The Looming Higher Education Bubble

Is higher education the next bubble to burst?

By Kathryn Masterson

Five years after graduating from Butler University, Greg Moser (Butler) and his wife are looking forward to doing the things considered rites of passage for generations of young adults pursing the American dream: buying a house and starting a family.

Those dreams may take longer to realize than for those generations past. The couple have a combined student debt load over $100,000 (for two undergraduate degrees, two Master’s, and Moser’s expected law degree this May), a hefty financial obligation that plays a major role in their decisions about where to live, what house to buy, and when to start a family.

“Our debt is something we think about every day,” Moser says.

“Where the suffering over student debts is most acute is with students who enrolled in the most expensive colleges but majored in the least lucrative fields.”
– Kantrowitz

The pair have been looking for a house in St. Louis for a year, but have yet to find one in their budget in a neighborhood they like. They are staying in St. Louis for at least two years after Moser graduates so that his wife, a math teacher in a local high school, will be eligible for a loan forgiveness program. And depending on what kind of job Moser is able to find after graduation — he’d like to practice public-interest law, but knows the job market is tough — they may put off having kids for a couple of years in order to save some money.

They’re far from the only graduates today starting their careers and adult lives with a significant amount of debt. And as the cost of college continues to rise at a rate higher than inflation but incomes for many remain stagnant, there’s a growing sense that something is out of whack with the cost of higher education. In light of the country’s gloomy economy, it’s a situation that is prompting some people (as well as the media) to ask if higher education will be the next economic bubble to burst.

Consider these recent findings:

  • For the first time ever, college loan debt exceeded credit card debt and could go as high as $1 trillion. (FinAid’s Mark Kantrowitz)
  • The average debt level for the two-thirds of college graduates with loans went up 5 percent for the Class of 2010 to $25,250. At the same time, this group faces an unemployment rate of 9.1 percent, the highest in recent years. (Project on Student Debt)
  • In one year, tuition and fees went up 8.3 percent at public four-year institutions, 8.7 percent at two-year colleges, and 4.5 percent at private four-year colleges. (College Board)
  • Federal student loan default rates are going up. In 2010, the default rate on student loans rose to 8.8 percent, up from 7 percent the year before. (U.S. Department of Education)

Taken with the nation’s high unemployment rate, these data points are adding to the talk of a bubble. Will higher education and student loans go the way of the housing market and dot.coms, markets that rose sharply with inflated prices and widespread faith in higher returns, then came crashing down when the funding sources disappeared? And if that happens, what does it mean for families, students, and organizations such as Sigma Nu?

Kantrowitz: “It’s hard to recognize a bubble until it pops. But they typically happen when there is an oversupply of liquidity, which drives up the price of an asset. ”

A few outspoken voices are encouraging borrowers and lenders to be wary. Moody’s Analytics published a report on student lending in July that said the long run outlook for student lending and borrowing remains worrisome, and “fears of a bubble in education spending are not without merit.” PayPal founder Peter Thiel made headlines with his claim of a bubble and offer to pay 20 students under 20 $100,000 each to drop out of school for two years.

Other experts who study higher education disagree. While there are some similarities between the housing market and student loan trends, the comparison is not a fair one, as housing and higher ed are more dissimilar than alike. People aren’t buying a degree in the hopes of reselling it for more money. Many colleges provide aid money to offset the sticker price for those who can’t afford it. And over the long term, people are still better off financially when they have a college degree than when they don’t.

“I don’t think we have a bubble — not a student loan bubble or a higher education bubble,” says Mark Kantrowitz, who runs the FinAid web site and an expert on financial aid. “What we have is a long-term, continuing trend toward decreased college affordability.”

It’s hard to recognize a bubble until it pops, says Kantrowitz. But they typically happen when there is an oversupply of liquidity, which drives up the price of an asset. In the case of housing, easy-to-get mortgages drove the boom. And when that liquidity is withdrawn, people can’t buy anymore and prices plummet.

Many familiar with the subject recognize the role rising costs play in fueling the higher education bubble. Columbia University, pictured above, is consistently on the list of top 10 most expensive colleges, according to

The student loan market is different, he says. Most of the money funding it comes from the government, which isn’t likely to withdraw it anytime soon. Even with today’s record-high default rates, the government still makes money on its loans.

What there is, he says, is an increase of people over-borrowing for their college education. Kantrowitz says one’s student loan debt should be no higher than the starting salary one expects to get out of college. While student loan debt has long been considered the good kind of debt, because it is an investment that has shown to pay off over a lifetime for people, “too much of a good thing can hurt you,” he says.

That seems to be the case for many Occupy Wall Street protesters with $80,000 in debt, a number far above the national average of $25,000 (an amount that adhered to Kantrowitz’s suggestion of keeping debt equivalent or under to a starting salary). Where the suffering over student debts is most acute, he says, is with students who enrolled in the most expensive colleges but majored in the least lucrative fields.

The Moody’s Analytics report that raised the specter of a bubble points out that some borrowers carry unrealistic expectations about future earnings, and warns them to make good choices about how much they take out and what they major in.

“Unless students limit their debt burdens, choose fields of study that are in demand and successfully complete their degrees on time, they will find themselves in a worse financial position and unable to earl the projected income that justified taking out their loans in the first place,” the report says.

The financial impact of that $1 trillion in student loan debt, which unlike other debts cannot be discharged in a bankruptcy, has implications not only for individuals, but for society, too.

According to a Pew survey of 2,142 adults this spring, almost half of those surveyed who had college debt said their debt made it harder to pay other bills. Twenty-five percent said their debt made buying a home harder, and 24 percent said their loans have had an impact on their career choices.

Moser said college was definitely worth it. “I met my wife and so many friends and had so many experiences I wouldn’t have had if I hadn’t made that investment in myself,” he says. “Sigma Nu was such a large part of my undergraduate experience. You can’t put a price tag on it.”

Kantrowitz foresees an economic impact further down the line, when today’s new grads are still paying off their own loans when it’s time for their children to go to college. With wages and family incomes mostly stagnant and college costs showing no signs of going anywhere but up, the percentage of people who say their loans make it difficult to pay other bills may not be able to save money for their children’s college educations.

“There’s going to be a kind of cascading effect,” he says. “Potentially one third of the next generation of college students won’t be able to count on parental support.” And if the cost of college continues to increase at the rate it has been — and it hasn’t shown signs that it won’t — those future students will need to borrow even more than today’s students if they want a traditional degree.

“The debt will be a much bigger issue then,” he says.

Underneath the debt debate lies a much is a bigger question: Is going to college still worth it?

Though it may be fashionable to argue that one is better off in today’s economy starting a business than pursing a traditional degree — in addition to Thiel’s provocative dropout challenge, a new book by Michael Ellsberg called “The Education of Millionaires” argues that some people do better by skipping out on college — many involved in higher education decry that argument as misleading. It is the exception that one can do better without higher education, not the rule. 

Sandy Baum, an economist and senior policy analyst at the College Board, which issues the yearly reports of college prices and aid levels, says college grads earn a premium over those who never went to college. “That is not remotely going to stop being true,” she says.

Even with monthly loan payments, that still holds true, she says. “The vast majority will have more money left after paying back their student loans than they would if they hadn’t gone to college. That’s the relevant comparison.”

The Pew survey on the value of college echoes that. While three-quarters of adults said that college is too expensive for most Americans to afford, an even higher percentage of college graduates — 86 percent — said college has been a good investment for them personally.

That doesn’t mean people aren’t struggling when they’re in school. Because education must be paid in a lump sum, before those lifetime earnings kick in, and because families real wages have declined or stagnated in recent years, paying for college can feel like a financial crisis. “Even if tuition were free, you’d still see struggling,” Baum says.

Even as prices escalate, a phenomenon partially caused by declining government support for higher education, colleges are raising their financial aid (a practice Baum says isn’t sustainable in the long run). And higher prices aren’t affecting market demand. College enrollment keeps going up.

It looks likely to keep going that way. President Obama has issued a challenge to have the U.S. have the highest rates of college graduates by 2020 (a stretch to accomplish in the next 8 years). Organizations such as the Lumina Foundation have taken up the cause of educating more Americans, too. Lumina’s Goal 2025 aims to have 60 percent of adults with high-quality degrees and credentials by 2025. That means more people likely entering the higher education market, rather than a trend of students who were considering college deciding to dump higher education all together.

To be sure, not every college costs $50,000 a year. Higher education comes in a variety of price points — the expensive private, the state flagship, regional public institutions and community colleges — and there are already indications that some people are shifting to less expensive options.

If more students chose a model other than the traditional brick and mortar path, might Sigma Nu consider a change to its model?

Sallie Mae, the student loan company, said this fall that more affluent students choosing to attend community colleges than in years past. And Kantrowitz sees families looking closer at the tradeoffs between the cost of a particular education and the expected returns, which can include quality of education, likelihood of graduating, and experience.

“We’re seeing families willing to sacrifice a little for better quality, but not a whole lot more,” he says.

In the midst of the cost debate and the push to educate more Americans, higher education policy makers and even some colleges are exploring ways to offer education at a lower cost.

“Our current business model is very expensive and the sustainability long term is really at question,” says Holly McKiernan, a vice president with the Lumina Foundation. “Can you continue to be able to keep the system that is very bricks-and-mortar based and residence based? Is that the model we can actually use long term to be able to drive the economic engine of the economy?”

To provide more Americans with high-quality education — a necessity in our current economic environment, where manufacturing jobs have given way to gains in productivity and a sizable skill gap exists between what today’s jobs require and what skills jobseekers have — a new model is needed. The current one is not sustainable, and cannot be scaled to reach the growing number of Americans Lumina wants to see educated, McKiernan says.

No one knows quite what the college of the future is going to look like. Will it be online only? A hybrid of online and in-person courses? Or a stripped-down version of today’s traditional colleges, minus the tenured professors, residence halls and student activities that we all associate with the collegiate experience?

Whatever they look like, the consensus is they won’t look like our current bricks-and-mortar, ivy-covered institutions. (There isn’t much worry those will go away, though. While a few financially struggling colleges will likely go out of business, the majority will continue to exist and offer the more traditional experience. “They might educate a smaller percentage of students, but not a smaller number of college students,” says the College Board’s Baum).

So what will this change mean for those organizations—including fraternities and sororities—whose existence is centered around the current model of America’s college campuses?

Moser got a scholarship from Sigma Nu, and saw how the financial assistance made a difference to others in his fraternity chapter. “Without that scholarship program, there were definitely some members who wouldn’t have been able to stick around all four years. They probably would have ended up transferring without that little bit of help,” he says.

Brad Beacham, executive director of Sigma Nu, is watching the trends and thinking about what they might mean for the fraternity.

If more students chose a model other than the traditional brick and mortar path, might Sigma Nu consider a change to its model? Beacham says the fraternity’s board of directors raised the question of a virtual chapter several years ago during a discussion of online degrees. We didn’t come to an answer,” Beacham said. “I have to think that is possible.”

Also on his mind is the rising cost of college and the escalating levels of debt students are taking on to attend. “Do students get to a point where their disposable income is completely used up by tuition and other fees and don’t have the disposable income to invest in fraternity membership?” Beacham wonders.

So far, the fraternity has not noticed a decline in membership or retention, he says.

“We still feel we’re a tremendous value,” Beacham says. Sigma Nu has not raised dues significantly since 2006, but the fraternity does need resources in order to compete with the other Greek organizations (the fraternity’s foundation has seen a drop in contributions, a widespread trend in philanthropy post-recession and something Beacham says is definitely on his mind).

There may be a silver lining, however, to the economic challenges and changes in the higher ed system. Lumina’s McKiernan, who served as the head of Alpha Chi Omega before her current job, says the current situation provides opportunities as well as challenges for Greek organizations. While the economics of higher education may mean fewer students can afford both tuition and the Greek experience, fraternities and sororities can also articulate the added value they can provide both individuals and society.

If there is a higher education bubble, and if it bursts, tapping a network of support will be even more important as a growing number of applicants seek a relatively fewer number of jobs. The social skills absorbed from fraternity membership, combined with the applied career and life skills learned from the LEAD program, will give an edge to the members who took full advantage.

“In our very technological society, we need people who are very effective at relationship building and that value the importance of connecting with people and solving problems together,” McKeirnan says. Her words call to mind the dueling but harmonious symbols of Sigma Nu. While the basic tenets of higher educations will remain in place, other aspects are likely to change significantly. As the Rock and the Rose remind us, Sigma Nu must remain committed to our core principles while placing equal importance on the willingness to adapt to our surroundings.


Editor’s Note: Kathryn Masterson is a writer based in Washington, D.C. Prior to joining the Chronicle of Higher Education, Masterson worked at The Chicago Tribune, Associated Press and The Philadelphia Inquirer.

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