The college bubble

We are facing a major socio-politico-economic tipping point. A “paradigm shift” if you will. The educational-industrial complex, fueled by easy access to cheap credit and fiat currency is in a bubble. Yep, that’s right. If you thought the housing bubble had an impact on university finances, wait until this college bubble pops.

As of this year, the average cost of attendance (according to the College Board College Cost Calculator) of a 4-year residential institution is $39,000 and $19,400 for private and public colleges, respectively. The most important number is still the average debt after getting your degree (50% of students who enroll will drop out, so we wont even count the money wasted there). For a graduate of a public college average debt is about $46,000, and more than twice that for a private university. And student debt is notoriously difficult to write off in bankruptcy.

It is a vicious cycle, expanding credit and ballooning prices; exactly what happens in a classic “bubble.” Student loans now represent a 0.5 trillion dollar market with a rising 6.7% default rate this year, and, if the 1990 recession is any guide, defaults may reach over 20%. Similarly to subprime housing loans, the share of the student loan market classified as “private,” with high and variable interest rates, rose from 7% to 23% of the student loan market over the course of this decade. During the heyday of this system, cosigners and credit score evaluations were waived. With the accelerating depression (yes, pay attention), the unsustainable is quickly becoming unsustained. (All numbers from Wall Street Journal.)

But the greatest cost of college attendance is the opportunity cost. Four of your most productive years is a long time. For many middle-class students, who do not intend to pursue highly competitive and poorly compensated academic fields, college represents a stepping stone to graduate or professional schools, but they just don’t make any economic sense. Even then, alternative paths to higher degrees exist: a personal passion for medicine or business or technical sciences (demonstrated by work and projects in the field) will make an applicant stand out much more than an accredited degree from one of many, many, colleges. So save that tuition money and get a degree cheap through placement exams and community college credit. Use it instead to start a business or build a table-top neutron generator – whatever floats your boat, or rather, grad school application.


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