The Education Bubble

April 11, 2011

April 11, 2011

There’s a lot of talk about the next bubble.  Some say it’s tech, but they’d be wrong.  While a few companies will always go out of business, tech is taking off for very good reasons – there’s nothing “bubbly” about it.

Peter Thiel, founder of Paypal, recently made a statement in Tech Crunch, making the point that education is the next bubble. I come to the same conclusion in my article written back in January.

Here’s a quick rundown of what the education bubble is, why it’s going to pop, and how we can avoid it.

Bubbles begin with an inefficient allocation of money in the economy, like the high air pressure zones your meteorologist tells you about on the nightly news.  These high pressure zones arise for one reason or another – with housing, in the lead up to 2008, it was easy to get a housing loan…  too easy.  This is because it’s the American dream to own a home! We had a sense of entitlement regarding home ownership, and the best of intentions led us to strive for home ownership for everyone.  A fine goal; we just botched the execution.

We have the exact same thing happening with education in 2011.  It’s a part of the American dream to go to college, get an education, go back to school, learning more and more about less and less.  Like home ownership, it’s impossible to demonize the act of pursuing an education.   And because our political system is largely built around only banning things that can be demonized, there’s really no check or balance on the huge flow of money going into education lending.

Consider that any student can get a private loan.  You need little more than an admission letter and a heart beat.  The thought is that the education is going to provide for a much higher-paying job, as demonstrated by James Monks. However, Monks-style estimates are out of touch with reality.  As a result, many people will be stuck paying back loans that can’t be forgiven through bankruptcy – student loans.  As we saw in the 2008 housing failure, economic earthquakes happen when large amounts of people can’t repay debt.

There is one key difference between the housing crisis and the education bubble. You can kick someone out of a house.  Banks loved to do this, and foreclosed on as many people as they could, in some cases, even foreclosing illegally. Conversely, you cannot revoke a college education.  There is no diploma repo man – you will keep your degrees.

To balance this, student loans cannot be forgiven through bankruptcy.  They’re with you for your entire life.  Sometimes, there’s a clause cutting off the debt after 30 years (if you’re relying on a clause like this for your debt, I’d highly recommend you understand it thoroughly, because banks didn’t get rich by forgiving debt, and I’ll guarantee you that banking lobbyists will push hard to get rid of this kind of clause).  As we can see, there is a high pressure region around student lending, and someday, this pressure has to be released.  When it does, I predict rain and storms for the economy as a whole.

There are two possible scenarios I see coming out of this.  One, everyone will have to pay back all of their student debt.  Tuition, something that used to cost a month’s wages, now costs our youth years of work and earnings.  Many people have six figure student debt and five figure income.  This is not sustainable.  In scenario one, these indebted former students are going to have significantly less purchasing power than their contemporaries from years past or in other countries.  These people will be the lost middle class, forced by high education prices into relative poverty.  (When I say education prices, I’m also referring to private school for K-12, inefficient public schools, college, as well as grad school).  It’s safe to think of this as the “trickle down economics” approach.

How to lessen the harm of the popped education bubble

In scenario two, we change the laws so that student loans are forgivable through bankruptcy.  When lenders realize that not only can’t they revoke a college education, but they can’t make a student pay off those loans, they’ll immediately start lending more responsibly. Student loans won’t go out to anyone with an acceptance letter and a heart beat, they’ll go out to students who present themselves to the lender as solid investments of time and resources.  Instead of sending almost our entire workforce to school to learn anthropology or economics (neither of which help you much in the employment marketplace), we’ll just send them to work.  We’d stop sending everyone to school, and instead they’ll learn more on the job.  Workplace education, funded by companies themselves, will become more commonplace.  Scenario two is far more efficient, and is the best option.  The key is that student loans must be forgivable through bankruptcy.

Colleges charge so much these days because they can. Students have to go to college to stay competitive, and therefore they have to pay whatever colleges charge.  It would be the government’s job to keep the price of tuition in line with inflationary increases, but *inexplicably,* the government doesn’t do this…  There are, without doubt, low cost education alternatives.  However, prospective students aren’t given the necessary information to be able to make the right decision, often ignoring low cost alternatives due to misinformed views regarding future income.

Huge portions of the budgets of governments around the country go towards education.  What we don’t need is more money or funding for education, what we need is education reform. Make education reform the most important issue next election, and we’ll hopefully see cost-effective improvements in our incredibly inefficient education system.  As a country, we need to be ready for fundamental changes in the way we educate.

If anyone wants a picture of what this education reform should look like, I highly recommend beginning with some Sir Ken Robinson.

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1 Comment
April 27, 2011 @ 8:51 am

I think it’s a myth that sociology and economics don’t earn you a place in the marketplace. I worked for a time at Microsoft. My major was psychology. In addition to all of the computer science and engineering majors, there were artists, designers, editors and writers, ethnographers, etc. At a tech writing conference I attended recently, most of the attendees had majored in disciplines like English, rhetoric, and philosophy.

If a person is great at math and science, let ‘em at it. Many (I’d venture most) of the rest of us, the verbal folks, want to do something other than middle-management. The interesting niches in business draw from all of the humanities.

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