Education bubble? I don't think so.

As a professor and parent, I read with interest claims about an "education bubble" for some time.  I use bubble in quotations, because I am not sure "bubble" is the right word, but I don't have a better one.  I see it a lot like medical care - rapidly increasing prices largely created by government interference.  ALL previous bubbles that I am aware where in products, commodities, and stocks - things that could be bought and sold.  That is not true of education or medical care.  Whatever you decide to call it, I do not see a rapid change in either the prices or the attendance in our university system anytime in the near future.

From what I understand of economics, a bubble starts in a speculative environment where something is bought with the express purpose of selling it at a higher price to someone else, rather than for consumption.  In some sense education can be seen to fit this pattern, as students speculate that the education they are buying will be worth more than the salary gain they will get for it.  And since education is a service, there is no consumption in the traditional sense.  But speculation does not a bubble make.  Whether using credit or not, students are making a calculation that the value of college is worth the cost of tuition.  If that calculation is irrational or without consideration of all the facts, it could lead to a bubble, but I am not convinced that is the case.

What about the demand?

Some sort of post-secondary education is a necessity into today's world.  That need will only increase, not decrease with time as more careers require advanced skills.  Yes, there some some careers/jobs/business opportunities that do not require that extra education.  Those opportunities are becoming fewer and farther in between.  Most people realize this, so the demand for post-secondary education will not go away.

What about cost?

College costs are going up faster than inflation, yet the output arguably is not.  Government pressures, federal grants, and subsidized loans are all helping drive up the costs (which I believe are huge mistakes for practical and moral reasons) in both private and public programs.  That certainly is a problem, but one that won't change unless our government sudden decides to reduce those entitlements.  If that stops, certainly demand will lessen, leading to a drop in prices.  In fact, a 2009 change in federal education loans directly impacted my last school's enrollment numbers.  But that does not seem to be the argument of education bubble claimants.  Their argument seems to be that, like the housing bubble, easy credit has created an inflated value of education that in and of itself will pop without a change in government policy.

When I think about this, I ask "What would happen if there was an increase in defaults on educational loans, like there was in home loans?  Would this decrease the net present value of a university education?"  Not that I can see.  This is in part because education is a service, not product.  This is a critical difference.  Because education cannot be resold (at least not in the traditional sense a product), once provided, it can not be taken away.  So one student defaulting on a student loan will not impact other students' value from education.  Unlike the housing bubble, where homes in foreclosure drive down the value of all homes, education loans in default will not drive down the value of education to new students entering a university.  How one student values education does not impact the value of education to another student.  A student who miscalculate the value of their education, taking on more debt than they will be able to repay, directly impacts their own financial situation, but does not directly impact other students who take on dept they can pay back.

As a service, universities essentially certify that their graduates have the initiative, knowledge, and skills necessary to work in a particular area (degree).  Students are held accountable to professors for really understanding the material (at least they should be), not just good at memorizing content to pass a certification.  Until another system provides that accountability, universities are the only game in town.  So we can expect a similar percentage of students going to college in the future as do today, perhaps more.  Elite colleges with high tuition, may experience a drop in demand, but given the current extremely high demand to get into those colleges, its doubtful that even a slight drop will effect the prices.  More likely, students (and their parents) will start demanding majors with greater returns on their investment.  Less liberal arts majors and more professional degrees like engineering, journalism, business, medicine, or law.

Is it possible to provide high quality post-secondary education at a much reduced price?  Absolutely.  Administration cost in many universities have lots of run for cuts.  Technology could also provide a means to reduce the number of professors.  I've been working on a solution to the latter myself, as have others.  Will it be rapidly adopted?  Depends on what you mean by rapid.  First you have to prove that a specific innovation really is better.  That can take years.  Then the proof must be disseminated into the culture.  That can take even longer.  As of now, the best medium for dissemination is the university system itself.  Could a disrupter educational model change the game?  In the computer industry, where I work, I see the vast number of certifications available in practically all IT areas.  10 years ago, some people in our industry claimed that you could get jobs with certifications alone.  Some did.  It promised to be a great disrupter to traditional university education.  That promise never came to fruition.  Could it eventually?  Possibly, but even today, most new IT workers come from the university ranks.  I just don't see it changing the cultural expectations of the university experience because certifications are too one dimensional.  If change does come, it'll be a slower 10-20 year process, not a quick 1 or 2 year change as a bubble would predict.

Because of all these reasons, I do not think there is an education bubble.  I fully expect a shift in the university system during my career, but the nature of the change will be slow.  There will not be mass movement away from colleges anytime in the near future, nor will there be a huge drop in prices without some outside influence like a new technology or a change in government policy.  It is far too ingrained in our culture for an alternative educational system to rapidly change this approach.  Even with increasing costs, there are cheaper community colleges and regional universities that do a fair job at education at prices that are affordable without large loans.  If prices do drop, it will be because universities figure out a way to educate larger numbers of students at lower prices and pass those savings on.  Perhaps something like the Khan Academy, adopted at the university level (HT to Paul Hsieh for reminding me).

This by no means I endorse all aspects of the current educational system.  I, like many of you, see many problems with this system, including the massive increase in tuition.  I just don't see a "bubble".