Peter Thiel, co-founder of Paypal and first major investor in Facebook, has a track record in spotting bubbles, namely the internet and housing bubbles. He thinks he’s spotted another: Higher Education. But he’s not alone, an increasing amount of commentary and evidence points in this direction. Like the housing market, where people rushed to take out loans (mortgages) based on the belief that the value of their asset will always rise (or at least stay the same), many suffered a shock when the value dropped.
Interesting idea, but where’s the evidence?
1. Blind belief
Criticising Higher Education is like “saying there’s no Santa Claus” claims Thiel. This is a feature of all bubbles, believes Thiel, where ‘groupthink’ takes over and false assumptions become absolute beliefs, and even debate of the negative consequences is seen as ‘party-pooping’.
Huge hikes in prices for the buyer (almost tripling in UK), now seem unrelated to the real price of the degree. Since ’78 a US degree has increased by 650 points above inflation, compared to the housing bubble at only 50. This is exactly what happened in everything from tulips to internet stocks and housing. There is no compelling evidence that the future worth of degrees will be guaranteed. That’s the mistake made in all bubbles.
3. Unintended consequences
In a bubble, real demand is brutal, and in a buyers’ market may lead to degrees being simple indicators of ‘class’ rather than intrinsic value. In adopting the £9000 (or close) fees, Universities may be creating their own bubble, dislocating cost from real value. Institutional brand ranking, and they are brands (academics & students come and go, and content owned by publishers), may lead employers to dismiss degrees from institutions perceived as second-rate. In short, your degree may become a liability while your debt remains all too real.
4. Student short-termism
Decisions made by young people are measurably short-term, with factors like ‘fun’ or ‘easy’ often playing a part in their decisions. This is a distorting factor, as it over-values some subjects and degrees over others. This generation could become the most indebted generation ever, in a time when debt has been shown to be an indicator of failure. What makes this bubble so dangerous may be naivety.
5. University short-termism
No one could really claim that the huge hikes in pricing reflect corresponding hikes in the value of University tuition. So what’s happening? Universities are complicit in this. They raise prices because they can, without attention to lowering costs through online learning, fourth semesters etc. In fact the quality of tuition may have fallen, with more students and less qualified lecturers, matched by salary inflation at the top, higher numbers of administrators and wasteful capital expenditure in largely empty buildings. I've blogged on this before.
6. Context changes
Just because degrees lead to value now, doesn’t mean they will in the future. The chicken that comes out for its feed from the farmer every day, may suddenly find its neck wrung. When a bubble bursts, the rising tide that raised all ships, suddenly falls, leaving huge numbers stranded. As unemployment rises, a similar effect takes place with large numbers of debt-laden graduates on the market. There is already evidence of graduate wages stagnating or falling.
7. Tsunami of debt
The student debt bubble in the US has reached $1 trillion and raising eyebrow. Delayed payment means the accumulation of huge debts by students, and in this case, ultimately, the bailout would come from the state. Heard that before? In the US SLABS (Student Loan Asset-Backed Security) underpin students loans and have Federal Guarantees. A recipe for a massive default?
The truth of the matter, I suspect, is that Higher Education has become simply an extension of school, but with delayed school fees. Shortly the majority will be moving seamlessly from school to higher education. Many will enjoy the fruits of a meander through University but may (literally) pay a heavy and disproportionate price later. However, as Shakespeare said in The Merchant of Venice, ‘All that glisters is not gold’, and debts, as that great play so eloquently shows, distort human behaviour in unpredictable and distasteful ways. A degree should be seen as more than a fiscal investment, but that does not mean taking ridiculous risks when you’re only 18 years old.