Higher Education Bubble

The "Higher Education Bubble" refers to the economic concern surrounding the increasing burden of student loan debt incurred by college graduates. Proponents of this theory argue that the financial advantages of a college degree, such as higher wages and job security, are diminishing. As tuition costs continue to rise, many graduates may struggle to repay their loans, leading to fears of a potential economic crisis similar to past financial collapses. Statistics reveal that a significant percentage of graduates carry debt, with average amounts reaching nearly thirty thousand dollars.

Critics of the bubble theory point out that education, being an intangible asset, does not lend itself to the same market dynamics as tangible assets like real estate, which can fluctuate in value. They argue that while student debt may slow economic growth, it is unlikely to lead to a total devaluation of a college degree. The ongoing debate includes discussions on the rising costs of education, the impact of student loan policies, and the effectiveness of alternatives to traditional degree paths. As the landscape of higher education evolves, particularly with advancements in technology and online learning, the discourse surrounding the sustainability of the current student loan system and the value of a college education remains highly relevant.

Published in: 2023

By: Zimmer, Scott

Subject Terms

Higher Education Bubble

Abstract

The higher education bubble is the theory that the economy is in jeopardy because of the large amount of student loan debt owed by those who have attended college. The fear of those who believe in the higher education bubble is that the advantage one receives by possessing a college degree, in the form of greater job security and higher earnings, may be smaller than it once was and that if this trend continues, there will come a time when college graduates are unable to earn enough money to pay back their student loans.

Overview

Periodically, different sectors of the economy in the United States have been the subject of concern for long-range forecasters. One example of this has been the social security system, which at various times has been predicted to become insolvent within the next ten, twenty, or fifty years, depending on the source of the analysis. This problem is correlated to the aging baby boomer population in the United States. Dire predictions of this sort gained a firm grounding in reality in 2008 when the global economy was severely impacted by the financial collapse of the mortgage-backed securities market, resulting in what some have termed the Great Recession. Since that time, there has been growing concern that the same sort of collapse could occur regarding the money owed by college students and graduates in the form of student loans. As more people attend institutions of higher learning in the United States this fear has grown.

The Institute for College Access and Success reported in 2015 that the previous year, nearly 70 percent of students graduating from a public or nonprofit college had some amount of student loan debt. These figures did not include the debt load carried by those who enrolled in college by taking on student loans but then do not finish their degree programs. The average amount of debt each student owed was slightly less than thirty thousand dollars. Most of this debt was in the form of federal financial aid, but about 17 percent was held by private lenders. In 2022, the percentage of individuals graduating with student loan debt declined to 65 percent, though federal student loan programs enacted during the COVID-19 pandemic may have played a role in this decline (Hanson, 2023). These figures represent averages across different types of colleges. In general, students at public colleges and universities are less likely to have debt and if they do owe money, it tends to be a smaller amount. Those who attend private, for-profit institutions are more likely to owe money and the amounts tend to be larger. Students attending private, nonprofit schools fall in between these two extremes.

Further Insights

The gist of the argument that there is a growing bubble in the student loan market is that with each year that passes the economic advantage enjoyed by college graduates over those who have not completed an advanced degree is shrinking. This decline in the wage premium combines with the uncertainty of college graduates finding a position within their field of expertise upon graduation, as well as with the continuously rising cost of tuition at colleges and universities, to cause a sort of spiral effect in which an increasing number of students default on their loans. Ordinarily, new borrowers of student loans are compensated for by students who graduate, find jobs, and begin paying back the money they borrowed. "However, if borrowing increases at the same rate as past borrowers who cannot repay their loans on time, the "well runs dry," and the system stops working."

An opposing view suggests that the student loan market is fundamentally different from the market for tangible assets such as real estate. This perspective states that bubble economies tend to form only around tangible assets, while education (the asset being acquired with student loan funding) is intangible and nontransferable; one can buy a house with the expectation that the real estate market will continue to rise, and then resell the house when the market goes up, but the same is not possible with the intangible asset of a college education. With tangible assets, there is the danger that they may become unsustainably overvalued through repeated purchase and resale, as investors crowd in to speculate on the future direction of the asset's price. At some point, demand begins to fall, and those who have invested with the hope of reselling will seek to unload as quickly as possible, potentially causing the market to crash. Critics of the higher education bubble theory point out that this is not possible with student loan debt because there will not come a time at which the value of the education received by a college graduate will begin to plummet toward zero. The worst that might happen, they argue, would be for the student debt load carried by a large number of people to gradually slow down the economy as more people are forced to devote part of their income to debt repayment.

Much of the discussion around the concept of the higher education bubble is directed toward determining why the cost of a college education continues to rise faster than the rate of inflation. The higher education price index attempts to capture and track operation costs. The costs of college and university administration have risen at rates far greater than the amount these institutions spend on instruction, leading critics to conclude that these schools are operating inefficiently at best and becoming bloated and top-heavy at worst, with overpaid administrators using resources that would better be made available to instructors and classroom infrastructure.

Other explanations tend to look more at the dynamics of the higher education marketplace than at individual behaviors at particular institutions. One view suggests that the steady rise in tuition can be traced back to legislation that was introduced in the 1990s that removed many of the consumer protections, such as disclosure requirements pertaining to the terms of student loans, that had previously existed and made it infeasible to discharge student loan debt through bankruptcy. The effect of this legislation, whether intentional or simply unforeseen, has been to cause student loan debt to skyrocket because borrowers are no longer well-informed, and lenders are assured that whatever debt the borrowers take on will have to be paid back. Those who hold this view of the student loan situation tend to favor a return to stricter lender requirements and a relaxation of the restrictions on discharging student loan debt through bankruptcy or debt forgiveness for student borrowers who meet specified criteria. This would theoretically cause lenders to exercise greater caution in evaluating borrowers, resulting in fewer high-risk student loans. According to the Bennett hypothesis, fewer student loans being approved would reduce the amount of revenue available to colleges and universities and might cause them to slow the pace of tuition increases or even lower tuition in order to incentivize students to enroll with them.

The debate over whether or not higher education is experiencing a bubble is one that is, unsurprisingly, heavily influenced by money. Lobbying groups, including for-profit universities as well as well-known private, nonprofit universities, have a stake in maintaining the status quo and spend considerable amounts of money urging Congress to keep things as they are. Those employed by colleges and universities may be negatively affected or even find their jobs eliminated if reforms to the student loan system are enacted and have the effect of reducing the flow of tuition revenue from lenders to colleges and universities. Further, there is a growing sentiment among many college-aged people that they need a college degree in order to compete in the modern economy, even if the cost of acquiring the degree involves crippling levels of debt. This view is still upheld by the Bureau of Labor Statistics tuition-fee index, which tracks the earning potential of college graduates over time.

In fact, it has been suggested that the entire student loan system as it presently exists represents the culmination of a broad effort designed to shift funding of education, particularly higher education, from the public sector onto the private sector. This perspective maintains that for several decades states have significantly reduced the amount they spend supporting higher education, both through the provision of financial aid and through the direct budget allocations that allow public universities to continue operating. As these public monies have dried up, the argument goes, colleges and universities have had to look elsewhere for the revenue they need to sustain their operations. The solution that has presented itself is to increase tuition and other fees, which has, in its own right, caused students to take on larger and larger amounts of debt, thus shifting the financial burden from public coffers onto the student.

The desired effect of making a college degree more accessible to the general population, however, is not necessarily being achieved. Economic data shows that much of the total increase in tuition has gone not to public institutions but to more selective private colleges and universities. Many of these institutions spend huge percentages of their annual operating budgets on advertising designed to entice more and more students to enroll, thus perpetuating a system that, in the eyes of some scholars, is becoming more adept at fund-raising than at educating. Many of the larger universities in the United States are engaged in ongoing competition with one another to attract high-profile faculty, increase enrollment, and build their institutional endowment. Some of the main methods of accomplishing these goals are to continue adding administrators and faculty with high salaries and to continue to expand the institution by adding new buildings and new programs, even when the need for these is questionable at best. While budgets at public institutions such as community colleges were flat (at best) in the early twenty-first century, private university spending continued to grow, fueled by a veritable arms race of prestige within the academy.

Faced with what can appear to be an extremely cynical system of paying large amounts of money to obtain a degree that may unlock other life opportunities, some have advocated for alternatives to a college education. One such advocate is Peter Thiel, one of the founders of PayPal. Thiel encouraged youth to explore alternatives to higher education by recruiting his own colleagues in the technology sector to volunteer their time as mentors for those who have decided to put college on hold for a few years in order to explore other options. Thiel successfully paired up several dozen students with mentors in this way, though it will take some time to evaluate their progress and determine whether the program offers significant benefits.

Viewpoints

Whether or not a bubble in higher education borrowing exists, it seems clear that colleges and universities will face some significant challenges in the years to come as people continue to pay close attention to the costs and benefits of an advanced degree. Technological advances are also expected to play a major role in whether these institutions are able to adjust to changes in the model of college funding, particularly the move toward online education as opposed to traditional, face-to-face class time on campus. Many brick-and-mortar universities have begun offering their courses in an online format as well as in person. Still others have started to explore the format of the massive open online class, or MOOC, which uses the power of the Internet to make instruction available not only to a roomful of students but also to hundreds or thousands of online participants.

Many pundits suggest that with technologies making online or blended learning attractive alternatives to campus-bound instruction, it will be harder and harder for universities to justify the cost of new buildings or the cost of maintaining old ones. After all, if an instructor can use a MOOC to conduct classes from their faculty office and reach the computers of students in the comfort of their own homes, then there may no longer be a need for some of the expensive infrastructure that many colleges have come to take for granted. The prospect of education taking place entirely online in this way is enticing for those hopeful that by lowering overhead costs, it may be possible to make education and its opportunities available to a wider audience than ever before.

Higher education advocates, however, express concern that departing from the model that colleges and universities have traditionally been—well-stocked libraries, ivy-covered walls, and cavernous lecture halls not to mention, centers of collegiality and mentorship—may also detract from the value that society places on education, transforming it from a valued commodity into nothing more than another tool in the toolbox.

Issues surrounding student loans and their repayment became hotly-debated public issues in the 2020s. Under the Coronavirus Aid, Relief, and Economic Security Act (CARES), enacted during the COVID-19 pandemic in 2020, student loan payments were suspended from March 2020 through June or August 2023. In 2022, the White House announced the Biden-Harris student debt relief program. The administration attempted to introduce this legislation to permanently lower the amounts of student debt owed or completely suspend payments, though the program remained blocked by courts in 2023 (Sherman, 2022).

Terms & Concepts

Bennett hypothesis: The view that part of the reason that increases in tuition prices at colleges and universities have outpaced the rate of inflation is that access to student loans is made too easy by government policies and that restricting access to loans and limiting the amount that students may borrow will have the effect of slowing down the rate of tuition increases.

Debt load: The amount of student loan debt a person owes at a given point in time.

Higher education price index: This index measures changes in the average annual operating costs faced by institutions of higher education, attempting to show changes in what it costs these entities to stay in business.

Loan limits: The maximum amount a person may borrow for higher education is set by Congress, and periodically this amount has been increased to account for inflation and tuition increases.

Tuition-fee index: One metric of the cost of higher education is the tuition-fee index maintained by the Bureau of Labor Statistics. The tuition-fee index tracks the earning potential of college graduates over time, with adjustments made for inflation.

Wage premium: The difference in average earnings between those who have completed a college degree and those who have not. The wage premium is frequently cited as one of the primary motivators for people to attend college. Declines in the wage premium have caused some to question whether college is still worth the expense.

Bibliography

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COVID-19 Emergency Relief and Federal Student Aid. (2023). Federal Student Aid. Retrieved May 25, 2023, from https://studentaid.gov/announcements-events/covid-19

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Hanson, M. (2023, Apr. 1). Student Loan Debt Statistics [2023]: Average + Total Debt. Education Data Initiative. Retrieved May 25, 2023, from https://educationdata.org/student-loan-debt-statistics

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Sherman, M. (2022, Dec. 1). Supreme Court to keep Biden's student loan cancellation blocked for now. PBS. Retrieved May 25, 2023, from https://www.pbs.org/newshour/politics/supreme-court-to-keep-bidens-student-loan-cancellation-blocked-for-now

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Higher Education Bubble

On this Page

Subject Terms

Higher Education Bubble

Abstract

Overview

Further Insights

Viewpoints

Terms & Concepts

Bibliography

Suggested Reading