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June 10, 2010 [feather]
How's your bubble?

At Naked Law, eight reasons why the college tuition bubble is about to burst:

1) Tuition is, and has been, increasing at double the rate of inflation

On average, college tuition increases at around 8 percent per year, which means the cost of college doubles every nine years. Because colleges know that students will simply borrow more money to cover tuition increases, colleges have been relying on steady tuition hikes to solve all of their money problems. If this continues a college degree will soon cost as much as a house.

2) Students are borrowing more than ever to pay for college

The number of college students graduating with over $25,000 in student loan debt has tripled in the past decade alone. Today, 66% of students borrow to pay for college, taking on an average of $23,165 in debt. Twelve years ago, 58% borrowed to pay for college, taking on only $13,172 in debt.

3) For profit colleges are paying homeless people to take out federal loans to enroll

Because student loans are so easy to acquire, enterprising colleges are paying homeless people to enroll. The math makes sense when you think about it: if paying someone a $2,000 "stipend" gets the college $20,000/year in tuition courtesy of the federal government, that's money well spent. Unfortunately, many people who accept such "stipend" offers never graduate, become overwhelmed with student debt, and destroy their already bad financial records.

4) Colleges are on a non-teaching staff hiring spree that far outpaces enrollment

Why hire a full-time professor when you can hire an "environmental sustainability officer"? According to the a New York Times article, over the past two decades colleges have doubled their non-teaching staff, while enrollment has only increased by 40%. Often times staff members have exotic duties like monitoring environmental sustainability, or their focus is on student "lifestyle." Economist Daniel Bennett, who conducted this study, says "Universities and colleges are catering more to students, trying to make college a lifestyle, not just people getting an education. There's more social programs, more athletics, more trainers, more sustainable environmental programs." Of course, much this exotic hiring and lifestyle catering is made possible by student loan money.

5) For profit reliance on federal loans has reached an all time high

According to Bloomberg, publicly traded higher education companies derive three-fourths of their revenue from federal funds, up from just 48 percent in 2001 and approaching the 90 percent limit set by federal law. The fact that colleges are almost completely relying on borrowed money to finance tuition, up to the legal limit, means we’ve almost hit the breaking point. If not for the easy student loan money sloshing around, many colleges would go belly up tomorrow.

6) Schools are spending on luxurious amenities to lure in more students

Flush with student loan money and wanting to attract even more, colleges are increasingly spending on luxury dorms, gyms, swimming pools and other amenities.

Freakonomics author Stephen Dubner noted that when he went back to his college, a chancellor told him that “[the gym] was a top priority because parents and prospective students increasingly think of themselves as customers, shopping for the most amenities for the best price, and the colleges that didn’t come to grips with this would soon see their customers going elsewhere.” But gyms are just the tip of the iceberg. At High Point University in North Carolina, students are treated to valet parking, live music in the cafeteria and Starbucks gift cards on their birthdays.

7) College president salaries are sky high, even in a historical economic downturn

USA Today reported that 23 Private College Presidents Made More Than $1 Million in 2008, while 110 made more than $500,000. In case you were wondering, this is not the norm -- as recently as 2002, there were no million-dollar presidents. And it's no wonder the college administrator gravy train continues despite the down economy. After all, when your "customers" have easy access to credit and pay you with money they don't have, the economy doesn't really matter, does it?

8) The student loan problem cuts across all schools, for profit and nonprofit

Often times the discussion about a high tuition leads to a flogging of for profit colleges. And while for profit colleges are often the worst about shamelessly fattening themselves at the trough of student loans, it's not a for profit vs. non profit issue. In fact, for profit colleges account for less than half of student loan defaults. Nor is the issue one of "good colleges" vs. "bad colleges." As this New York Times article illustrates, even students at prestigious non-profit schools like NYU can find themselves in financially ruinous circumstances because of their student loans.

My line on this is the minimalist one: Don't take on any debt, ever, that you don't have to take on. If you can't afford a private school, then do not enroll in one. There are still affordable publics in this country, and you can even still get a good education at them.

This is not to say that we don't need lots and lots of reform, within the student loan industry and within colleges and universities themselves. Student loans have been too easy to get, and they are too hard for too many to pay off. And if you read this blog, you've heard me time and time again about the way bureaucratic bloat, excessive executive pay, unnecessary country-clubbish perks, academically lame boutique programs and majors, and so on have pushed costs up way beyond what's viable--even as they have failed to do anything meaningful for improving actual education. You've also heard me over and over again about how we need to rethink the idea that a college degree is the only path to economic success. That's just dumbing it all down while wasting the considerable talents of people who are not "book smart" but are very smart, talented, and able in other ways.

But people are getting smarter--and the recession is forcing them to become just a bit more financially literate than they were before. Fewer folks are going to make decisions that they know will harm them financially--and colleges and universities are, I hope, going to have to recalibrate when they struggle to enroll, when diversity falters as a result, and when they are forced to confront their ethical lapses in recruiting students who cannot pay for the product they are selling (we need to be brutally economic in our vocabulary in this instance).

This is not a tragedy. It is an opportunity.

posted on June 10, 2010 7:39 AM

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I was at a restaurant the other day and the waiter, noticing my copy of Financial Times, asked for some career advice. He had recently gotten an undergraduate finance degree from a low-ranked college, and his career success so far was indicated by the fact he was working as a waiter. His objective was to do something in investment banking, and his plan was to go to a very expensive (but not top-tier) college to get an MBA in finance.

This guy's chance of ever working as an investment banker at Goldman or equivalent was extremely remote, but I'm sure there are plenty of universities that would be willing to take his money (mostly in the form of debt, no doubt) to feed that fantasy.

Posted by: david foster at June 10, 2010 8:07 AM

You've probably already discussed this, but I'm (sadly) new here.

How do you think the federal takeover of student loans going to affect this bubble? My guess is that it will prevent it from bursting until the whole country suffers.

Posted by: HW at June 10, 2010 9:00 AM

To add some extra grist to this mill see recent Rasmussen Poll:
"31% Say It’s Too Hard To Get A Student Loan"

Posted by: HW at June 12, 2010 6:20 AM