Higher Education: The Next Big, Bad Bubble

“Good afternoon, sir. I’m a broker with Churnham & Burnham, and I’d like a few moments of your time to discuss an extraordinary investment opportunity. It’s an asset that everyone is buying—your friends, your neighbors, teachers, firemen, doctors, lawyers, and even your humble broker.

“Not only that, but it’s an exceptionally long-lived asset. Once you own it, you’ll be getting dividends for your entire working life.

“While it’s not as cheap as it used to be—in fact, it’s going up in price at about twice the rate of inflation—it’s never been easier to get government-subsidized loans to purchase it. In fact, third parties may pay for some or all of it for you!

“The asset is, of course, a college education. Now, wouldn’t you like to review the prospectus?”

If you’re an average American, an undergraduate degree is the second biggest purchase you’ll make, after a home. It’s well-known that a college degree is an investment with a positive return. Most successful people are college graduates, and most desirable career tracks require at least a college degree.

But I contend that college is not a good investment. It’s a bubble. Why?

1. The price of college is continuing to rise faster than the rate of inflation.

2. There is empirical evidence that the dollar value of a college degree is flat—or possibly declining.

3. If college loses its signaling power, this will make past degrees retrospectively worth even less.

What is the Return on Investment for a College Degree?

I’d like to preface this by noting that I don’t think all degrees are a bad investment. A technical degree at a decent school is almost always worthwhile. It’s very hard to do a decent job at a top-tier school and not end up with a degree worth having. That said, most of the growth in the college population comes from:

1. Lower-tier schools expanding their classes. (Arizona State has grown from 26,000 to 68,000 students since 1970. Yale’s undergrad class grew from about 5,000 to 5,300 in that period.)

2. New schools. The University of Phoenix was not exactly a major force a few decades ago. Meanwhile, schools rarely shut down.

Actual return data are hard to come by, but one source is to look at the difference in earnings between college graduates and non-graduates.

This data has an interesting feature: it’s based on average earnings over a ten-year period. That has two effects: first, to the extent that college degrees are for signalling, rather than for skills, it will exaggerate their effect; if you’re a smart engineer with no degree, it might take you a couple years to get the job you would have gotten out of school, but you’ll get it eventually. The more pernicious effect is that if college degrees are suddenly worth less, it will take a while for this to be reflected in the average. In a worst-case scenario, where the implied value of a college degree spikes and then plummets (the way technology stocks did in 1999-2002, or housing did in 2000-2009), this effect won’t show up in median earnings.

The government data table is missing two columns: first, the average difference between college grads and high school grads. And second, the growth rate of that difference. Add them, and the result is striking:



Median Wage

HS Wage

Grad wage


Annual growth rate


















































College was a great investment in the early 80’s (when, incidentally, parents who are paying for college now probably formed their picture of the value of a degree). But now the cost of a degree is rising at twice the rate of inflation—while the return on that investment is rising by half the rate of inflation.

What is a “Degree,” Anyway?

If tough degrees from good schools aren’t numerous enough to match the demand for college education, that demand will be expressed elsewhere. As mentioned before, this can show up in the enrollment growth at lower-tier schools. It can also show up:

1. In the growth of lower-income, less demanding degrees. According to the National Center for Education Statistics, the number of Engineering degrees granted grew by 53% from 1970 to 2008. The growth in psychology degrees: 142%. (Math and statistics, by the way, has declined 38% during this period, though it used to be a proxy for computer science, too.)

2. In the growth of for-profit schools.

All of these factors change the definition of a “degree,” and not in a positive way. According to the same NCES data, Engineers made around $58,300 a year in 2001; psychology majors clocked in at $35,100. 87% of engineering grads were employed full-time; 76% of psychology grads were. For-profit schools don’t release numbers on their students’ incomes, but from the résumés I’ve seen as a recruiter, the numbers are not likely to be impressive.

In other words, the growth in the number of people who have a degree has coincided with a decline in the average value of those degrees. The class of 1970 was comparatively more likely to go to an Ivy-league school, major in math or engineering, and get a job. The class of 2011, God help them, is more likely to go to a state or for-profit school, graduate with a degree that has a lower expected salary, and have trouble finding employment. And all else being equal, more subsidies for higher education will imply more of all this—it is vastly cheaper to get another sociology major into Capella University than to get another Astrophysics major into Princeton.

Popping the Higher Ed Bubble

The bubble in higher education is fueled by culture and subsidies. Culturally, college fits in about where housing did until very recently: it is simply something you do. If you’ve succeeded in life, you’ve gone to college and paid for your kids to do the same. It’s hard to change that perception; if Bill Gates didn’t, Mark Zuckerberg won’t.

But what we can change are the policies that subsidize college. Student loans should be drastically curtailed, especially for the “at-risk” groups (which are also the fastest-growing). Loans to students at for-profit schools have an appalling 40% default rate. While I can’t find data for degrees, I suspect that hard science graduates default more rarely than social science graduates (except for education, where the compensation is nothing if not reliable).

This is a bubble like any other bad bubble (i.e. a credit bubble). It ultimately rests on the twin mistakes of extrapolating based on bad data, and assuming that investments will behave the same way when they’re made en masse and by default, rather than individually and with great care.

The solution is to pay attention. There shouldn’t be a “higher education” bubble, because higher education shouldn’t be treated as a single aggregate entity. As long as it is, we’ll have a surplus of degrees from the University of Phoenix—just as the last bubble gave us a surplus of suburbs outside of, well, Phoenix.

Full Disclosure: Depending on how you calculate this, I own a little more than half of a degree in economics or math. Basically all of my friends have degrees, including postgraduate degrees. Everyone I’ve ever hired or been hired by has a degree. I haven’t found a way to short higher education as a whole. If you can think of one, let me know.

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| August 2nd, 2010 | Posted in economics |

36 Responses to “Higher Education: The Next Big, Bad Bubble”

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  2. Parag Shah Says:

    Very nice article. I agree with you… the college bubble is on it's way to bursting. But it will take a while.

    In your article you mentioned, “what is a degree?”. Well in a practical sense it's a proof of learning. There are many fields in which a person can be self taught, and make just as good an income, but that required a lot of discipline. Also many potential self learners may be unsure of what the future will hold for them without a degree, so they take the well known path.

    I have been recently started an experiment. I am doing a masters in CS using open courseware and social learning / social credentials. I am documenting this experiment at http://opencs.wikidot.com


  3. byrneseyeview Says:

    That's very interesting! I gave OCW a try right before I went to college,
    but didn't have enough time to keep up with it once I was in school.

    One of the hypotheses I've heard about that is that you need the peer
    pressure (and pressure from teachers) to stick with school long enough to
    complete a degree or equivalent. Perhaps doing a degree through OCW instead
    will be considered a sign that you have even more self-discipline than the
    average grad.

  4. Ro Atkinson Says:

    At the moment it does seem that a degree does not do a lot to help one find a decent job. I have a first in law and since then have only been working a 30 hour week at the minimum wage for my age as a seller of electronics. However, I don't think that monetary return is the sole incentive for gaining an education. I have a far greater appreciation of many things in life since I took my course. I am now aware of what is going on around the world. I enjoy reading the Economist magazine regularly. My mind is sharper. Maybe I don't have a great job to give me the finances to enhance my outside world but I far prefer my inner world now to what it was before.

  5. byrneseyeview Says:

    I'd hoped that college would have that effect for me! But I can read and
    enjoy *The Economist *just as well without a degree.

    Obviously a lot of this depends on circumstances, so I wouldn't interpret
    your story as a negative for degrees as a whole. But if college degrees are
    for individual enrichment and not for financial gain, they are terrible
    collateral for massive loans. Nobody can borrow five times their income and
    an infinite multiple of their net worth in order to buy artwork or to
    finance a life as a poet–or if they could, it wouldn't be a good policy for
    the government to subsidize it.

  6. Parag Shah Says:

    I agree, peer pressure does play a very important role in staying on track (or sometimes getting of track…). If a person is entirely self educated, it does indicate a great amount of discipline and determination.

  7. jdavid_net Says:

    “But what we can change are the policies that subsidize college. Student loans should be drastically curtailed, especially for the “at-risk” groups (which are also the fastest-growing). Loans to students at for-profit schools have an appalling 40% default rate. While I can't find data for degrees, I suspect that hard science graduates default more rarely than social science graduates (except for education, where the compensation is nothing if not reliable).”

    Are you really suggesting that we take away this opportunity from the dis-advantaged?

    I may not be willing to give 99% of bumbs money, even for food, but i am completely willing to give money to the government no-matter the cost to make sure that everyone has a chance to seek knowledge. I am almost of the opinion that there is no greater thing a country can do, than to provide a proper education to everyone within it's boarders. ( regardless of race, creed, gender, nationality, or citizenship ) let the world come here to learn, let the world compete to come here to get an education.

    yes, we need to make hard decisions in the coming years, but limiting access to knowledge is not one of them.

  8. byrneseyeview Says:


  9. Eric Gilbert Says:

    Interesting analysis and a nice post. However, I wonder if this American-centric view misses something crucial: American higher-ed is a chief export of the United States. Your analysis looks at the return Americans get for finishing college. I suspect that foreign nationals who attend U.S. universities accrue far bigger returns (in real terms). This may help explain rising prices without rising value (if only partially).

  10. byrneseyeview Says:

    Absolutely! I wish we had better data on how much people make when they go
    to American schools and work overseas. That could explain a lot of it,
    especially given the US's disproportionate share of the very best schools.

    But that won't affect the policy decisions. If American's middle 50% is
    bidding against China's top 1%, it's even more important to avoid the
    distorting effects of subsidies–since they increase the odds that an
    American student with less academic potential but more access to loans will
    have an advantage.

  11. Modern Youth Says:

    “if you’re a smart engineer with no degree, it might take you a couple years to get the job you would have gotten out of school, but you’ll get it eventually.”

    Seriously? You'd have to be an astonishingly good civil/mechanical/chemical/electrical engineer for me to hire you on the basis that you're smart, rather than that you have academic credentials. I flinch at the thought of having someone building office blocks for me without a degree in civil engineering – just being smart really wouldn't be enough.

  12. byrneseyeview Says:

    The sentence starts with “If college degrees are for signalling…”

  13. byrneseyeview Says:

    Or rather, “to the extent that college degrees are for signalling…”

  14. Kadin Says:

    If higher education really is a “bubble,” then subsidizing it really isn't providing those disadvantaged people with an “opportunity” — it's selling them something (via a loan) that will probably turn out to be worth much less than they paid for it. Possibly worth even less than the opportunity cost — the time that they gave up — to get it.

    It's like taking away the “opportunity” to buy a McMansion at a vastly inflated price on some sort of shady no-doc loan. University of Phoenix and the other for-profit universities are like the Countrywides of the higher-ed world. They're pushing products that aren't worth nearly what the buyers think they're going to be, and it's all going to end in tears down the road.

    Better to pop the bubble early than let it fester until it explodes, the way “homeownership” did.

  15. jdavid_net Says:

    1st, if libraries are your answer then you are probably self motivated enough to start a company and would not have time for libraries anyways. libraries don't host classes, and have social obligations, and don't have peers.

  16. Scott Locklin Says:

    This is an astute economic analysis, though I suspect there are more serious intangibles: the most successful people I know didn't go to college at all. I think the college treadmill promotes a sort of blinkered vision.

  17. jdavid_net Says:

    ok, keep the opportunity, but ditch the loan. if 40% default anyways, maybe, there is a way we can pay for that education. the seeking of truth should be a fundamental thing our country supports.

    education supports society in a number of ways. it creates social groups, it creates a challenge for someone to surpass, and it creates friendships. college is a means to create a network of people that choose to be together. it's really the 1st network that someone encounters where their choices brought them together.

    secondly, having a high education rate reduced crime. having a more educated population is the clearest means by with crime can be reduced. if a would be delinquent is in school doing something of his or her choosing that is in no doubt more productive than what idle hands might do.

    3rd, college is a place where people can take risk and discover who they are. it, builds a set of character and self identity. it creates a feeling of self worth.

    for a few people out there, they can derive all of these things without going to school, and in that case they should not. i strongly believe that if the disadvantaged don't go to school they will be much worse off.

  18. links for 2010-08-02 | The 'K' is not silent Says:

    […] Higher Education: The Next Big, Bad Bubble (tags: article blog editorial highereducation education economics) […]

  19. Bunnykins Says:

    Who said that schools have social obligations? It can be argued that social obligations are what is helping to fuel the fire here; in that schools administration (and therefore, educational loan lenders) feels obligated to provide everyone that walks through their doors with a degree. College isn't for everyone.

  20. byrneseyeview Says:

    I agree. I didn't want to turn this into another Campus Culture Wars essay, but it can't help that professors are stuck in whatever mindset they graduated in, so their students get views that are a generation out of date.

  21. byrneseyeview Says:

    All of your answers apply very well to jobs, especially apprenticeship-style jobs. It's unfortunate that people look down on, e.g., a plumber or electrician who didn't go to college. But that person did plenty of learning–and earned a salary for it!

    Also: “secondly, having a high education rate reduced crime. having a more educated population is the clearest means by with crime can be reduced. if a would be delinquent is in school doing something of his or her choosing that is in no doubt more productive than what idle hands might do.” Are you sure you don't have cause and effect backwards? Is it “college makes people less criminal,” or “Less criminal people go to college”? There's a strong correlation between low IQ and eventual imprisonment, and college is, for now, still an IQ-weighted decision.

  22. vl Says:

    Interesting analysis, but it seems to miss the fundamental calculus – a degree from a state school (like ASU) probably costs about $100k in total, at $23k difference year you'd recoup your costs within 5 years, and by 15 years, you'd be more than $230k in the black. That's a pretty sweet investment. Your numbers seem to show that it's becoming a less amazing investment, but that's not the same as showing it's becoming a bad investment.

    As you allude to, there seems to be a vastly different outcomes based on the school you go to. That said, we are missing a lot data here – what's the outcome differences between Ivies/Top Tier State Schools/Liberal Arts Schools etc. Based on the wireframe of evidence you've provided, I'd have a hard time saying you make a compelling case to reduce students loans in general. Perhaps the most natural thing is to step up the regulation on the for-profit schools – which are an awful deal compared to public schools or community colleges:

    The average one charged about $14,000 in tuition in 2009, according the Senate Committee on Health, Education, Labor and Pensions. The average community college charged $2,500. The average four-year public university charged $7,000 annually for in-state students.

    For more, see an editorial in:

  23. byrneseyeview Says:

    Your analysis is broadly correct, but first a minor issue: you're omitting two factors that make college a worse investment.

    1. You need to add opportunity cost to the tuition. If a dropout can make, say, $25K, that's another $100K. (Or less, given the next issue.)
    2. You need to discount that value to the present. $23K in 2020 is worth less to me than $23K in 2010.

    When I looked at the numbers, assuming a 7% discount rate, a 6% rate of tuition growth, and the same tuition and income numbers you looked at, it takes 10 years from starting school to break even. That assumes you're not borrowing to go to school.

    Add in the $25K opportunity cost, and it takes about 22 years to break even!

    But the larger point is that people have a general sense that a degree is a good investment. The way they understood that residential real estate always went up in price fast enough to pay off a mortgage, especially if it had a lower initial interest rate. The problem is that this thesis gets expressed in the most harmful way possible–in overpriced, low value degrees, or in overpriced, low-value housing.

    It's the bad aggregation that puts us in bubble territory.

  24. Steve Says:

    It depends on the degree. Too many Peace Studies programs around. If it ends in Studies, it isn't worth the paper it's printed on. Engineering, Business (from a decent school), Forestry, and other degrees where you actually know something besides opinion are the only degrees worth getting.

  25. Ken Sundheim Says:

    By far, this may be the worst article I’ve ever read. You need an education for certain purposes:
    1. Get a good job so you can learn the in’s and out’s and open your own business.
    2. Obtain good writing skills, too many of our day to day correspondence comes in the form of writing
    3. Social Situations. Anybody here like to have to discuss that they have no college degree when having an informal with someone whom you haven’t met?
    4. If you take advantage of what is offered, you can learn about so many different subjects
    5. College is a big social step as you are put in a situation with many different cultures and many different backgrounds and even sexual orientation. You’re not going to get exposed to this siting in your basement.
    6. You’re probably not Good Will Hunting.
    7. People from all around the world would kill for an American education, and for a good reason.

    Sorry to be so disagreeable, but while the others kiss your ass, I hope deep down they know that your arguments and logic are made of entire bullshit.
    Ken Sundheim
    KAS Sales Recruiters, Sales Headhunters

  26. byrneseyeview Says:


    1. I have a job. I know a bit about the job prospects of people who
    graduated from college when I would have; I invited a lot of them to job
    interviews, and rejected the vast majority.
    2. You read my blog post–not all of it, but some of it. Did you find any
    3. I don’t have a problem with it. I tell people I had better things to do.
    Life is short; how much of it do you want to spend jumping through arbitrary
    4. I guess you’re talking about used bookstores. Or libraries. Or the
    Internet. I’ve learned a lot more from all of those than I have from school.
    5. College does a terrible job of actually handling diversity. Colleges
    encourage people to isolate themselves in clubs and student organizations
    that are stratified based on minority group identification. Meanwhile, I
    have no trouble meeting such people in real life.
    6. Okay.
    7. They would kill for an Ivy League education, or a hard-science education
    from a lower-tier school. But nobody immigrates to the US so they can send
    their kids to the University of Phoenix. Meanwhile, as I discussed in the
    post, the biggest growth is coming from bad schools and low-value degrees.
    Meanwhile, the average value of a degree is going up at less than the rate
    of inflation, while the cost is going up at twice the rate of inflation.

    The data are clear. On average, the person who joins the college-going
    population now is going to pay too much for a bad degree from a bad school,
    if the even manage to finish. This is subsidized by the government (i.e. by
    the taxpayers). The situation will worsen unless people are aware of it, and
    I’m raising awareness.

    Thanks for your comments, but I don’t believe you have properly addressed
    any of my claims.

  27. AFellowGrad Says:

    An interesting analysis. Well done.
    However, you reference a five year old Times editorial to reinforce the claim: within the field of education, “compensation is nothing if not reliable.” First, this reference completely out of date. Post-recession data would be far more relevant, education is one of the first items to see the chopping block as most states are seeing drastic reductions due to budget shortfalls. Second, the article refers to the highest income bracket of teachers in New York (2%), however you misleadingly use this article to reinforce a claim about education majors. I guarantee that these 100k+ teachers have post-secondary degrees and they are far from the norm. The comment distracts from your otherwise sound argument.

  28. byrneseyeview Says:

    Thanks! If you have some post-recession data, I would be interested. I’ve
    heard about budget cuts for schools, but salary cuts for teachers tend to be
    rarer. And pensions appear to be untouched.

    My main point was not that you’ll make six figures as a teacher, but that
    within a given market, teacher salaries are very predictable. If you know
    what a teacher made at 25, and you know they won’t change jobs, you have a
    pretty good idea of what they’ll make at 50. The same can’t be said for e.g.
    engineers, lawyers, doctors, or manual laborers.

  29. The Higher Education Bubble: Are Foreign Students the Answer? « A Separate Piece Says:

    […] steal. The problem is of course that’s not what’s happening. This graph comes from a very insightful article written by a fellow names Byrne with data gleaned from this article over at the National Center for […]

  30. Quora Says:

    Is higher education a bubble?…

    Yes. College is a bubble, because the primary argument for investing in college involves blind extrapolation from an irrelevant data set. The college education wage premium has been declining in real terms for decades, while the quality of the median c…

  31. How to Short the Higher Education Bubble | Byrne's Blog Says:

    […] know the return on investing in college is low and declining. You know there are better alternatives to college. You know that […]

  32. How To Short The Bubble In Higher Education — My Blog Says:

    […] know the return on investing in college is low and declining. You know there are better alternatives to college. You know that […]

  33. Sam Says:

    Ken- are you a real person? Your blog is very strange.

  34. Mark Says:

    And by strange I mean obnoxiously self-promoting

  35. Questioning the Signaling Model of Education | Byrne's Blog Says:

    […] was an early adopter of the Higher Ed Bubble thesis. Like all early adopters, I’ve gotten skeptical now that […]

  36. Brad Crompton Says:

    A college education MAY replace your house as your most expensive purchase. I was an Assistant Director of Admissions for the second largest proprietary education. You got a totally over priced education which equated to a MBA at Carnegie Mellon which is a top 10 or 15 in the US. The proprieraty did not have regional accreditation so you caaaaaaaaaaaaan not transfer credits. Was almost sued byu the Department of Education for $21 Billion. Maine US Senator Snow was married to the CEO of EDMS ( Number 2 in prop ed) she got a ton of Obama’s legacy paeesed when her & Susan ollins aaalso of Maine would vote with Democrats. Her reward do not presecute trhe company hyer husband has TONS of stock in. After it got let loose by Snow it sold for a meager $7 million. It owned 4 FULL SIZE Accredited Universites. What a bargain. The Universities were funded 93% by student loans. Students now need someone who has knowledge about where to go to undergrad. University of Pittsburgh is a top 50 MBA & i8s dirt cheap. It used to be parents let 6tyeir hormone plagued 17 year olds pick their university..NO NO NO. Its why Play Boys list of top partying Schools is a huge revenue jumper it draws students.

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