The College Education Bubble

by | Aug 29, 2014

Government intervention has done for the higher educational marketplace what it did for the real estate marketplace a decade back -- created a bubble.

College tuition and resulting student loan debt are past the crisis point. Does anyone seriously disagree?

According to the National Center for Education Statistics, the number of post-secondary enrollees increased from 12.2 million students to 21 million from 1985 to 2011. That’s a 42 percent increase compared to a national population growth of 23.6 percent over that same period.

The growth of college tuition has far outpaced the growth of enrollment; since 1985 college tuition has increased by 538 percent according to the Labor Department. This staggering jump has caused the average student borrowing to rise from $22,000 in 2000 to $29,400 in 2013.

Politicians usually tell us the answer is more government subsidies, more government loans (increasingly defaulted on), and still more federal intervention in the educational sector.

There are at least two problems with this. One, we have been doing this for decades. The more we subsidize people’s college tuition, the higher it goes. The higher it goes, the more we subsidize it — either via direct grants and subsidies or, more often, government-written loans through otherwise private lending organizations.

Clearly, government intervention has done for the higher educational marketplace what it did for the real estate marketplace a decade back. Politicians in both parties decided that it would be nice for everyone to own a house. As a result, regulations and incentives were initiated by the government to ensure that home loans were cheap and easy to get. This created the biggest real estate bubble in human history. Who got the blame? The private lenders and “lack of regulation,” even though it was regulation (i.e. manipulation of the marketplace for political ends) that gave us the bubble. (For one of the best books on this subject, see Cato Institute president and former BB&T CEO John Allison’s  The Financial Crisis and the Free Market Cure: Why Pure Capitalism is the World Economy’s Only Hope.)

It’s the same dynamic in education. Government “does everything possible to ensure every young American gets a college education.” What could be wrong with that? In practice, it means government does everything possible to make it easier for people to get college educations, thereby driving up demand relative to the limited supply. This inevitably breeds inflation. The more you try to make something free or cheap, the more demand you will create for it. The result will either be shortages or inflation. There’s no getting around it!

Politicians such as Barack Obama, Elizabeth Warren and others maintain that college tuition inflation is the fault of the private sector and mean people who won’t allow “more” funding. But what does “more funding” actually consist of? The national debt cannot be paid off for decades or centuries, and it’s growing exponentially even without more student aid. More loans? But tampering with the loan marketplace, artificially stimulating demand, only creates a bubble, as we saw with real estate and now with education.

In total, student loan debt has topped a whopping $1.1 trillion as of 2013. It even surpasses consumer credit — mostly comprised of credit card debt — which stands at $870 billion. Meanwhile, students who borrowed for a bachelor’s degree and work more than 35 hours per week rose from 52 percent in 1992 to 74 percent in 2008. So much for the conventional wisdom that “young people these days” are lazy.

And despite their debt and hard work, recent college grads still face an unemployment rate of around 13.5 percent. To make matters worse, the jobs they do have, most don’t like. Only 28 percent of young workers were satisfied with their jobs in 2013.

There has been a similar increase in delinquent loans as the number of people who borrowed federally backed loans and defaulted within two years rose from 8.8 percent in 2009 to 10 percent in 2010.

These are the results we have obtained from decades of government intervention in the field and economics of higher education. How well is this working out for anyone?

It’s easy for a politician to say college tuition is high because unspecified people are mean. But none of these emotionally manipulative claims alter facts. So long as we keep doing what we’re doing, college tuition will continue to increase. If we simply do more of it, then tuition will go even higher. On our present path, the only possible outcome are even higher costs, more defaults on loans, and still higher costs. If you doubt what I’m saying, simply look at what has been happening for the last 30 years or more.

I’m not suggesting there’s a utopia where college would ever be cheap. It probably would not be, because higher education would always be a valuable commodity, so long as it added value to people’s intellect, talents and productive capacity in the marketplace. However, in many respects (particularly in the social sciences and humanities), we see evidence that the quality of higher education is declining. Government tends to cheapen a product by making it more of an entitlement than something you have to earn; and, counter-intuitively but logically, it tends to drive up the cost for that cheapened item in the process.

With education as with so much else, we’re doing the same thing over and over again and expecting different results. There’s no basis for this insanity, and it has to stop. Sadly, it does not look like it will. Politicians keep telling us that if you want more education, then you need more government — as if government can alter reality, including the law of supply and demand, simply by demanding it. (It hasn’t happened up to now.)

The most probable outcome is that higher education, as we know it, will price itself out of existence, or at least limit itself to a select minority who can afford it (ironic, given the populist intentions of making education “affordable for all”).

While this might be a cause for despair and the educational ruin of a society, it might not end up that bad. As colleges simply go out of business because of the tuition bubble created by government intervention, technology may save the day. Online courses and other affordable options may be the way of the future. Liberalization of the private marketplace for education will be the only way we ever find out.

So long as people are willing and able to reason, think and develop, it’s never all over. Only government censorship or controls on speech, thought and innovation would ensure our ruin. But we desperately must get government and politicians the hell out of the way economically if higher education — and everything else valuable to human survival and civilization — is to have any chance of sustaining itself.

[Source of statistics: “The Indebted Generation Didn’t Ask For This” at 8/8/14]


Dr. Michael Hurd is a psychotherapist, columnist and author of "Bad Therapy, Good Therapy (And How to Tell the Difference)" and "Grow Up America!" Visit his website at:

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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