Higher education's bubble is about to burst

It's a story of an industry that may sound familiar. The buyers think what they're buying will appreciate in value, making them rich in the future. The product grows more and more elaborate, and more and more expensive, but the expense is offset by cheap credit provided by sellers eager to encourage buyers to buy.

Buyers see that everyone else is taking on mounds of debt, and so are more comfortable when they do so themselves; besides, for a generation, the value of what they're buying has gone up steadily. What could go wrong? Everything continues smoothly until, at some point, it doesn't.

Yes, this sounds like the housing bubble, but I'm afraid it's also sounding a lot like a still-inflating higher education bubble. And despite (or because of) the fact that my day job involves higher education, I think it's better for us to face up to what's going on before the bubble bursts messily.

College has gotten a lot more expensive. A recent Money magazine report notes: "After adjusting for financial aid, the amount families pay for college has skyrocketed 439 percent since 1982. ... Normal supply and demand can't begin to explain cost increases of this magnitude."

Consumers would balk, except for two things.

First -- as with the housing bubble -- cheap and readily available credit has let people borrow to finance education. They're willing to do so because of (1) consumer ignorance, as students (and, often, their parents) don't fully grasp just how harsh the impact of student loan payments will be after graduation; and (2) a belief that, whatever the cost, a college education is a necessary ticket to future prosperity.

Bubbles burst when there are no longer enough excessively optimistic and ignorant folks to fuel them. And there are signs that this is beginning to happen already.

A New York Times profile last week described Courtney Munna, a 26-year-old graduate of New York University with nearly $100,000 in student loan debt -- debt that her degree in Religious and Women's Studies did not equip her to repay. Payments on the debt are about $700 per month, equivalent to a respectable house payment, and a major bite on her monthly income of $2,300 as a photographer's assistant earning an hourly wage.

And, unlike a bad mortgage on an underwater house, Munna can't simply walk away from her student loans, which cannot be expunged in a bankruptcy. She's stuck in a financial trap.

Some might say that she deserves it -- who borrows $100,000 to finance a degree in women's and religious studies that won't make you any money? She should have wised up, and others should learn from her mistake, instead of learning too late, as she did: "I don't want to spend the rest of my life slaving away to pay for an education I got for four years and would happily give back."

But bubbles burst when people catch on, and there's some evidence that people are beginning to catch on. Student loan demand, according to a recent report in the Washington Post, is going soft, and students are expressing a willingness to go to a cheaper school rather than run up debt. Things haven't collapsed yet, but they're looking shakier -- kind of like the housing market looked in 2007.

So what happens if the bubble collapses? Will it be a tragedy, with millions of Americans losing their path to higher-paying jobs?

Maybe not. College is often described as a path to prosperity, but is it? A college education can help people make more money in three different ways.

First, it may actually make them more economically productive by teaching them skills valued in the workplace: Computer programming, nursing or engineering, say. (Religious and women's studies, not so much.)

Second, it may provide a credential that employers want, not because it represents actual skills, but because it's a weeding tool that doesn't produce civil-rights suits as, say, IQ tests might. A four-year college degree, even if its holder acquired no actual skills, at least indicates some ability to show up on time and perform as instructed.

And, third, a college degree -- at least an elite one -- may hook its holder up with a useful social network that can provide jobs and opportunities in the future. (This is more true if it's a degree from Yale than if it's one from Eastern Kentucky, but it's true everywhere to some degree).

While an individual might rationally pursue all three of these, only the first one -- actual added skills -- produces a net benefit for society. The other two are just distributional -- about who gets the goodies, not about making more of them.

Yet today's college education system seems to be in the business of selling parts two and three to a much greater degree than part one, along with selling the even-harder-to-quantify "college experience," which as often as not boils down to four (or more) years of partying.

Post-bubble, perhaps students -- and employers, not to mention parents and lenders -- will focus instead on education that fosters economic value. And that is likely to press colleges to focus more on providing useful majors. (That doesn't necessarily rule out traditional liberal-arts majors, so long as they are rigorous and require a real general education, rather than trendy and easy subjects, but the key word here is "rigorous.")

My question is whether traditional academic institutions will be able to keep up with the times, or whether -- as Anya Kamenetz suggests in her new book, "DIY U" -- the real pioneering will be in online education and the work of "edupunks" who are more interested in finding new ways of teaching and learning than in protecting existing interests.

I'm betting on the latter. Industries seldom reform themselves, and real competition usually comes from the outside. Keep your eyes open -- and, if you're planning on applying to college, watch out for those student loans.

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The Lottery: Children’s Futures Left to Luck

Tomorrow, a new documentary, The Lottery, will premier in Washington, DC.

The film is based on the Harlem charter school lottery: a luck-of-the-draw process to determine who of thousands of vying New York City children will be offered 475 charter school slots. Specifically, it tells the stories of four New York families hoping to break free from New York City public schools to increase the likelihood of their children’s educational success. Madeleine Sackler, the film’s director tells the Wall Street Journal:

These are parents who don’t have the means to move to a richer neighborhood with better public schools, so instead they have to rely on luck. When demand for a charter school exceeds supply, the random drawing is required by law. Some schools inform parents by mail, but Harlem Success holds a public lottery.

The film not only takes the viewer through the emotional roller coaster of the lottery process, but illustrates the political opposition that curbs the growth of more charter schools to fill the demand of these families. Why such opposition to educational opportunity for NY children? Eva Moskowitz, founder of the Harlem Success Academy network and a key character in the film, identifies the “union-political-educational complex.”

In one scene, viewers see the likes of Acorn, hired to protest a charter school on behalf of the teachers union. While the film was not originally meant to be political, Sackler comments:

Finding out that the teachers union had hired a rent-a-mob to protest on its behalf was “the turn for us in the process.” That story—of self-interested adults trying to deny poor parents choice for their children—provided an answer to Ms. Sackler’s fundamental question: “If there are these high-performing schools that are closing the achievement gap, why aren’t there more of them?

The film also seeks to dispel the myth that children are failing because parents don’t care. As The Lottery reveals, there are many parents who are willing to fight for their children’s education. However, a broken system provides little chance at accomplishing that. The Lottery’s message will hopefully bring families one step closer to achieving that goal.

“The public education system is at a crossroads,” Ms. Sackler says. “Do we want to go back to the time when children are forced to attend their district school no matter how underperforming it is? Or do we want to let parents choose what’s best for their kids and provide a lot of options?”

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Worst British universities 'could be closed', says CBI

The government should consider closing Britain's worst universities to stop them dragging down elite institutions, a business leader has suggested. Richard Lambert, director-general of the Confederation of British Industry, said the move should be considered by the coalition government as it attempts to cut public spending.

He said the country’s top universities should not be forced to “pay the price for the incompetence of the worst”, particularly at a time of public sector cuts.

In a speech, he also suggested that so-called “premier league” institutions should be allowed to charge higher student tuition fees to protect academic standards.

The comments come weeks after the Government announced plans to cut £200 million from the higher education budget as part of sweeping public spending reductions. Three-quarters of universities were already facing real-terms funding cuts following allocations made by Labour earlier this year.

Mr Lambert said a small number of universities were currently in “serious financial difficulty” and many more were “heading into very big trouble”.

In a speech at Sheffield University on Tuesday evening, he warned that the Government would have to make difficult decisions to safeguard the world-class reputation of British higher education. “Would it take the politically explosive but probably economically sensible decision to close or merge the worst run institutions? Or would it instead attempt to bail them out?” he said. “That would mean the already reduced quantities of jam having to be spread even more thinly across the system, making our best universities pay the price for the incompetence of the worst.”

Lord Browne, the former head of BP, is heading a review into the existing system of university finance. He will make series of recommendations in the autumn that are expected to lead to a radical overhaul of student tuition fees, loans and grants.

Many vice-chancellors have already called for the existing £3,250-a-year cap on fees to be raised, with some calling for the complete abolition of the upper limit. This could pave the way for universities to set fees similar to those in the United States, where top Ivy League institutions can charge up to £20,000. Mr Lambert said ministers should consider allowing the best universities to charge more.

Britain currently has around 150 higher education institutions. Four universities - Cambridge, University College London, Oxford and Imperial - were ranked among the world's top 10 in a global league table last year. Eighteen were in the top 100.

Mr Lambert said: “If we want them to stay in this division in what is becoming an increasingly competitive marketplace – which we surely should – then we are going to have to find ways of channelling more money in their direction. “They already get a disproportionate share of public funding for research… But does the one size fits all approach to the tuition fee cap make sense in this environment?

“Provided they offered full bursaries to those who couldn’t afford to pay the full rate, why shouldn’t those in the premier league be allowed to raise their fees to something nearer what the market could bear? Or would have that have adverse consequences in terms of social mobility and equity?”

In further comments, Mr Lambert criticised the failure to properly open up higher education to the poorest students. According to figures, almost two thirds of universities recruited fewer students than expected from the poorest areas last year.

Mr Lambert said universities had “more to do”, but insisted that the real blame lay in the “earlier years of education”. Almost half of schoolchildren fail to get the GCSEs necessary to move onto A-level courses, he said, blocking their access to degree courses.

“Disproportionately large numbers of this group come from the most deprived backgrounds,” he said. “Some 16 per cent of children leave school in this country without any form of qualification, which is well above the [international] average. This represents a scandalous waste of human capital.”

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