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Higher Education Bubble

Higher Education Bubble

5 February, 2016

The higher education bubble is a hypothetical boom and bust phenomenon in the field of higher education.

According to the theory, while college tuition payments are increasing, the rate of return of a college degree is decreasing, and the soundness of the student loan industry may be threatened by increasing default rates. College students who will not find employment at the level needed to pay back their loans in a reasonable period of time have been compared to the debtors under sub-prime mortgages whose homes are worth less than what is owed to the bank.

In 1971, Time ran an article “Education: Graduates and Jobs: A Grave New World,” which stated that the supply of post-graduate students was around twice bigger than the anticipated future demand in upcoming decades. In 1987, U.S. Secretary of Education William Bennett first suggested that the availability of loans may in fact be fueling an increase in tuition prices and an education bubble. This “Bennett hypothesis” claims that readily available loans allow schools to increases tuition prices without regard to demand elasticity. College rankings are partly driven by spending levels, and higher tuition prices are linked with increased public perceptions of prestige. Over the past thirty years, demand has increased as institutions enhanced facilities and provided more resources to students. Additionally, schools tend to enroll fewer students as they improve student offerings and increase prices. This suggests that it is in schools’ best interest to increase tuition prices as much as possible, so long as financial aid ensures an ability to pay on the part of students and parents.

A 2009 article in The Chronicle of Higher Education, related concern from parents wondering whether it is worth the price to send their children to college. The Economist in turn hypothesized that the bubble bursting may make it harder for colleges to fill their classes, and that some building projects will come to a halt. The Boston Herald further suggested the possibility of mergers, closures and even bankruptcies of smaller colleges that have too much expenses and taken on too much debt. National Review writer Dan Lips has suggested that the bubble’s bursting may bring down higher education prices. Glenn Reynolds wrote in the Washington Examiner that those who have funded their educations with debt may be particularly hard-hit.

Further speculation as to the higher education bubble was the emphasis of a series of articles in The Economist in 2011.