Explain to me how the higher ed bubble will burst?

[tex]

This topic is just for fun, but interested in how everyone thinks it will all play out. Is there a higher ed bubble? What caused it? What will the tipping point be that causes it to pop? What effect will that have on the rest of the economy?


This is also a bit of an excuse to share this bread article that I found interesting:
https://nyti.ms/2qstonF

"The association tracks the average tuition “discount rate” at private colleges and universities — that is, the difference between the “sticker price” that colleges advertise and the actual price they charge students, after subtracting scholarships granted by the colleges themselves. If, for example, the sticker price is $50,000, but the average student pays $30,000, the discount rate is the difference ($20,000) divided by the sticker price ($50,000), or 40 percent.

In the 2005-06 academic year, the average freshman discount rate at private colleges was 38 percent. It has increased every year since, rising to a high of 49.1 percent last fall...

...The steadily growing tuition discount rate suggests that the price discrimination payoff is in decline. If you increase your tuition by $100, but have to increase your average discount by $100, you’re no better off. Price discrimination could have been a time-limited strategy that allowed small private colleges to cut costs, develop new programs and use information technology to reach new markets. But for a growing number, it was a way to put off a day of reckoning that now seems to have arrived."

Seems like the small expensive liberal arts college isn't long for this world. The "discount rate" for medical schools is basically zero though. Without some federal student loan reform, I sense we are nowhere near the tuition ceiling for what a doe-eyed pre-med is willing to borrow.

Answer however you like! Tinfoil hat approved.

[ENT Doc]

tex wrote:

This topic is just for fun, but interested in how everyone thinks it will all play out. Is there a higher ed bubble? What caused it? What will the tipping point be that causes it to pop? What effect will that have on the rest of the economy?

This is also a bit of an excuse to share this bread article that I found interesting:
https://nyti.ms/2qstonF

“The association tracks the average tuition “discount rate” at private colleges and universities — that is, the difference between the “sticker price” that colleges advertise and the actual price they charge students, after subtracting scholarships granted by the colleges themselves. If, for example, the sticker price is $50,000, but the average student pays $30,000, the discount rate is the difference ($20,000) divided by the sticker price ($50,000), or 40 percent.

In the 2005-06 academic year, the average freshman discount rate at private colleges was 38 percent. It has increased every year since, rising to a high of 49.1 percent last fall…

…The steadily growing tuition discount rate suggests that the price discrimination payoff is in decline. If you increase your tuition by $100, but have to increase your average discount by $100, you’re no better off. Price discrimination could have been a time-limited strategy that allowed small private colleges to cut costs, develop new programs and use information technology to reach new markets. But for a growing number, it was a way to put off a day of reckoning that now seems to have arrived.”

Seems like the small expensive liberal arts college isn’t long for this world. The “discount rate” for medical schools is basically zero though. Without some federal student loan reform, I sense we are nowhere near the tuition ceiling for what a doe-eyed pre-med is willing to borrow.

Answer however you like! Tinfoil hat approved.

Click to expand...

I don't know if we're in a bubble or not, but we're certainly headed in the wrong direction.  As for what caused this, I would say 3 things - the government, rankings, and lack of discriminatory behavior on behalf of consumers.  First, if the government didn't make loans so accessible people would be far less interested in paying inflated sticker prices.  They need to end all policies creating easy access to money or making loans look more cheap (see PSLF).  Second, if you look at what underpins the college rankings you'll see that colleges are incentivized to spend more per student.  This bolsters their ranking.  What comes as a result of spending more?  Charging more.  Third, we have been lazy consumers, following a blind belief that everyone needs a college education and that simply getting a certificate on the wall will vault someone to success.  This is wrongheaded.  We haven't been discriminating based on value - of the school or that of the underlying degree.

As for the price discriminatory behavior being perpetrated by colleges across the land, a higher discount rate doesn't mean that their price discriminatory power is eroding per se.  Their ability to get the sticker price may be eroding, but that's not what price discrimination means.  In fact, colleges are masters at first degree price discrimination - they have access to your bank accounts, income statements, etc. and know exactly how much you can afford to pay.  That larger discount rate just means that the slope from full tuition down to no tuition is at a steeper grade vs a gradual one in the past.  If anything, this shows that they can price discriminate across the spectrum quite well.  Again, they belong in an economics text under this pricing behavior.

Too much being spent in one area of the economy out of proportion to the value it provides is inefficient.  Healthcare is no different, really.  The net effect is a depressed economy from where it could otherwise be IMO.  I'm not sure education's bubble will pop necessarily.  But I think the market will slowly evolve to include more online, cheaper learning, more of a willingness of employers to hire early and have people do on-the-job education and certificates.  The market doesn't like inefficiencies.  It doesn't necessarily figure out the solutions right away, but eventually - if patient enough - it will respond.

[Zaphod]

I dont know that were in a bubble since that implies valuations are above what truly are in reality. While it could be said for certain majors on aggregate possibly, its still untrue overall.

You have to look at it from the idea its a business. They are in the business of credentialing. They are also monopolies that hold all the cards in credentialing. You pay for this very expensive brand of credentials even though it isnt worth it (as in actually necessary to be good at many positions in real life), yet since they are the monopoly holders on said entrance fee, its worth it.

For hard sciences and professions its much better as far as being applicable and rigorous, but for a lot of things its bad ROI or frankly wholly unnecessary.

However, there are a ton of fringe overall well being benefits to a highly educated society, but that doesnt mean it has to be crazy expensive. We have the money to be well educated as a society but we choose bombs and tanks and stuff to a much higher degree.

[huruta]

If you are academics and biomedical research like I am (PhD married to MD which is why I'm here) I would say yes we are in some sort of bubble/unchartered territory. There is insufficient $$$ for researchers both at academic institutions and at the federal level to sustain biomedical research in any way shape or form. Part of the problem is that more senior investigators are not retiring which means the young researchers have a much harder time getting funding. Those of us lucky enough to get our first NIH large grant know that the 2nd is even harder because we are competing with researchers with 30+ yeras experience....but alas most on this forum are practicing MDs not doing research and for that group I don't think there's a bubble but I do think these are tumultous times with a lot of change and potentially lower reimbursements ahead.

[hightower]

Zaphod wrote:

I dont know that were in a bubble since that implies valuations are above what truly are in reality. While it could be said for certain majors on aggregate possibly, its still untrue overall.

You have to look at it from the idea its a business. They are in the business of credentialing. They are also monopolies that hold all the cards in credentialing. You pay for this very expensive brand of credentials even though it isnt worth it (as in actually necessary to be good at many positions in real life), yet since they are the monopoly holders on said entrance fee, its worth it.

For hard sciences and professions its much better as far as being applicable and rigorous, but for a lot of things its bad ROI or frankly wholly unnecessary.

However, there are a ton of fringe overall well being benefits to a highly educated society, but that doesnt mean it has to be crazy expensive. We have the money to be well educated as a society but we choose bombs and tanks and stuff to a much higher degree.

Click to expand...

I think I agree with what you're saying for the most part, but I always cringe when I hear any talk of higher education being a bad investment or that it isn't even necessary at all in some scenarios.  I don't think its good to label college as simply a means to get a job.  Its far more valuable than that.  I feel my 4 years of liberal arts education would have been worth it even if I ended up dirt poor the rest of my life.  Too many people in our society think there's absolute zero value to learning anything but some specific skill that will get you paycheck.  Though finding gainful employment is certainly important, it's not the main reason colleges exist.  I think a big reason why this sort of sentiment has taken hold is because of the cost being so out of control.  We're pricing ourselves into stupidity.  The higher the costs, the less likely people are to take advantage of the many, many benefits of going to college that have nothing to do with getting a job when you graduate (like gaining cultural awareness and empathy, an understanding and acceptance of the importance of scientific research, learning our own history, etc, etc).  These are the sort of things that can prevent war, prevent us from destroying our own planet, prevent us from allowing a dictator to take over, etc.  And you're right that we have the money to pay for it, we just choose not to (or at least our greedy, corporate controlled government chooses for us).

A major step in the right direction would definitely be to somehow control the costs of higher education.  It shouldn't be so insanely expensive to get a bachelor's degree, let alone a graduate degree.

[Zaphod]

huruta wrote:

If you are academics and biomedical research like I am (PhD married to MD which is why I’m here) I would say yes we are in some sort of bubble/unchartered territory. There is insufficient $$$ for researchers both at academic institutions and at the federal level to sustain biomedical research in any way shape or form. Part of the problem is that more senior investigators are not retiring which means the young researchers have a much harder time getting funding. Those of us lucky enough to get our first NIH large grant know that the 2nd is even harder because we are competing with researchers with 30+ yeras experience….but alas most on this forum are practicing MDs not doing research and for that group I don’t think there’s a bubble but I do think these are tumultous times with a lot of change and potentially lower reimbursements ahead.

Click to expand...

Thats not a bubble thats a structural priority problem. US simply chooses to not fund the amount of research to fill up every scientist. Like I mentioned above, we seem more content to spend the money on things that will never be used that fulfill some sort of special interest/moneyed group that got some house/senate member elected. It'd be great if we could focus on research again, but we have different priorities than those in power, hence why they are in power and we are not.

[Zaphod]

hightower wrote:

Zaphod wrote:

I dont know that were in a bubble since that implies valuations are above what truly are in reality. While it could be said for certain majors on aggregate possibly, its still untrue overall.

You have to look at it from the idea its a business. They are in the business of credentialing. They are also monopolies that hold all the cards in credentialing. You pay for this very expensive brand of credentials even though it isnt worth it (as in actually necessary to be good at many positions in real life), yet since they are the monopoly holders on said entrance fee, its worth it.

For hard sciences and professions its much better as far as being applicable and rigorous, but for a lot of things its bad ROI or frankly wholly unnecessary.

However, there are a ton of fringe overall well being benefits to a highly educated society, but that doesnt mean it has to be crazy expensive. We have the money to be well educated as a society but we choose bombs and tanks and stuff to a much higher degree.

Click to expand…

I think I agree with what you’re saying for the most part, but I always cringe when I hear any talk of higher education being a bad investment or that it isn’t even necessary at all in some scenarios.  I don’t think its good to label college as simply a means to get a job.  Its far more valuable than that.  I feel my 4 years of liberal arts education would have been worth it even if I ended up dirt poor the rest of my life.  Too many people in our society think there’s absolute zero value to learning anything but some specific skill that will get you paycheck.  Though finding gainful employment is certainly important, it’s not the main reason colleges exist.  I think a big reason why this sort of sentiment has taken hold is because of the cost being so out of control.  We’re pricing ourselves into stupidity.  The higher the costs, the less likely people are to take advantage of the many, many benefits of going to college that have nothing to do with getting a job when you graduate (like gaining cultural awareness and empathy, an understanding and acceptance of the importance of scientific research, learning our own history, etc, etc).  These are the sort of things that can prevent war, prevent us from destroying our own planet, prevent us from allowing a dictator to take over, etc.  And you’re right that we have the money to pay for it, we just choose not to (or at least our greedy, corporate controlled government chooses for us).

A major step in the right direction would definitely be to somehow control the costs of higher education.  It shouldn’t be so insanely expensive to get a bachelor’s degree, let alone a graduate degree.

Click to expand...

I agree with you totally, though it was only a sentence whole books can be written on the value of education for a society as a whole. It would be great if there were a much higher baseline of even just general knowledge among the populace, I know it would make clinic more pleasant.

College is unfortunately too expensive now to be anything other than for getting a good job, unless youre independently wealthy, than you can do it for joy. If I stroked out one evening and bought/won the lottery I might take some kind of courses just for the educational interest part of it. Costs have forced people to choose one or the other.

There are certainly fields (most I'd say) where you dont need the length or breadth of classes to be perfectly capable in the related job. We need a more vocational bent for many things, this drawing it out is simply taxing the student. After a basic test of determination and some threshold level of smarts I would take the wager that you could even make a functioning base level physician or even a surgeon with strictly apprenticeship type training. No one like to hear it but its just too algorithmic and based on repetition to be anything else. Its not tv where you muse about cases for days, its 10 min, pop and gone for most.

Obviously aggregate quality and other things would go down, but it wouldnt be the unmitigated disaster some would have you believe (and the costs would be insanely less).

[tex]

ENT Doc wrote:

As for the price discriminatory behavior being perpetrated by colleges across the land, a higher discount rate doesn’t mean that their price discriminatory power is eroding per se.  Their ability to get the sticker price may be eroding, but that’s not what price discrimination means.  In fact, colleges are masters at first degree price discrimination – they have access to your bank accounts, income statements, etc. and know exactly how much you can afford to pay.  That larger discount rate just means that the slope from full tuition down to no tuition is at a steeper grade vs a gradual one in the past.

Click to expand...

They may be just as savvy as ever at price discrimination, but a climbing discount rate seems to indicate (to me, as a layman) an approaching ceiling in revenue growth. The weakest gazelle would be a hypothetical ultra-small enrollment, ultra-expensive private school with a waning ability to recruit ultra-wealthy students. To survive they will need to reduce expenses (more grad student teaching? more adjunct faculty? pension default?) or increase revenue (perhaps increase enrollment but jeopardize their "intimate learning environment" allure).

 

So is "bubble" even a helpful term if there can be no massive sell-off? Question for the non-vanilla investors: is it possible to invest/speculate on university debt? Student loan debt? Student loans for a particular major   ? I don't really understand how an acute devaluation in higher ed might occur. The pessimist in me seems to agree with most commenters so far - a steady trend that favors the owners of capital over labor. More people in debt, people in debt for longer, people working longer.

[ENT Doc]

tex wrote:

ENT Doc wrote:

As for the price discriminatory behavior being perpetrated by colleges across the land, a higher discount rate doesn’t mean that their price discriminatory power is eroding per se.  Their ability to get the sticker price may be eroding, but that’s not what price discrimination means.  In fact, colleges are masters at first degree price discrimination – they have access to your bank accounts, income statements, etc. and know exactly how much you can afford to pay.  That larger discount rate just means that the slope from full tuition down to no tuition is at a steeper grade vs a gradual one in the past. 

Click to expand…

They may be just as savvy as ever at price discrimination, but a climbing discount rate seems to indicate (to me, as a layman) an approaching ceiling in revenue growth. The weakest gazelle would be a hypothetical ultra-small enrollment, ultra-expensive private school with a waning ability to recruit ultra-wealthy students. To survive they will need to reduce expenses (more grad student teaching? more adjunct faculty? pension default?) or increase revenue (perhaps increase enrollment but jeopardize their “intimate learning environment” allure).

 

So is “bubble” even a helpful term if there can be no massive sell-off? Question for the non-vanilla investors: is it possible to invest/speculate on university debt? Student loan debt? Student loans for a particular major  ? ? I don’t really understand how an acute devaluation in higher ed might occur. The pessimist in me seems to agree with most commenters so far – a steady trend that favors the owners of capital over labor. More people in debt, people in debt for longer, people working longer.

Click to expand...

I don't doubt that a ceiling is approaching.  It's not like education is completely inelastic.  However, the issue I brought up was whether or not the colleges were getting worse at price discrimination.  The data described doesn't support that claim.  Keep in mind a few things about the sticker price and discount rate.  The sticker price on many colleges (my own included) have been increasing by 4% on an annualized basis.  50% of kids' parents pay that full rate.  There's plenty of slack left there.  A reason for the increasing discount rate is because schools are ranked based on their average student aid amount when given.  That incentivizes them to give out, on average, large student aid packages for those who need it more and soak the well-off as much as possible.  It's a game within a game - and we get screwed.

As for how to invest (or short) this madness, take a look at SLABs - although these represent a minority of student loans.  Since the government is getting in the business of loan forgiveness, the taxpayer (not the individual taking out the loan) is subsidizing education with an increasing national debt burden.  The math is pretty clear on that situation.  Plan accordingly.

[Craigy]

Law schools experienced this a few years back, though it wasn't really a burst bubble but more of a deflating bubble.  There were no jobs and prospective students wised up.  Applications were halved and quality of applicants substantially dropped, nationwide.  Most schools simply filled their rosters with crappier incoming classes but many had empty seats.  Some of the schools had severe financial difficulties when they missed out on just 5% or 10% of their tuition.  Others were able to fleece their students for more tuition since said crappier applicants received less scholarships.

Most of these private academic institutions have no idea how to truly budget or control costs.  The solution has always been to levy more money for whatever new project.  And the money is always there.

Only way the bubble really bursts is if the free money stops falling out of the sky.  If the free cash dries up, the consumer has to actually shop, and the whole thing falls apart.

[High Income Parent]

I think that we could go one of two ways, or maybe even both. We could go to a government mandated system like several European countries where everyone is guaranteed a certain level of higher education.
Then we will have socialized education up to a certain point like we do K-12 now. I would imagine professors would oppose that. Maybe some elite private colleges will be the last place for the truly talented professors to go.

I think an equally likely way we go as a society is for education to become less and less centralized. Look at things like the MIT challenge. Scott finished the MIT computer science curriculum in a little over a year.
The only thing left is for companies to set up some kind of testing of their own to measure qualified applicants. Say Google develops their own testing and outlines the knowledge necessary to attain a certain job with them, then they administer tests and hire whoever passes and they desire.
That could be achieved with spending time in a library, buying some books and the Khan Academy.
Look at the rebellion in board certification going on. As people get more and more fed up with student loan endentured servitude, decentralization could be a more accepted option.
I think online classes are becoming more and more accepted in society, especially as the millennials gain more and more leadership and more simpathy with the costs of education.
I don't think college costs will be cut in half overnight, but it could become less and less important in achieving higher paying jobs. Then costs will go down because of that.