College Price Bubble Possibly? Or Are We Just Paying More to Keep Shaka?

The next official estimate of outstanding student loan debt in America is expected to be close to $1 trillion and larger than credit card debt.  This coupled with the still heightened unemployment rates presents a very difficult problem for the graduate students who struggle to find jobs.  The Economist article below specifically emphasizes the potential need to change bankruptcy laws to help out struggling college graduates who cannot make these student loan payments:

Many countries, America included, have designed student debt primarily as a mortgage-like obligation: it is repaid to a fixed schedule. Other places, like Britain and Australia, make student-loan repayments contingent on reaching an income threshold so that the prospect of taking on debt is more palatable to people from poorer backgrounds. That approach makes sense, especially when jobs are scarce. Barack Obama this week proposed to limit loan payments for some struggling American graduates to 10% of discretionary income and forgive outstanding debt after 20 years. Income-based repayment ought to become the norm.

This New Yorker article goes further to suggest the possibility of a price bubble existing within college education.  The following highlights some supporting points to the existence of this bubble:

We’ve just endured two huge bubbles, which sent the value of stocks and then homes to ridiculous levels, so the theory isn’t implausible. Of course, a college-education bubble wouldn’t look exactly like a typical asset bubble, because you can’t flip a college degree the way you can flip a stock, or even a home. But what bubble believers are really saying is that young people today are radically overestimating the economic value of going to college, and that many of them would be better off doing something else with their time and money. After all, wages for college graduates actually fell over the past decade, and the unemployment rate for recent grads is close to ten per cent. That’s hardly a ringing endorsement of the economic value of education.

The bubble analogy does work in one respect: education costs, and student debt, are rising at what seem like unsustainable rates. But this isn’t the result of collective delusion. Instead, it stems from the peculiar economics of education, which have a lot in common with the economics of health care, another industry with a huge cost problem. (Indeed, in recent decades the cost of both college education and health care has risen sharply in most developed countries, not just the U.S.) Both industries suffer from an ailment called Baumol’s cost disease, which was diagnosed by the economist William Baumol, back in the sixties. Baumol recognized that some sectors of the economy, like manufacturing, have rising productivity—they regularly produce more with less, which leads to higher wages and rising living standards. But other sectors, like education, have a harder time increasing productivity. Ford, after all, can make more cars with fewer workers and in less time than it did in 1980. But the average student-teacher ratio in college is sixteen to one, just about what it was thirty years ago. In other words, teachers today aren’t any more productive than they were in 1980. The problem is that colleges can’t pay 1980 salaries, and the only way they can pay 2011 salaries is by raising prices. And the Baumol problem is exacerbated by the arms-race problem: colleges compete to lure students by investing in expensive things, like high-profile faculty members, fancy facilities, and a low student-to-teacher ratio.

The college-bubble argument makes the solution to rising costs seem simple: if people just wake up, the bubble will pop, and reasonable prices will return. It’s much tougher to admit that there is no easy way out. Maybe we need to be willing to spend more and more of our incomes and taxpayer dollars on school, or maybe we need to be willing to pay educators and administrators significantly less, or maybe we need to find ways to make colleges more productive places, which would mean radically changing our idea of what going to college is all about. Until America figures out its priorities, college kids are going to have to keep running just to stand still.

The article does mention some flaws in this article in the fact that people without college degrees are still worse off than those with degrees in terms of the unemployment crisis.  Also, it does acknowledge that the difference between the earnings of a college graduate compared with someone who did not obtain a degree is higher than it has ever been.  Nevertheless an interesting article worth a read if you are interested.


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