Could there be a college bubble?

The essence of a bubble is that you can flip an asset one more time before the bubble bursts. Most people know it will burst, but as long as prices are still rising, we might be able to fleece one more sucker. But we have to get the timing right or we might be that sucker.

But what about college? I can’t sell my degree (and there are other things that Jon Lajoie can’t do with it, but that’s neither here nor there), so I can’t flip it. But I can get rents on it. I give up $100,000 to get a degree with a present value of $300,000, and I feel peachy-keen. That’s a recipe for increased demand leading to higher tuition, sure, but could there be a bubble?

Let’s start with equilibrium so we have a counterfactual. Basic supply and demand here: higher incomes for college grads increase demand, and increased demand increases prices. In equilibrium the marginal student’s value of the degree will be equal to or greater than the opportunity cost of getting the degree.The student’s value is the benefit of cool college parties, mind/horizon expansion, reduced expected unemployment in the future, and higher expected income. Their opportunity cost is tuition, loan interest, stress from doing homework, and time not spent working. The question of going to school is different for different students; some will enjoy college more, will get more out of it, will have an easier time of it, etc. And the financial return isn’t the only relevant variable. At this point I’m thinking that maybe the current market is actually pretty sensible… we can ask questions about the sustainability of subsidies, but given everything, it’s likely that the students going to school are making the right choice, as are the ones who don’t go. Mistakes will be made, but it isn’t necessarily the case that there are systemic, wide-spread mistakes.

Now let’s think about what it might mean for the bubble to burst. First off, there would have to be a bubble: too many people paying too much to be in school; too little incentive for any individual to change their behavior. Then all at once, there is a flood away from the market, and recent grads are left holding the bag. During the bubble, I can get financing for my degree and I can reasonably expect (even if I see that there’s a bubble) that I will come out ahead, as long as I jump ship soon enough. Let’s say that during the bubble, I pay $10k to get a degree and I earn an extra $1k per year (and lets also assume, for simplicity’s sake, that we don’t have to worry about discounted values… a bird in the hand is worth one in the bush). My behavior is rational as long as I expect to keep getting that extra grand for the next 10+ years. So our bubble has a weirder time dimension than, for example, a beanie baby bubble where I can buy and sell rapidly.

Also, our bubble requires that my income is inflated compared to it’s post-bubble level. That would certainly be the case for me as an academic; if that bubble bursts, my income will drop. Will that be true of someone getting a business degree? American employers are keen to hire people with degrees, and so there’s a de facto licensure system. The assumption is that if you don’t have a degree there must be something wrong with you. As long as everyone holds this assumption then all would/could-be students will have to get a degree. But if no degree means ‘idiot’, that doesn’t mean that degree means ‘genius.’ Employers could well figure out a better vetting procedure, and students could get sick of undergoing the opportunity cost of attending school. But if this is a gradual change, then ‘bubble’ doesn’t seem like the right word. Even if the change in hiring practices is instant, the change in the labor market won’t be. If every 30 year old has a degree and suddenly degrees become unimportant, companies won’t rush out to replace them with 20 year-olds. The supply of lightly-experienced, qualified workers won’t change in the short run unless there’s a reserve army of qualified but un-credentialed labor currently in limbo as baristas.

So is there a bubble? It certainly seems like enrollments don’t reflect underlying realities. It also seems like there are profit opportunities for entrepreneurs able to improve hiring procedures; placement services could vouch for a candidate’s abilities, employers could accept non-college interns and hire from that pool, would-be students could become self-employed. I think the market is far away from equilibrium. But I’m doubtful that re-equilibration will happen rapidly. There isn’t room to “burst” a bubble, so much as there is room to avoid wasting a lot of 18-24 year-olds’ time.

Subsidy and accreditation

I’m working on a paper on subsidy and accreditation of post-secondary schooling and the Chronicle of Higher Ed, conveniently, posted an article on the City College of San Francisco’s upcoming loss of accreditation. This article highlights a few key thoughts from my paper. But let me start with a general statement of my argument, and the key insight driving that argument.

In my paper (Accreditation: Introspection Turned to Incapacitation), I argue that call for college subsidies overlook important costs that reduce the educational effectiveness of those subsidies. This is because public discourse confuses the distinct concepts of “education” and “schooling”. A school is an organization with certain features that we hope will advance the education of students. Education is a nebulous concept, a sort of general intellectual improvement and growth, that is inherently unmeasurable and comes from many sources besides schooling. For this reason, I refuse to use the term “higher education”, instead opting for “post secondary schooling” (PSS).

Accreditation of some form or another is inescapable as long as there is subsidy. A subsidy for schools requires a definition of what a school is, and the voluntary accreditation system that already existed in the U.S. was designed to do just that. The original accreditation agencies (now the Big 6 regional accreditors) arose to define what exactly PSS was, how it related to secondary schooling, and set general guidelines defining what sort of schools could be accredited members of these organizations. This created some standardization as well as minimal quality assurances that helped students to understand what to expect from these schools. This standardization and quality assurance prompted the commissioner of education to leave eligibility for federal aid up to the Big 6 when the second GI Bill was instituted in 1952. This was considered necessary when the first GI Bill (of 1944) lead to a proliferation of low quality schools intent on profiting from the sudden availability of free money.

The current accreditation standards set requirements such as including certain types of courses in the curriculum, academic standards (to be evaluated by the institution in question!), and availability of certain resources to students (such as a professionally staffed library). For the most part, there is a focus on inputs rather than outputs. And as the CCSF incident makes clear, “institutions must meet standards in areas that include financial solvency, and that student achievement alone is not a sufficient means of retaining accreditation.” It’s rare for a school to lose accreditation, but when it happens it’s usually for financial reasons rather than quality or standards. Obviously this leads schools to be more conservative and less entrepreneurial than they might otherwise have been. Schools can only change as the accrediting standards change. That is, innovation must beat the system level for any schools intent on maintaining access to subsidies that make up around half of the industry.

There’s a lot to talk about here so I’ll leave the rest for another post.