Trends from 2013: the higher education bubble

FTTE logoNow we complete this series of year-end trend analysis posts.  The final category combines education and technology, but with a darker tone of crisis.  (Previous posts: 1, 2, 3)

As before, this post draws on my FTTE reports, which is where you can find extensive sources for these comments.

Is higher education experiencing a bubble?

a bubbleThis concept, which I began to track in early 2012, built across multiple fronts in 2013. The bubble idea holds that colleges are overpriced, that student demand is questionable, and both could drop together. I have tested this concept throughout 2013 through social media and in-person presentation, using multiple trends and analyzes, and even developed an alternative model (peak higher education).  My verdict now is… the bubble might be happening.

A series of major trends supported the bubble concept in 2013:

  • College and university tuition and fees continued to rise, despite several tuition freeze experiments.  This is consistent with a rising bubble, among other interpretations.
  • Student debt rose throughout 2013, inspiring widespread anxiety.  This is also consistent with a bubble (as well as other models: consumer behavior in a captive market, and also consumers reacting to media panic, etc.)
  • A number of institutions took drastic steps to stave off financial crisis, including merging with other campuses, ending academic programs, and laying off faculty (I dubbed the latter two “sacrificing the queen“).  These events could be advance signs of a bubble about to pop.
  • The number of students taking classes went down across many sectors (see “Enrollment decline” above).  If this continues, then that’s a sign of a bubble popping.
  • Some graduate programs suffered badly in 2013, most notably law schools, who saw declining revenues, applicants, graduates, and jobs.
  • Outside of campuses, political pressures remained steady.  Some of this occurred in partisan terms, as Republicans extended their criticism of public K-12 to all of higher education, sometimes with an anti-union dimension.  Indeed, I find bubble arguments most often made by conservatives.  However, 2013 also saw Democrats joining in for a full-court bipartisan press on higher education, from a presidential charge to build a new institutional assessment system to high-profile governors and mayors calling for reduced higher education fees.

For an example of the latter, president Obama this past August:

[O]ver the last three decades, the cost of higher education has gone up 260 percent, at a time when family incomes have gone up about 18 percent.  So […] if you’ve got one line going up 260 percent and another line going up 16 percent, you start getting a bigger and bigger gap.  And what’s happened as a consequence is that either college has become out of reach for too many people, or young people are being loaded up with more and more debt.

bubble smearing

All of these trends – each and every one – seem likely to continue in 2014, and perhaps beyond.

At the same time several powerful trends countered the preceding.

  • The college premium – that lifelong boost to a person’s earnings from having completed an undergraduate education – remains in evidence, despite anxieties about rising tuition and student debt.   So one measure of higher education’s value remains.
  • College and university endowments grew in 2013, after several years of stagnation.  On the one hand, this gives some of them the financial strength to expand student aid and/or reduce prices.  On the other, these institutions suffer less bubble-related anxiety.

In other words, Americans increasingly think college is too expensive and fewer of us enroll, but the benefits remain and no alternatives have seriously challenged higher education.  2014 will likely see these trends continue to struggle against each other.

What do you make of this concept, as 2014 dawns?

(bubble photos by Ali Smiles and Jenny Downing)

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11 Responses to Trends from 2013: the higher education bubble

  1. I’ve never believed the bubble talk, largely because I’m an historian and think of speculative asset bubbles as the relevant concept — and since you can’t sell a degree you earn, there goes the speculative part of the definition.

    What is true is that demand for higher education can go down as well as up, though the last half-century has seen enrollment in community colleges along counter-cyclical lines. And, true to form, enrollment in community colleges dropped in the past year as the recovery has limped along. If there is a clear place where enrollment has dropped substantially, it’s in the for-profit sector. Not sure exactly how much of that is due to both journalistic exposes of their practices and how much due to Congressional hearings and other actions to crack down rhetorically or actually on scandalous practices.

    Well-endowed private institutions are fine and will remain so, for the most part.

    Public institutions are an open question, financially, primarily because of state disinvestment and the way that the “balance-wheel” dynamics favors pet projects on the budget upside rather than investment in general instructional costs. Tuition-dependent private schools are also vulnerable, and here is where the high-tuition model is most dangerous to an institution. If you’d like to send your child to XXXXXX, which is twice as expensive as the regional state university campus near you, you can always tell your child that without funding, it’s time to think about four-year publics (or 2+2). And with the tuition-dependents, the only option is to add masters programs in hopes of buffering the institution against undergraduate enrollment declines. Not a good picture right now.

    • Good thoughts, Sherman.
      Strictly speaking, the higher ed bubble idea is based on services, rather than goods (i.e., American houses, Dutch tulips). The college experience of teaching and learning is a service delivered to a consumer, one which can be priced, regulated, assessed, etc. Services are not so fungible as goods; as you say, I can’t trade my University of Michigan degrees, although I can trade on them. What do we know of service bubbles from the historical record? If there were any, did speculation occur?

      I agree re: state schools and most (non-elite) private ones. That’s the main focus of my attention, actually.

  2. Bob says:

    Just curious, you say the “college premium” remains in evidence. But isn’t that a lagging indicator? You need a substantial fraction of a working lifetime to judge a lifetime’s income, so today’s evidence would be related to the education acquired some 10-30 years ago, no? Comparing the arc of income for someone 5 years out today with the equivalent 5 years from 1980 would seem to have a lot of error, depending in no small part how the 5 years aligns with general economic trends.

    • That’s a good and disturbing point, Bob. The evidence is indeed historical and projected forward. Yet we seem to be experiencing lower wages for workers in their 20s; do we need to assume they will make unusually high salaries later in life to keep the model stable?
      Bob, you should write this up somewhere.

      • Bob says:

        Not sure where, I don’t even pretend to know any real economics.

        But let me try a different riff on the same subject. There is a difference between micro and macro, what we think best for an individual, and what we think best for the industry.

        Suppose graduates do make “more than average” lifetime incomes. Does that mean, if we graduate enough students, we can all be above average? Or that, if we graduate enough students, we change the overall economic environment of the graduates?

        Obviously if you overproduce widgets, they go down in value. I’d like to believe education is not like that, that a more educated society is actually more productive. But true or not, that is a very different argument from advising an individual based on the college premium. And different still from the issue of balance between GDP and Gini coefficient.

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  4. It is indeed a very complex problem, Bob. But I think you nailed key pieces of it:

    -possible overproduction of graduates (“if you overproduce widgets, they go down in value”). Connect this with recent projects of jobs growing in numbers, which don’t require an undergraduate education.

    -a reliance on a non-college-education population (“if we graduate enough students, we can all be above average?”). This ties in with charges of elitism, of course, but also with cultural trends away from skilled trades. It also reminds me of the exclusivity so many institutions proclaim. Will a continued emphasis on higher ed worsen the American Gini score?

  5. Maria says:

    I think some of the demand for college can be explained by the lack of alternatives elsewhere rather than a demand for college itself. If there were manufacturing jobs out there, I bet a lot of community college students would be working them instead of taking classes. The other aspect I notice falls under the category of “irrational behavior”. I used to work for a for-profit college and plenty of our students were taking out as many federal loans as possible for our online programs while not making much of an effort to actually do school work. I’d like to think that if these students (many of them were older adults or stay at home moms) had some sort of reasonable alternatives, they would be choosing them over racking up lots of debt without getting a degree. But human nature is definitely a strange thing. So I think at least some of the continued demand for college is not actually demand for college but lack of alternatives elsewhere (and also just plain irrational behavior in a lot of cases).

    • Good points, Maria.
      Let me try to respond:
      1) If American jobs come back (perhaps a big “if”) will we see fewer still students in college? That might accelerate the bubble.
      2) Irrational behavior: I wonder how people thought of debt before, say, 2009-2011. How fantasy-like was it, how removed from everyday life?

      • Maria says:

        The number of students in college may stay the same or even increase if US manufacturing comes back e.g. more foreign students could attend US schools or some students may feel that attending college is worth the price tag b/c they’ll be able to get an even better job than a manufacturing job. I’m just positing that a lot of students who are in college now, especially in the for profit institutions and community colleges, probably wouldn’t be there if they had other alternatives. As for debt, I think it was, for a time anyway, an ok thing to go into debt if you knew there would be a reasonable way out of it. Now that it’s more uncertain whether you’ll be able to repay college debt without seriously hampering your ability to do other things in life, debt seems a lot riskier.

      • American schools are certainly gunning for foreign students these days. Competition is heating up overseas.

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