Paying for College

College Tuition Bubble about to Burst

Inflation. Deflation. Stagflation. Conflagration . . . What's going on here?

The answer to that question is twofold: (1) Uncontrolled spending and (2) Free-market forces. In the case of Answer #1, we can look at any number of state universities that have been on an administrative and managerial feeding frenzy, hiring staff and faculty at a rate seemingly oblivious to the financial realities of their respective state governments.


In the private-school realm, we see Answer #2 referencing the two-edged sword of "what the market will bear." The huge increases in tuition and related costs apparently make little difference to those aspiring for higher education. This fact is nowhere more apparent than in the so-called "elite" halls of ivy, such as the Ivy League and other top-ranked colleges and universities in America.

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Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the  University of Michigan. He is well known for his insights into the economic conundrums of higher education. In a blog post from June, entitled The Higher Education Bubble: It's About to Burst, Perry outlines (literally) the seeming arrogance of higher-ed managers.

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The top chart above shows the housing bubble in the U.S., using monthly median new home prices (Census data here) and the monthly Consumer Price Index (CPI, data here), back to 1978, where both series are adjusted to equal a value of 100 in January 1978.  The bottom chart illustrates a much, much bigger bubble than the real estate bubble - the "higher education bubble" - based on an annual comparison of the CPI, median new home prices and the CPI for "College Tuition and Fees" (data here).  Note that the housing bubble resulted from about a 4-time increase in home prices between 1978 and 2006, and college tuition has now increased by more than twice that amount since 1978 - it's gone up by more than a factor of ten times.  The college tuition bubble makes the housing price bubble seem pretty lame by comparison.

According to Glenn Reynolds, writing in the Washington Examiner, "Higher education's bubble is about to burst":

"It's a story of an industry that may sound familiar.  The buyers think what they're buying will appreciate in value, making them rich in the future. The product grows more and more elaborate, and more and more expensive, but the expense is offset by cheap credit provided by sellers eager to encourage buyers to buy.

Buyers see that everyone else is taking on mounds of debt, and so are more comfortable when they do so themselves; besides, for a generation, the value of what they're buying has gone up steadily. What could go wrong? Everything continues smoothly until, at some point, it doesn't.

Yes, this sounds like the housing bubble, but I'm afraid it's also sounding a lot like a still-inflating higher education bubble. And despite (or because of) the fact that my day job involves higher education, I think it's better for us to face up to what's going on before the bubble bursts messily."

For more insights on this issue, go here. Be sure to read the comments following Perry's post.

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For additional commentary, check this thread on the College Confidential discussion forum.

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