This Time, We Are the Bubble

When the dot-com bubble hit in 2000, I thought, “Technology investors should have seen it coming! Why didn’t they act?”

When the real estate bubble hit in 2010-11, I thought, “Homeowners should have seen it coming! Why didn’t they do something?”

When the higher ed bubble hits any time now, I’ll be thinking, “We’ve seen it coming for a long time! Why didn’t we prepare?”

“A bubble is when something is overvalued and intensely believed,” says Peter Thiel – the co-founder of PayPal, Facebook investor, hedge fund manager, thought provocateur, and venture capitalist. “Education may be the only thing people still believe in in the United States. To question education is the absolute taboo. It’s like telling the world there’s no Santa Claus.”

Yet Thiel is questioning higher ed big-time, with a series of outspoken media interviews and the launch of the “20 Under 20″ program last September. This program aims to pick 20 high-performing, high-ability college students under 20 years of age and pay them $100,000 over two years to quit college and start a company instead.

"Our world needs more breakthrough technologies,” says Thiel. But today’s colleges and universities actually diminish innovation instead of enhancing it. Higher education, he concludes, has reached a “bubble” stage where its cost to society exceeds its benefits.

It’s a controversial stance, but Thiel’s foundation received more than 400 applications for a spot in the program, with heavy interest from students at top colleges, including 17 from Stanford. Thiel believes, with some good reasons, that there’s been a sea-change in public perceptions of higher ed during the last three years as public debt has mounted and the economy has faltered.

Rumblings and warnings of a bubble have been seeping up from other places, too, even from within higher ed itself. Richard Vedder, for example, Distinguished Professor of Economics at Ohio University, Director of the Center for College Affordability and Productivity and an Adjunct Scholar at the American Enterprise Institute, wrote several weeks ago in Forbes:

“Higher education is in a bubble situation—Its price has risen sharply, fueled by cheap federal loan and grant money (sound familiar?) while the return on the investment has fallen. More and more college students are either not graduating or are taking jobs that do not require college-level skills and often pay mediocre amounts. In investor parlance, the price-earnings ratio on investing in higher education seems to be rising sharply. Where markets operate without external interference, there would be a correction. Sensing lower returns on their investment, the demand for higher education would fall and, with that, enrollments. Declining demand would lead to falling tuition fees, etc. Colleges would layoff lots of workers.”

A number of factors, he says, are contributing to the situation:

  • Tuition costs continue to escalate faster than the economy
  • Government subsidies for universities are declining precipitously and will continue to fall, while the recent short-term stimulus funds will end soon
  • The size of the 18-22 year old college-bound population is stagnant, and will remain so for a number of years, reducing demand
  • College outcomes are openly questioned: Less than half of students graduate within four years and a recent study asserted that more than a third of students "did not demonstrate any significant improvement in learning" from college and the rest showed only modest gains
  • The perceived economic value of a college degree has eroded: A large percentage of graduates are unable to find the professional and management level careers they believed would be theirs for the taking, a situation magnified by weak U.S. employment
  • The increasing elderly population demands ever more support from society, leaving less and less for education
  • Current government spending levels will not be able to continue, given public and political outcry over the federal deficit

Truth is, a menu of government subsidies have supported higher ed for decades, artificially mitigating free-market impact on tuition and enrollment. But these are unsustainable. While the Obama administration – and much of higher education – deny the severity of the situation and have even proposed expansion of Pell Grants, which have already roughly doubled in size in recent years, the drumbeat to reduce government spending and debt make this and future increases in higher ed support unrealistic.

So the bubble in higher education grows and grows and grows. And I’m thinking, “What are we doing to prepare for when that bubble finally bursts?”

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