Higher Education Bubble

This quarter, the M12 MBA’s at Georgetown are taking a core class on business ethics.  Each class is divided up into multiple groups, and each group is to present on an ethics topic at the end of the quarter.  The student group that I am working with chose to do our topic on the ethics of for-profit higher education (University of Phoenix, DeVry, ITT, etc.).  In the midst of my research, I began to uncover how much higher education as a whole is being discussed as problematic – not just for-profit universities, but public and private non-profit universities as well.  The meat of the problem is the amount of student debt that is building.  It now exceeds that of credit card debt in the US, measured at $830B in June of 2010.

How did this happen?

My Budget 360 has a fantastic (but biased) piece on how big banks and private institutions are taking advantage of students.  The price of college tuition and fees has outpaced medical care, average household income, and inflation over the past 30 or so years.  And while inflation post-recession saw a hiccup, the costs of tuition has kept the same trajectory.

There is a high degree of difficulty associated with defaulting on student debt.  If a budget-constrained student can’t pay down the debt owed to their lender, the federal government actually steps in and pays the lender (Sallie Mae, Citi, Wells Fargo, or JPM) and then sends out the debt collectors for the student.  An example of one of these debt collection agencies is GRC, which is actually owned by Sallie Mae.  These debt collection agencies will take money from your paycheck, tax returns, social security – basically any means possible, until your education (and interest and fees) is paid off.  And if its never fully paid off, that means the government doesn’t get back the money it originally paid, and the bill lands in the lap of the taxpayer.

But if you owe too much on your home, you simply foreclose.  If you owe too much on your credit card, you simply default.  Its not the same with student loans.  That’s why this bubble has continued to grow over the past 3 years while housing prices have dropped and US credit card debt has shaved off around $100B.

But why are tuition prices increasing?  As long as the government will continue to fully-back education costs, why wouldn’t schools charge students more money?  They can increase endowments, pay more for better teachers, and of course, administration can pay themselves more money.  And as long as the government will continue to fully-back education costs, why would Sallie Mae, Citi or JPM continue to provide students with loans?  They’re gonna get paid no matter what.  If the government stopped backing students loans, Sallie Mae and other private lenders wouldn’t lend as much (they especially wouldn’t lend to a huge percentage of the people that attend many of these for-profit institutions), there would be a decrease in demand, and tuition prices would drop.  At the least, the government should scale back the extent to which it backs the loans to at least curb the growth in tuition prices.

At this point, its basically up to the parents and/or students to stop and say enough is enough.  College will eventually be the wrong choice for a large group of Americans because the costs will outweigh the benefits.  And if and when this happens (if it isn’t happening already), we’ll likely see the bubble begin to deflate.  As demand drops, schools will begin to take lower-tier students to fill their revenue gap.  Lower-tier students won’t be able to find jobs.  This will hurt individual school rankings, as well as the perception of higher education as a whole, and will double down on the decreased demand for higher education.




About dwkmusings

Student in Georgetown University's McDonough School of Business MBA Program
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