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The Myth of the Tuition Bubble

It’s all over the place. ABC: “Is College Tuition The Next Bubble?”, The Consumerist: “When Will The College Tuition Bubble Burst?”, Policy Archive: “A Tuition Bubble? Lessons From the Housing Bubble”, The New Republic: “A Radical Solution For America’s Worsening College Tuition Bubble”. You can’t avoid it, and it’s become conventional wisdom. Tuition is rising at unbelievable rates, way faster than inflation, and that is the very definition of a bubble. To do: panic, and stop getting educated. And then panic some more.

Bubble
IT IS A BUBBLE! PANIC! Image via cagle.com

The concept of a tuition bubble has set my teeth on edge since I first heard it, and every time I hear it, I stiffen involuntarily. Partly because I believe strongly in the value of a liberal arts education, and those are the places where TUITION IS RISING OUT OF CONTROL. Partly because I work in a private, four-year, liberal arts college, and am invested in not having my professional life crumble underneath my feet. Partly because the image in the media tends to be greedy money-grubbers checking out what banks will offer as loans and then grubbing as much money as possible so as to grub grub grub, while our faculty meetings are chock full of difficult conversations about budgeting and how to squeeze as much quality education as we can out of every dime that we manage to get, and I’m making far less money than the majority of my friends, while I have far more education. But mostly because it just doesn’t make any sense.

I graduated from college just as the dot-com bubble was bursting. It was a heady time, with people who graduated before me making an unbelievable amount of money for basically nothing. I don’t remember if people were yelling, “Bubble! Bubble!” at that time, but I do remember that there was a strong feeling of “just vomit out an idea and you are set for life.” Then it burst. I bought a condo in 2006, right when the housing bubble was reaching its maximum point. The TV was filled with “Flip This House” kind of shows, and when I was talking to my brother, a real-estate agent, about how I was worried we wouldn’t get a loan, he told me about NINJAs – people who were getting loans with No Income No Job or Assets. We got a loan, despite having only one very small income and no assets, and the banker tried to push a bigger house and a bigger loan on us because HEY! IT’S A GREAT TIME TO BE ALIVE! I don’t remember if people were yelling, “Bubble!” at that time, either. Then it burst.

Both of those times were similar in that masses of people were rushing to do something based on the belief that they could put in a small amount of effort and get an incredible return. People didn’t worry so much about there being a bubble because they were too busy making money hand over fist. They were similar, I guess, to the “tuition bubble,” because prices were rising quickly. But that is where the similarities end, and all of those charts that tell you OH NO TUITION INFLATION IT’S A BUBBLE! PANIC! are kind of bullshit anyway. More on that in a second.

An economic bubble is characterized by a rapid increase in prices, while intrinsic value for whatever it is increases at a much less rapid rate, and then a dramatic crash back to, or below, intrinsic value. The thing about bubbles is that they are impossible to predict accurately, and, like a recession, can only be determined for a fact after the damage has been done. But people predict nonetheless.

There are several reasons why people predict a tuition bubble: 1) When you make a prediction and it comes true, you are seen as a genius. When you make a prediction and it doesn’t come to pass, nobody notices. Making bold predictions is an excellent business plan for economists and those in the media, and the more panicky, the better. 2) Tuition is rising and the value of college tuition is not rising at an equal rate. Bubble! 3) There are a lot of unhappy debt-laden students and former students who want very badly to believe that they are the victim of something bigger than a bad economy. I understand this, being tens and tens and tens of thousands of dollars in school debt, and I would really love for inflation to kick it up just a bit so that I’d make more money compared to my debt. I also think that student loan regulations need to be overhauled, and I think it’s bullshit that private student loan debt isn’t eligible for bankruptcy. But the point is this: TUITION BUBBLE! is a very, very sellable story to a very, very large audience.

But it doesn’t make any sense. Even articles such as this one, entitled “The Kids Aren’t Alright: The Policy-making of Student Loan Debt” starts out with something that knits my eyebrows. “When the class of 2014 graduates, they will be $22,000 in debt on average.” When I graduated from undergrad, that was about as much as I had in debt, and the school loan counselor said to me, “we try to get people out of here with around $20,000 in debt or less.” This was 11 years ago. College tuition, according to all of the articles, has nearly doubled in that time. The college where I work costs nearly twice as much as mine did. Why are loans basically the same?

According to the College Board’s Trends in Financial Aid, “In 2010-11, undergraduate students received an average of $12,455 in aid per full-time equivalent (FTE) student, including $6,539 in grants from all sources, $4,907 in federal loans, and $1,009 in a combination of tax credits and deductions and Federal Work-Study (FWS).” The average student receives almost $5,000 per year in federal loans. This is basically what I received in undergrad. And yet, the way the picture has been painted, I would expect that number to have skyrocketed. Consider this graph:

PANIC!
PANIC! IT'S A SUPER BUBBLE! Graphic from The Consumerist.

But then look at this one:

Don't panic
Student loans over time. Graphic from the College Board.

Seriously, what is going on? Everywhere I turn, I see TUITION BUBBLE TUITION BUBBLE TUITION BUBBLE! It is sure to crash, the cost is rising rapidly, we are in for it. Ron Paul got a lot of followers by blaming student loan debt on the Fed. On the other hand, the atmosphere of college tuition is vastly different from that of the dot-com bubble or the housing bubble. I have yet to hear somebody say, “I’m going to just take out a loan for college education so that I can, with very little effort and in a short time, get incredibly rich,” my own work environment is one which is constantly focused on budgeting and how to cut costs while keeping quality high, and students are basically taking out the same debt as they did ten years ago.

The trick is in the data. Every college has a sticker price, the price that is listed on the books, tuition plus room and board plus books and fees. All of the OMG BUBBLE! articles are looking at the rise in sticker price, and it has been rising at an alarming rate. But it is the wrong data to look at.

Because sticker price is the maximum amount anybody could ever pay for a year of tuition. A handful of students do pay that cost, but they are the students who a) can afford it, and b) value that school enough that they are willing to pay that much. The reality, though, is that most students pay far less. From Planet Money: “Nationwide, the average sticker price is more than twice as high as the price students actually pay, and the gap is getting wider.”

The average price of a 4-year, undergraduate college, it turns out, is not rising at an incredible rate. It’s rising slightly faster than inflation, but nothing near like what the first chart says. The average price that the average student pays is basically rising with inflation.

So the sticker price, which most people don’t pay, screams BUBBLE! But the net price, which most people do pay, screams CALM DOWN! Consider this chart:

Net Price
CALM DOWN! Over 15 years, tuition has gone up $2340, and room and board has gone up $2370. CALM DOWN!

In other words, a handful of students are asked to pay a lot more than they were ten years ago. These are students who don’t qualify for need-based aid, and they are students who don’t qualify for merit-based scholarships. Most students pay around the same price as a decade ago. From the College Board: “The average net tuition and fees in-state students pay after taking grant aid from all sources and federal education tax credits and deductions into consideration increased by about $170 in 2011 dollars, an annual rate of growth of 1.4% beyond inflation.”

The Planet Money podcast goes into the economics behind it (if you have the time, the podcast is only about 15 minutes long and well worth a listen), but the general reasoning is this: such a varied system allows students who want to go to a specific school, who have financial means and are maybe not super academic, to go. Students who have higher qualifications or more needs get a discount. It’s basically a reaction to the market. No, Ron Paul et. al., it isn’t because the Fed is evil.

And the funny thing about it? If the “bubble” bursts, average prices will likely go up for students. The students who are willing and able to pay the sticker price make it possible for the other students to receive those grants and scholarships. Get rid of those high costs, and those in the middle will have to cover the difference. Which means (wait for it): student loan debt would increase.

Look, I’m all for a revamp of the student loan system, especially private loans. The data on private loans is murky, but it is clear that they are rising, with about 14% of students taking out private loans (about a quarter of those are students of the non-profit private schools). Much of that rise is attributable to for-profit schools, and over a quarter of the students who took out private loans didn’t take out any Stafford loans (which are available for all students), which suggests that they aren’t being administrated efficiently. And I’m all for a revamp of the for-profit colleges, because they are driven by money. And I’m even more for a revamp of the dialogue around graduate school, even as somebody with a Ph.D.; I don’t know that it’s the right path for most of the people that take it, and it’s an incredibly expensive wrong path. But the knee-jerk reaction to undergraduate non-profit sticker prices, and the get-more-clicks sensationalist stories about BUBBLE BUBBLE BUBBLE!, are adding absolutely nothing to the dialogue.

If you look at the comments on the Planet Money podcast, people are incredulous at the fact that net cost hasn’t risen substantially, and accuse the Planet Money team of pretending like student loan debt doesn’t exist. I listened to the podcast again, and did extra research to make sure I understood what “net cost” means – it is sticker price minus grants/scholarship/deductions, and does not disregard loans. Even when the facts are presented clearly, even when everything is laid out by professionals, the storyline that STUDENT LOAN DEBT IS EXPLODING! and TUITION IS EXPLODING! is too much a part of our current belief for it to be questioned, much less proven wrong.

There are people who have taken on more debt than they can afford, and people who have private loans that are dragging them down. I personally have way more than $20,000 in debt now, because I went to graduate school. There are students who take on the full sticker price every year to go to a school that they want to because they don’t fully understand the consequences and haven’t been given any financial aid. But the fact remains that for the average student at the average undergraduate not-for-profit college, tuition is not out of control. And looking at the big picture, there is no bubble.

Take a step back, remove yourself from the rhetoric, and think about how things felt as the housing bubble grew, and the way people approached buying houses. Think about the dot-com boom and think about the way that people approached creating crappy companies. Does undergraduate education resemble that in any way? There is a point to be made that the sticker price of college right now resembles a bubble, but the majority of students don’t pay that price. Why is that the data that people are using?

Oh yeah. Because it sells.

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Susan

I am old and wise. Perhaps more old than wise, but once you're old, you don't give a shit about details anymore.

One thought on “The Myth of the Tuition Bubble”

  1. Yes, nothing about the education bubble label works for me. First, you actually have to hold on to your assets and work hard, which is actually the mark of the anti-bubble. Second, I have never heard anything about how my neighbors made a quick profit on their college degree by being in the right place at the right time.

    Also, and this is a side note, it’s interesting to see how little of the wealth from the dotcom and housing booms appears to have been retained by the people I know who jumped on those bandwagons. None of them used the money to build real wealth, and I don’t think it has gone into retirement funds.

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