What College Bubble?

For the past year or so, I’ve read terrifying headlines shout dire warnings about the “college bubble” and “education bubble.” These articles warned readers to be cautious about their college choices, or else they could end up drowning in student loan debt, unable to get a job because they have a worthless degree.

The articles also all seem to argue that

  • College is so expensive that college degrees are worth less than what students pay for them.
  • High college costs forced students to take out record amounts of student loans, which they then default on, hurting the economy the same way the collapse of the housing bubble did.

The warnings are stark: Megan McArdle, writing for The Daily Beast, cautioned that

“We all seem to agree that a college education is wonderful, and yet strangely we worry when we see families investing so much in this supposedly essential good. Maybe it’s time to ask a question that seems almost sacrilegious: is all this investment in college education really worth it? The answer, I fear, is that it’s not. For an increasing number of kids, the extra time and money spent pursuing a college diploma will leave them worse off than they were before they set foot on campus.”

But is this true? Is there an education bubble? Should students forgo college out of fear of being caught in the same kind of economic crunch caused by the sub-prime mortgage bubble?

What is an Economic Bubble?

Most people had probably never heard of an “economic bubble” until a few years ago. The Common Sense Investor defines an economic bubble as “the commonly used term for an economic cycle that is characterized by a rapid expansion followed by a contraction, often times in a dramatic fashion.”

The most powerful example of an economic bubble is the collapse of the housing market in the United States, resulting from skyrocketing home purchase prices based on the easier availability of risky sub-prime mortgages.

When the mortgage industry collapsed after high mortgage default rates, homeowners were left with mortgages that were sometimes twice as much as the actual worth of their homes.

What’s the Evidence?

Most articles on the so-called “college bubble” have tried to show that college loans are similar to the sub-prime mortgages that helped precipitate the great recession still plaguing the American economy, which inevitably ripples through markets around the world. Critics argue that a college degree isn’t worth the money because graduates end up in such debt that they are unable to ever recover financially.

David Blake recently published two charts on BusinessInsider.com that he claims prove that

“a college degree just isn’t worth the money anymore.” He writes, “we have now reached a tipping point. The ROI [return on investment] of education has diminished for all and become negative for many.  We have lost the ubiquitous positive financial return on education.”

Critics claim that this high rate of student loan debt, which for the first time has outpaced credit card debt in the United States, is going to destroy the economy as well as the futures of graduates. Therefore, many argue that the value of a college degree is falsely inflated, and bound to crash in the near future. But is this true?

The Real Value of a College Degree

The argument that a college degree is worth less than the tuition it cost is a very common argument.

The big problem is that it doesn’t include the larger context. How do students without a college degree fare in their careers? Almost every single study from the past few years shows that having a college degree is better than not having one. An August 2012 study from Georgetown University’s Center on Education and the Workforce supports this.

The report states that “It’s a tough job market for college graduates, but far worse for those without a college education.”

Plus, the “college wage premium,” which is the difference in income between those with a college degree and those who just have a high school diploma, is still quite high. The Pew Research Center confirms that “the typical college graduate earns an estimated $650,000 more than the typical high school graduate over the course of a 40-year career.”

In Australia, the chart looks like this (data from Australian Bureau of Statistics):

 

Jonathan James of the Federal Reserve Bank of Cleveland points out that “current data indicate that college degree holders enjoy an 84 percent increase in earnings over their high-school-educated counterparts.” He also argues that the wage premium increases exponentially the more education one completes, so that if you have a graduate degree, you will earn even more.

All of this evidence points to only one conclusion: there’s no bubble when it comes to the value of a college degree. It’s still better to have one than to try and make it on your own in a tough economy without one.

How to Avoid Defaulting

The evidence above suggests that the argument that there is a college bubble is pretty easy to deflate. But that doesn’t mean that students should plunge headlong into an expensive college program. It’s important to be cautious and make good financial choices when deciding where to enroll and what to study. Many of these factors will determine the actual worth of your degree and your future earning potential.

James Heckman, the Nobel Prize–winning economist, told The Daily Beast that “even with these high prices, you’re still finding a high return for individuals who are bright and motivated.” But he added, “if you’re not college ready, then the answer is no, it’s not worth it.”

In other words, if you enroll in college without having the appropriate academic skills to pass your courses, you’ll be stuck with large loans and no skills to get a job that will help you pay those loans. This is one way defaults happen.

Or, you may earn very low grades that, in a competitive job market, might hold you back from the kind of job you want.

To avoid getting caught in an economic crunch or default on your student loans, these are steps you should take before you enroll in college:

Weigh your options: Can you get the same degree from a variety of schools, including those with low tuition? Do the colleges you are considering offer career placement services? Is there an active alumni association where you can network to further your career? Choose the school that will provide you with the maximum amount of benefits in the long term.

Research scholarships: Find out what scholarships or financial aid you might be eligible for, and apply early. For some students, this factor alone can determine where they go to college.

Follow the news: Every day, laws regarding student loans and financial aid change. You need to be aware of any new programs, budget cuts, or other changes that may affect your plans.

Choose a major carefully: For many students, picking a college major is confusing, because so many fields are interesting and they may not have a clear idea what they would like to do after college. However, the current economic situation means that few students have the ability to make their way through college in a leisurely fashion. Pick a major based not only on your interests and talents, but also with an eye to the future.

Pay as you go: This is a long and challenging route to take, but for many students it’s both productive and profitable. One of my friends took ten years to earn her bachelor’s degree in Accounting, because she worked full-time and took classes at night, paying for one at a time. When she graduated, she not only had a degree but also had ten years professional experience that helped her get a better job.

In conclusion, the college bubble is largely a myth; instead, it’s a reflection of fears about the high rates of student defaults. Comparisons to student loans to sub-prime mortgages, however, are faulty: the value of knowledge gained in college does not depreciate the way a house does.

Do not fear that your degree with be worthless.

Andrianes Pinantoan originally published this piece at Open Colleges. It is republished here by permission. Image courtesy of Big Stock Photo.

 

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