The Student Loan Bubble: Higher Ed is Unsustainable

The demand is high, but so is the cost. A college diploma was once the ultimate investment, but the sacrifice no longer guarantees its expected dividends.

Today, the path to a position in the middle class is paved with student loans and steep tuition payments. Quality job opportunities after graduation have grown scarce, and many students leave college with few practical skills for the workplace.

Much like the housing bubble during the Great Recession, higher education could be on the verge of a burst. While college was once a worthwhile investment, the current higher education system is becoming unsustainable as a result of irresponsible bank lending, unaffordable tuition, insufficient degree payoff and an oversaturated market. This pattern of irresponsibility surfaced in the Great Recession, and it resurfaces today at the hands of schools, banks and the government as we approach a state of academic inflation.

College is getting more expensive at a growth rate exceeding that of inflation. As of 2014, the national student loan debt climbed to $1.2 trillion and burdened over 40 million people in the U.S. According to the College Board, “From the 1983–1984 enrollment year to the 2013–2014 enrollment year, the inflation-adjusted cost of a four-year education, including tuition, fees, and room and board, increased 125.7 percent for private school and 129.0 percent for public school.” Price increases jumped at public institutions in response to the recession, when schools lost funding from the government and increased tuition to compensate.

Inflation-Tuition

Adjacent to the increase in tuition cost, it is important to analyze the relative wage patterns of the average college graduate. The New York Fed conducted an in-depth historic study which compared the earnings of college graduates to the wages earned by those with only high school diplomas. The study found that wages of college graduates have leveled since 2000 and fell after the Great Recession. The study says this decrease is offset by a similar decrease in the wages of high school graduates, which means the college wage premium remains high and the opportunity cost for college attendance is low. So, students are better off going to college rather than starting to work after high school. Despite the relative benefit of a college diploma compared to a high school diploma, “the bad news is that college students are paying more to go to school and are earning less upon graduation.” It is important to note that the New York Fed’s analysis was qualified through research of historic patterns. The analysis to be presented forecasts the future burst of the higher education system based on its broken infrastructure and unsustainable future.

Underemployment

A college diploma is an asset, an investment that students hope will lend future financial security. The investment is viewed by many as a universal security blanket, but not all students with diplomas will gather a yield. In 2014, about 8.5% of college graduates were unemployed. Contrarily, the trend of wages for college graduates who do find a job has been dipping, as the New York Fed said, “Our analysis reveals that the average wages of college graduates have been falling for the better part of a decade, with the pace of decline accelerating after the Great Recession.”

Outside of this purely quantitative analysis of wage trends, there’s another component to the return on a bachelors degree that doesn’t add up. Students invest not only in their degrees, but also the skills learned while studying at university. In a survey that asked Americans what the most important reason for college attendance was, the most popular answer was “to gain skills and knowledge for a career.” Today, however, most students are not taught the skills necessary in the workplace, as “About three-quarters of new college graduates said they expect to receive formal training in their first job, whereas only half of 2013 and 2014 graduates report having had such opportunities.” So even after investing thousands for expensive degrees, many students emerge from campus without any real skills. When employers see this lack of preparedness among college graduates, they stop valuing the diploma. Financially and qualitatively, therefore, a college education is losing its value.

In addition to this negative trend, it remains true that not all college degrees are created equal. The New York Fed found that “In general, majors providing technical training—that is, training that focuses on quantitative and analytical skills—earned the highest return.”

MAJOR ROI

The skills valued in the workplace are those quantitative, technical skills that most nontechnical students never encounter in the classroom. Abel of the New York Fed said, “Building an actual skill — particularly quantitative and analytical skills — is going to be better in terms of outcome than getting something more general.” There’s a degree-monopoly in education, whereby those STEM degrees pay off more than liberal arts and humanities degrees.

Technical fields often remain immune to unemployment trends, making students in these areas the educational elite. When evaluating types of degrees, there’s another disparity. When students notice that a bachelor’s degree is insufficient for their desired job, they add additional certifications and advanced degrees in order to plump their work viability. Researchers have confirmed that “a graduate degree can substantially boost the earnings potential for even the lowest-paying undergrad majors (though, of course, that requires more outlay upfront).” So emerges a form of academic inflation, whereby multiple degrees are necessary for upward mobility.

Separate from degree-specific success, post-graduate success is also linked to the motivation and agency of each student. Students who succeed after college are those who take on internships, build their networks and imbue themselves in their field of study before graduating. The investment in college, therefore, is not a universally wise investment, and all diplomas don’t deliver the same results. It’s like stock speculation – there are profits for some, losses for many others.  The overarching value associated with a college diploma, therefore, is a little too enthusiastic.

The cracks in the higher education system are becoming visible as their effects surface. First, overwhelming student loans are shifting student behavior. Now more than ever, students are forced to consider loan repayment when picking their majors and careers, as “Eighty-two percent of new grads looked at the job market before choosing a major—up from 75 percent of 2014 grads.” Second, a large proportion of graduates are “underemployed,” which means students are working part-time jobs or jobs that don’t require their earned degrees. According to Accenture, “Forty-nine percent of 2013 and 2014 graduates consider themselves underemployed… Only 52 percent of 2013/2014 respondents are employed full time, down from 68 percent in 2011/2012.” These numbers assert once more the questionable universal utility of a college diploma. The New York Fed affirms the trend, finding that a third of college graduates spend much time in careers unrelated to their field of study.

The higher education crisis bears striking similarities to the Great Recession. As discussed, a college diploma is universally believed to be a valuable asset while investment in a degree does not always result in a proportional return, and students struggle to find employment and repay their loans. During the recession of 2008, houses were universally believed to be sound investments before the housing market collapsed and homeowners defaulted on their loans. In both cases, the responsible parties for crisis are banks and the government. In the case of higher education, schools are an added, primary contributor for driving the crisis.

Banks disperse incredible loans to students who have marginal potential for timely repayment. The government encourages lenders’ behavior (in an effort to support student funding), and the cycle becomes vicious. It begins when “banks are essentially insured by the government and its taxpayers, incentivized to make risk loans, and/or prevented from refusing to make risky loans.

In addition, interest rates set by the Federal Reserve are at record lows.” In 2008, banks participated in subprime lending, giving attractive loans to people who could never pay them back. What were dangerous mortgage-backed securities then are mirrored in today’s Student Loan Asset-Backed Securities (SLABS), which totaled $2.67 trillion at their peak (as of 2011). So not only are banks offering risky money to students, but they’ve also profited by collateralizing the loans. The government bailed out the banks in 2008, and today they’re encouraging the risky behavior they then condemned. The following paints a picture of this cycle:

“The loans and costs are caught in the kind of dangerous loop that occurs when lending becomes both profitable and seemingly risk-free: high and increasing college costs mean students need to take out more loans, more loans mean more securities lenders can package and sell, more selling means lenders can offer more loans with the capital they raise, which means colleges can continue to raise costs. The result is over $800 billion in outstanding student debt, over 30 percent of it securitized, and the federal government directly or indirectly on the hook for almost all of it.”

It seems irresponsible that banks would lend to a student who is academically unfit to repay the debt, in the same way that it was irresponsible for banks to lend to aspiring homeowners who had horrible credit. If a student plans to study a discipline that promises little in the job market, banks are participating in a mutated version of subprime lending in the educational realm by offering the student debt despite their dismal financial future.

The government plays a bigger role than simply encouraging lending. The U.S. government “is actually the biggest lender of student loans. In addition, the government is essentially subsidizing schools, by giving them tax breaks.” The intention seems honorable. After all, higher education is commonly viewed as a basic right by most Americans. Unfortunately, the reality remains that the government is encouraging students to accrue debt to fund an asset that doesn’t promise sufficient returns for repayment. Students can’t declare bankruptcy on their loans either, so the issue becomes more significant. Students become slaves to their student loans, working any job that pays enough to chip away at heavy loans and rid themselves of watchmen Sallie Mae and JP Morgan.

The final aggravator in this crisis is the university. Universities continue to hike tuition despite the public’s inability to afford the cost. College administrators seem ignorant of this reality; according to a Time/Carnegie Corporation survey, 80% of American adults felt that the education students receive at many colleges is not worth what is paid for it. In contrast, only 41% of college leaders shared the sentiment. Many hypothesize that private colleges will begin to see serious drops in enrollment as tuition continues to skyrocket, and the institution itself will become extinct.

Not only are universities raising tuition prices at incredible rates, but they are also supporting institutional stalemates that do not promote employment opportunities for their students. There are several examples of this structured sabotage. A first example is that many classes at universities do not teach practical workplace skills for humanities and liberal arts students.

highereducation

Wasteful spending is often documented at big private universities that allot hundreds of thousands of students’ tuition funds on showy buildings and unnecessary luxuries. Universities also continue to mandate general education courses, which are an additional strain to students’ pocketbooks and time. This is an unsustainable system that is not conducive to employment, tuition support or returns on investment.

A more concrete example of corruption in the university system is evident in the example of Everest College (operated by parent company Corinthian Colleges), which lied to its students to promote the school’s reputation and pump enrollment numbers. The school was “accused by federal agencies of operating a predatory lending scheme, preying on low-income students and falsely inflating job placement numbers. Corinithian is currently closing and selling its schools, leaving thousands of graduates on the hook for loans they took out.” One student, Rosalyn Harris, carried $22,000 in student loan debt after studying criminal justice at the college only to end up working for Victoria’s Secret. This story sounds strikingly similar to the broken stories of lost investments during the housing crisis. It is through these and similar patterns that American universities contribute to the budding higher education crisis and the diminishing credibility and reliability of a college degree.

Some might argue that a college education is intrinsically beneficial. This is very often a true statement, and three in four Americans agree that higher education is a basic human right. The issue, however, is not rooted in the value of an education itself, but the tradeoff between the price (and loans) paid for a diploma relative to the return on the investment. A Pew study found that most Americans agree that higher education is not affordable, and the study concludes that “If a bachelor’s degree is one important way for today’s young adults to achieve the American dream, affordability in particular could jeopardize that dream.” Others might argue that a degree is an eternal investment that carries weight throughout a student’s employment lifespan. The truth is that while degrees are indeed filters in the job market that prove some level of higher competence, they are costly verifiers that leave students in overwhelming and often indomitable debt.

Based on the facts presented, higher education in its present form cannot last much longer without bursting at its seams. The universal belief and trust placed in diplomas coupled with the easy access to low interest debt from banks make it likely that eventually, the system will implode. Students will no longer be able to pay off such immense debt, and so many will stop enrolling at higher education institutions altogether. As prices at universities continue to rise, private institutions will become unaffordable and students will resort to third party options to support their academic pursuits. Alternatives to the traditional model will quickly emerge, and more students will study practical and technical skills in order to support their professional success. The true defining certificate of one’s knowledge will be projects created in the real world and skills acquired along the way. Employers will stop valuing degrees and prefer students who can build and solve problems.

People still believe that a college education is worth its ticket price, but colleges aren’t even equipping many students with basic workplace skills. Students are unprepared for jobs, learning soft skills that don’t translate, and so many try to pick up trade skills or even become trade workers. With emerging and innovative education options like MOOCs and other online resources, the most competitive job seeker might be the one who’s mastered C++ with Udacity rather than the student with lecture notes from a gender studies class at UCLA.

A college education is a gilded promise of security; what once guaranteed opportunity now barely opens the door. The value of the college degree might disappear as this bubble pressurizes, and the investments made by so many young learners will have been compromised. It’s no doubt that an education is valuable, but knowledge can be gathered at more reasonable prices and sounder circumstances. For now, the key for students is to be risk-cautious, to weigh decisions and options before they embark on the expensive journey of 4-year university.

Works Cited

“2015 U.S. College Graduate Employment Study – Accenture.” 2015 U.S. College Graduate Employment Study – Accenture. N.p., n.d. Web. 19 Oct. 2015.

Aibel, Jason. “The Public Benefits of Investing in Upper Secondary Outweigh the Costs.” (2012): n. pag. Current Issues in Economics and Finance. New York Fed. Web.

Barrett, Jennifer. “You Wasted All That Money on a College Degree?” CNBC. NBC, 19 June 2015. Web. 19 Oct. 2015.

Davis, Alyssa, Will Kimball, and Elise Gould. “The Class of 2015: Despite an Improving Economy, Young Grads Still Face an Uphill Climb.” Economic Policy Institute. Epi.org, n.d. Web. 19 Oct. 2015.

Fishbein, Michael B. “9 Striking Similarities Between the Housing Bubble and The Higher Education Bubble.” The Huffington Post. TheHuffingtonPost.com, n.d. Web. 19 Oct. 2015.

“Most Americans Say Higher Education Not Affordable.” Gallup.com. Gallup, n.d. Web. 19 Oct. 2015.

Mulhere, Kaitlyn. “2015 College Grads May Not Be As Ready for the Workplace as They Think They Are.” Time. Time, n.d. Web. 19 Oct. 2015.

“Poll: Americans View Higher Education as a Right | Inside Higher Ed.” Poll: Americans View Higher Education as a Right | Inside Higher Ed. N.p., n.d. Web. 19 Oct. 2015.

Sanburn, Josh. “Higher-Education Poll | TIME.com.” US HigherEducation Poll Comments. Time, n.d. Web. 19 Oct. 2015.

Tuition, Thanks To Climbing, and Inadequate College Savings. “40 Million Americans Now Have Student Loan Debt.” CNNMoney. Cable News Network, n.d. Web. 19 Oct. 2015.

Weissmann, Jordan. “How Bad Is the Job Market for the College Class of 2014?” Slate. Slate, n.d. Web. 19 Oct. 2015.

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