a really big mistake…. I estimate that 70 to 80 percent of the colleges in the U.S. are not generating a positive return on investment.


The Great Recession of 2008 to the present is helping to bring the education bubble to a head. When parents have invested enormous amounts of money in their kids’ education, to find their kids coming back to live with them — well, that was not what they bargained for. So the crazy bubble in education is at a point where it is very close to unraveling.

That's notable that he said "the present," actually! I hate the conception that the recession "ended" in June, 2009, because we only define "recession" through very specific economic indicators.

61 Comments / Post A Comment

hockeymom (#143)

This is exactly why Child #1 is going to be an NHL superstar and Child #2 is going to win the lottery.
That's our plan and we're sticking to it.

deepomega (#1,720)

Yes yes a thousand yesses. Wish there was an easier way to impart some economic realism on the education industry (and it is most assuredly an industry!)

Of course where it gets fun is when you start thinking about the effects of federal aid on the cost and availability of education….

Yesss. The fact that loans make it so much easier for schools to jack up tuition (and room and board) rates because at 18 you aren't really thinking about paying back your Taco Bell dinners and women studies courses over the next 15 years.

myfanwy (#1,124)

Yesss some more. You can get government loans in Canada for school, and the repayment terms on them are much more flexible. Tuition rates and indirectly, the government, are funding the ridiculous amount of construction at my alma mater. (50 year old building? Rip it out! Make it bigger! MOAR STARBUCKS)

joshc (#442)

YES^2, especially when you think about how these loan programs allow states to cut higher education funding so that universities can pass the cuts along to students via higher and higher and higher tuition just to stay in business.

I'm pretty sure that my state school's tuition is now about 5 times the amount that I paid. My friend who went downstate to the same school but with a much, much better reputation said it the tuition there is now comparable to a private uni. Also, I looked into an MBA at my alma mater….$50,000.

Murgatroid (#2,904)

He doesn't look like Wallace Langham at all.

boyofdestiny (#1,243)

I'm very interested to know if seasteading is part of the 75% you're on board with.

… OKAY A LITTLE. But only a little. (Come on it's SO APPEALING!) I do like the idea of states as in competition. This is a thing that happens with cities, actually: New York remains "competitive"–but mostly to business interests. Really, cities and states should be competing for residents!

boyofdestiny (#1,243)

Compete how, though? And don't cities and states already implicitly compete? New York is very different from Los Angeles or Cleveland, and Wyoming is very different from New Jersey, and they have very different things to offer their residents. On paper it's easy to talk about moving from place to place, because on paper people aren't actually people. But in reality, there are a whole host of reasons why someone wouldn't up and move from State A to State B, even if State B had lower taxes or better services or more responsive government or more compelling cultural institutions. I just have a hard time envisioning cities and states in that frame, as entities competing for residents.

deepomega (#1,720)

@Boy: All true, and as with all sorta-market-y solutions the answer is: be patient. Look at the hollowed out husk of Detroit. Definitely an example of a city in competition with other cities and losing. It just takes a while!

boyofdestiny (#1,243)

deepo: Yeah, but what I'm saying is, the competition is already there, and I don't think it makes much sense for cities and states to think of themselves as explicitly in competition with each other for residents. I see people either moving to or away from places as more of a byproduct of a range of factors (the rise and fall of a dominant industry [to cite one example in Detroit's case], the general state of the economy, local and regional conceptions of justice, totally unknowable personal reasons) and less as a result of some purposeful competition between states and municipalities.

To sum it up, it's an interesting way to think about cities and states and one lens to look at their shifting populations, but it's a bad idea to think of competition for residents as any kind of raison d'être.

boyofdestiny (#1,243)

@deepo again: I'm also interested in what you mean by "solutions."

deepomega (#1,720)

@BoD Oh I'm speaking broadly: I am a pro-market liberal, who thinks that markets are a pretty great way to get things done, except when they aren't. There are some things markets will sort of deal with on their own, like pricing goods. And there are other things markets would most likely address eventually – like institutional racism – but agonizingly slowly. Usually the applicability of market solutions is mostly related to how long you're willing to wait for an answer, because markets be sloooowwwwww.

boyofdestiny (#1,243)

@deepo: I forgot how dickish "I'm also interested in what you mean by X" sounds. Good answer, though!

SeanP (#4,058)

Oh, I guarantee that they already think of themselves as in competition. 1) Many of them advertise – the state of Iowa has sent a number of nice brochures to my wife (a native Iowan) imploring her to return home. 2) They practically all do silly tax games trying to attract business.

But there is quite a lot of "friction" involved in the marketplace – as BOD pointed out, it's not necessarily so easy to up and move somewhere where they're offering a better deal. Otherwise we'd all be in Alaska tapping into those sweet, sweet permanent fund dollars.

boyofdestiny (#1,243)

@SeanP: Yeah, there's plenty of evidence that states compete for businesses. (Blah blah blah, all the credit card companies are in Delaware, blah blah blah). And it makes sense, since attracting businesses brings in a significant amount of tax dollars, new jobs, etc. I think Choire up there was specifically talking about states competing for individual residents (or, at least, that's what I was talking about in my response.) Which, as I've blathered on about, makes less sense to me.

I think states and cities already compete for citizens (in addition to business $$$), no doubt. Just because some of us are limited by our circumstances doesn't mean that they aren't out there trying to get us to move with their food carts.

dntsqzthchrmn (#2,893)

Define value?

hockeymom (#143)

Do you live in your parent's basement.

dntsqzthchrmn (#2,893)

Argh! A touch! I do confess, I breathe my last!

brent_cox (#40)

But will we be able to isolate this unraveling from all the other unraveling?

NinetyNine (#98)

In terms of economic utility, all college does is teach you how to be an entitled asshole. Which is a useful skill! It encourages you to demand fairness, raises, recognition. If your parents know how this works (and the world in general) they can teach you this just fine. That's why Carney is so aggressively on this beat; he didn't need college because he's been an entitled asshole his whole life.

Art Yucko (#1,321)


buzzorhowl (#992)


Neopythia (#353)

I see university less as an educational opportunity and more of a social one. Granted it is dependent on the specific field but outside of certain specialized industries getting and holding a job has little to do with an actual skill set or even the ability to think.

barnhouse (#1,326)

College helps some kids a lot, but they have to work while they are there and be thinking about what happens afterward from minute one. This is why Amy Chua is not 100% wrong.

Dave Chen (#8,973)

I've always been curious about the economics of college tuition. It's been growing at absurd rates. Colleges seem to charge more just because they can. Parents believe it's worth it, so the colleges make them pay.

And where does the money go? Faculty salaries sure haven't been going up at similar rates.

It's particularly scary because I'll be paying for a couple kids in not too many years.

olympiapress (#9,474)

Money's all gone to the administration building. The junior assistant provost in charge of outdoor smoking policy makes six figures, and will have you towed if you park in the space reserved for her Lexus.

When you think about it, since stuff like registration, scheduling and billing has all been computerized, you don't need as much bureaucracy as you used to to run Harvard, let alone State U…

/Young whippersnappers today don't believe I was out of pocket less than $10k for three years at a (decentish) state school, including summers. Free tuition from mom's job, but housing's also gone crazy there, and the Jersey girls we used to get in spades would be paying $30k annually for U Made a Bad Choice.

//I'm under 40.

deepomega (#1,720)

UMBC?!?!?! My alma mater!

(For serious.)

JPND (#9,550)

If it's a state university, you can look up where the money goes.
Administration is where it's all going.

However, I'm not sure it's accurate to say that faculty salaries have not been going up at similar rates.
For instance, at the University of Minnesota, chemical engineering profs make $190,000… which is definitely more than you make as a chemical engineer. Economics professors at the business school are making $300,000+. Philosophy profs are making $90K, which isn't being rich, but about twice as much as I assumed.

OH also, I was reminded by someone just now OF THIS, which, I had indeed completely forgotten! Blech!

barnhouse (#1,326)

Good lord. I did not know this.

buzzorhowl (#992)

I have never thought of using the term "education bubble" before, but I've been going on rants at parties/bars about this exact thing for at least five years now. I've never had one second's regret about dropping out of college, and I know a lot of people who've got multiple degrees I don't have and are making less money than me. THE SHIT IS NOT WORTH IT, people.

roboloki (#1,724)

student loans allow millennials to learn about indentured servitude first hand

Jared (#1,227)

"Education Bubble?" What!? No No No! Does anyone actually think that increased tuition goes towards Womens Studies departments rather than snazzy new dorms and lots of new computers? That's a housing bubble and tech bubble, so don't go blaming the eggheads.

If you think of education as an investment that needs to pay off in the future, then the only thing your tuition buys is entry into a higher job track. This cannot be anything OTHER than a bubble, but that's because employers are looking for pedigree rather than thinking ability. Think of education instead as a public good. The crisis in education is a tragedy of the commons, not a bubble.

Except that is not how it is regarded in this country AT ALL. If it were a public good, it would be free (well free as long as you don't pay taxes) or close to free.

dntsqzthchrmn (#2,893)

Wonder how all our brand name credentials will play with the children of the Great Pacific Plastic Garbage Patch.

shostakobitch (#1,692)

Wow! Somebody thinks education is overpriced! Who knew?

SeanP (#4,058)

I think this is exactly right. The thing to do is change the terms of these loans so that it's easier to get out of them, and that the university is at least partly on the hook in the event of a default. That would mean that fewer people would get loans, unfortunately; but it would also mean that you'd have few instances of people getting absolutely ripped off by huge college bills that could never, ever pay off – the banks and/or schools would do their homework.

Tulletilsynet (#333)

University is a place to sneak into and learn beautiful useless things from wonderful people who are up for tenure review and not going to make it because they didn't earn enough merit badges. This we may learn from the novels Pnin, Pictures from an Institution and Lucky Jim or the dialogues of Plato, take your pick. You can't buy an education, you can only steal it.

barnhouse (#1,326)

LOVE this comment so much. (Lucky Jim YAY.) But it is maybe only partly true. You can be an autodidact, of course, but that kind of adds some extra hurdles even for e.g. attracting capital to a business. I guess it's on a case-by-case basis; some people whom you need to persuade or "sell" are impressed by a good degree and others, not so much.

Tulletilsynet (#333)

An autodidact is a person who chooses his teachers.

Freddie (#4,189)

This has been a cute way to attack colleges by conservatives for ages, but it's a deeply flawed model. The housing bubble was a bubble because people were able to borrow against the market value of their homes. The fluctuation in the home's value is actually of little concern to an owner who intends to hold the asset. It is of great importance to the owner who is either planning on selling the home soon, or who is borrowing against the value of the home. Neither of these situations apply to college students.

You can't have a classic asset bubble when the asset in question is non-transferable. The students are expecting to earn more based on the possession of the degree, and this can turn out to not be the case– but let's be clear: the value-added of a college degree has never been higher. Generally, talk of college students not getting the value for their degree is limited to anecdote. On the level of data, the financial incentive for attending college has never been higher. To whit:

Anyway, I digress. While a college degree may or may not confer a financial advantage equal to the price of attendance, that is irrelevant to the formation of a classic asset bubble. You can't speculate on the value-added of a college degree. The degree is non-transferable; you can't take a bet by buying someone elses or reduce risk by moving yours away. And while there is some limited action in derivatives revolving around student loans, it is nothing compared to the endless derivatives, hedges, and collateralized debt that went into housing. Because, again, when an asset is non-transferable there's limited opportunity to speculate.

Really, both education and housing suffer from being defined as investments rather than tangible goods. A house's value can fluctuate wildly without cause for concern if the owner's primary interest is in living in it. (Refinancing your mortgage, after all, amounts to a bet by the bank on the future value of your home.) Meanwhile, higher education is treated as though it is only a financial instrument, rather than having the actual value of having been educated. Of course, education isn't going to look worth it, when you separate it from its actual value! It's like buying a chair, refusing to value the ability to sit in it, and calling it a bad investment if the chair doesn't rise in value. The question isn't purely of value but of utility.

Almost no one will see this comment which is too bad since it's absolutely correct. Props.

oudemia (#177)

Yes, yes.

Matt Cornell (#8,797)

Um, Thiel's also not a big fan of womens' suffrage.

Two things, though. Okay, three:

If financial literacy was taught pre-college (or at all, really), this would be more or less moot. Instead, it's deliberately obscured so that we can become indentured while we're still young–and just about every kind of financial institution is predatory in this regard. We just bitch about the student loans because we DO still pretend to believe, as Jared suggests above, that education is for the public good. But we only pretend.

And the problem with university costs is the urge to "run it like a business," which for the assholes at the top generally means to pay idle executives outrageously bloated salaries and take budget cuts out of the plebes' paychecks (happened at every public school in Indiana last year) while continuing to take raises and bonuses, a whole lot like Wall Street. More running it like a business is really, really not going to help.

Aaaaand this entire conversation takes the argument that education is a consumer transaction as a given. The premise that education is a consumer transaction is precisely what's ruining public universities. My students who still take responsibility for their own learning, who try at all, have perfectly good jobs after college. The ones for whom this is a good working model move back home. They're the same students who think it's the university's job to provide them an education in the way it's a cashier's job to hand you your smokes and your change. How is that the university's fault?

Anarcissie (#3,748)

Freddie is correct about the higher education 'bubble' not consisting of games played with transferable assets. The bubble in education costs is of a different nature: it is the rising price of something of very dubious value. (All the 'reward of education' statistics I have seen have not controlled for class, which would be essential to determining what ROI college educations produced.) The present model of college education is highly authoritarian (by social choice) and so does not offer many alternatives which might otherwise compete enabling us to arrive at better results. People waste their time in college because it's putting in time that counts the most — just as with the office or managerial work they will eventually get if they're lucky. Sorry this is so condensed, but the three or four who read it at all may at least get the idea.

oudemia (#177)

Peter Thiel also thinks that giving women the franchise was a bad idea.

AngelinaL (#9,601)

Parents are no longer able to save for their child's college years because postsecondary education price inflation is exponentially higher than the savings rate. This forces more and more students to go into debt before they earn their first professional dollar. It will eventually be disruptive to the economy and will have a massive impact on other industries. Furthermore, debt forgiveness is a moral hazard that means that the debtor has no real obligation and the taxpayer is now responsible. Whether the student loan debt industry is run by the American government or by subsidized lending institutions, the business model is flawed and will continue to force prices upward regardless of whether it makes economic sense.

moumita (#242,230)

Although there have been setbacks there is no need to lose hope. It is better to stay updated about the job trends through career blogs and magazines, there are publication for specific sectors as well such as best health workers publications.

Rishikesh (#242,248)

Just because there have been a turbulent time that does not mean that there is no real value of education. Now it has become even more essential to have the right qualification. No matter what field you want to work in interior design or health or management you should be qualified enough.

Anakoni (#241,215)

We find these sort of bubbles everywhere, but I must agree with the fact that education gets the first prize. Now you choose a degree that will be advancing your career, instead of choosing a job that soothes you better and whom you like doing.

Lisha (#242,462)

I didn't know the MBA costs $50,000, that's a lot of money spent for an uncertain success. If you turn out to be a disaster management boss, you won't be able to tell your parents their investment was worth it.

Kumara (#241,096)

I wonder if this value will be increasing participation from the students' part. I, for one, think it's a fair price for tuition. Honestly, when you come to think about it, being smart has its price.

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