The College Bubble

By Watson Scott Swail, President & CEO, Educational Policy Institute/EPI International

There is a great article on the Huffington Post this week by Amanda Fairbanks called Peter Thiel’s College Bubble Theory Gains Few Believers. Thiel is one of the founders of PayPal and an investor in Facebook. He argues that higher education is on the bubble, just like housing was, and it will quickly devalue. Thiel believes that we have so overvalued higher education that it could impact our nation’s creativity and vitality. He is currently conducting a competition to offer current college students $100,000 each to drop out and produce.

There are arguments whether higher education is on a “bubble,” as we like to say in economic circles. The article cites experts who say it isn’t a bubble because it isn’t a commodity that can be traded. No, a degree isn’t. But a person with a degree is traded daily. Just like we buy and trade football, basketball, and hockey players, we trade employees all the time. It is a free market, and in a free market, commodities, like people with degrees, can be overvalued and undervalued.

Where are we now?

For those who disagree with the notion that higher education is ready for a fall, let’s compare higher education with housing. The housing market, which is still falling in many areas of the country, collapsed for several reasons. First, there were too many houses on the market because of excessive demand. The construction boom simply left a glut of houses on the market. Once the market crashed, these “extra” houses pulled down the value of the existing market. Clinical supply and demand. Second, there were (and still are) huge public subsidies to buy houses in the US. There is the mortgage deduction (and I believe the US is the only country with such deduction), new house deductions for first-time buyers, VA programs for veterans, and low-income programs to get poor people into houses they own. This increases the demand side of the curve. And third, there was an incredible hype of the value of a home as an investment: “There was NO WAY that houses would (or could) devalue,” “Buy more,” “Don’t just buy one! Buy that second house, and perhaps that fixer-upper.” If you don’t believe me about the hype (and many of you “bought it,” didn’t you? I did), check out HGTV on your TV guide. Airing today (and this is ONLY today): “Designed to Sell,” “House Hunters,”  “House Hunters International” (which, of course, is for that “second home” appetite), “Get it Sold,” “My First Place,” “Property Virgins” (I cannot make this up), “Income Property,” and “Property Brothers.” And there are others, of course, including one of my favorites: “Flip This House.” Not because I like it, but because people can be so stupid. And, if you stick around, you can buy an Oreck vacuum, too!!!!

What’s the parallel? First, in higher education we have too many unemployed people with postsecondary credentials. I’ve written about this before. But there are literally millions of people out there with bachelor’s degrees or higher. Exhibit A shows new data from the US Bureau of Labor with the April 2011 unemployment data by education. To be fair, it is still entirely true that there is a negative correlation between unemployment rates and education. That is, the higher the rate, the lower the degree, or rather, the higher the education, the lower your chance is to be unemployed. That is entirely true. In fact, 4.5 percent of individuals with a BA or higher are currently unemployed, compared to 7.5 percent of those with “some” college, 9.7 percent who are high school graduates, and 14.6 percent of those who did not complete high school (which is also the smallest group). Education does “pay,” for sure.

But it does not take away that over 2 million BAs or higher are currently unemployed in this nation: a number higher than that of people who do not have a high school diploma. Together with those who have some college or an associate’s degree, almost 5 million people are on the dole.

Exhibit A. Number of unemployed workers in the United States, April 2011, by level of education (in thousands) SOURCE:

Economists will tell you that the influx of BAs has helped bring down the average salary of many jobs. We do know that the more education one has, the more they earn. But the trends have flattened. While this is still true, the returns have leveled out for anything sub-BA.

Second, the government, state and federal, provide subsidies to education, both direct and indirect, which alter the demand curve. The general subsidy to higher education, which is indirect for the student but very real and often forgotten, is the highest subsidy for students and higher education. And grants and loan subsidies, which are direct to the student and reduce their out-of-pocket costs. Together, this increases the demand for higher education by lowering the price.

And third, the hype. There is so much hype on the cost of higher education right now, as I have discussed ad nauseam, it seems. The various philanthropic groups supporting more higher education; the US Department of Education. Politics uses higher education as a lever for public support. Why? Because almost every voter has either gone to college, has or is sending their children to college, or wants to send their children to college. It is an issue that impacts almost 100 percent of voters, so it is critical to any campaign. So there is over hype as to the extent we need higher education and should be using it for real economic stimulus. As I want to warn, I am not against higher education, but my focus is on leveling playing fields between the haves and have nots, rather than just filling more and more seats. It is just not that justifiable in an economic assessment.

So what happens to higher education? Here’s what happens. I think Thiel has a lot of this right, regardless of the critics in the article. There won’t be a bubble burst like housing. That won’t happen. But there could be a real kick back in years to come of the valuation of a college degree. Why do we have $5 million college-educated workers in the unemployment line? Sure, the economy sucks. We get that. But also because some of these workers won’t move to the job they are suited for, and many will not take jobs that pay less than they expected. The glut has forced the salaries of many jobs down. And none of this will change until we see employers change. We keep on ratcheting up the rhetoric and expectations, and certainly the requirements, for an entry-level job to a BA and MA. But employers can hire them for $30-$40 a year, easy. And many of these “kids” have debts of $50,000 and higher. What are we selling our youth? Future promise or lifetime debt?

In the article, Mark Kankowitz of says that a graduate going into a field that pays a low starting salary shouldn’t borrow more than that starting salary in that career line. I’m sorry, but that’s just a stupid statement. It’s a fine thing to say, but please tell me how a student is supposed to evaluate this at 18-years old going into a college or university for a career that he or she “thinks” they want? How about the student at Stanford, who goes to get a degree and get into law? Until they find out they don’t like law. She is $120,000 in debt and now trying to find something to do with that “liberal” arts degree. I guess they were just stupid. They should have known better because life is SO predetermined.

The reality is this: we need to better match education with employment. Right now I bet that 50 percent of the jobs that require a BA don’t really need one. Second, we need to lower the cost associated with a basic degree. Last week there was an article about a three-year BA. Why not? Let’s make that happen. Let’s let community colleges offer more BAs, because they will cost less. Let us make online degrees—and I don’t care WHO offers them—more accessible to all and less expensive. They should be the cheapest degree of all! But they aren’t.

But mostly, let’s have real conversations about what we are doing with higher education. About the nexus between what we produce in higher education and what the workforce needs. Those two things are so far apart right now, and our rhetoric only pushes them further apart.

By the way, we don’t need more STEM students, either. We just need more citizens who understand math and science better. And literature. And music. And Arts.

Let’s have a real conversation.

2 thoughts on “The College Bubble

  1. My work is helping K-12 to output students who can problem-solve. So I see how K-12 has started to measure learning (albeit imperfectly) and what that is driving into place. At least since there is a goal (learning specified content and problem-solving skills) and a measure, it’s possible (I’ve seen it) to evaluate learning-per-dollar. Ultimately, one can have a rational discussion on what is the right place to put the dollars. [Note: these now universally-applied “economic” systems were driven from the top (federal and state regulations), not from the grass roots “market” (parents, teachers, teacher organizations, principals, districts, or school boards). The grass roots market was never aware enough, or sophisticated enough, or incented enough, to ask for universal measurements of value.]

    Higher Ed appears to be at square zero in this process, fidgeting and not really even getting ready to start moving. Thankfully there are blogs like this, and I think increasing visibility of Thiel’s thesis and the idea of how horrible the economic value many degrees might be. There are even articles about how little learning there may be after a 4-year, massively expensive process.

    In K-12 people complain about a factory system where just putting in the seat time gets you a diploma. In higher ed, it’s not qualitatively much different, in my personal observation. The main difference is that in MANY college classes, the learning environment gets so impersonal and crappy, that the load for learning shifts from largely-in-the-class, with a motivating teacher, to mostly outside-of-class, with the motivation AND the learning up to the student. Those classes aren’t worth paying much for at all; they may as well be 100% online and inexpensive (see for example and, no, I have no relationship to straighterline but I wish their business model well).

    As a parent and as a citizen of a nearly bankrupt state, which puts half its budget into K-20 education (but more into prisons than into higher ed) and which has seen the cost (but not value) of its top-level public university increase over 10X over 30 years, at an accelerating rate (!), I hope this conversation gains momentum.

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