Back at the beginning of the summer, I had a column in this space in which I predicted that higher education is in a bubble, one soon to burst with considerable consequences for students, faculty, employers, and society at large.
My reasoning was simple enough: Something that can’t go on forever, won’t. And the past decades’ history of tuition growing much faster than the rate of inflation, with students and parents making up the difference via easy credit, is something that can’t go on forever. Thus my prediction that it won’t.
But then what? Assume that I’m right, and that higher education – both undergraduate and graduate, and including professional education like the law schools in which I teach – is heading for a major correction. What will that mean? What should people do?
Well, advice number one – good for pretty much all bubbles, in fact – is this: Don’t go into debt. In bubbles, people borrow heavily because they expect the value of what they’re borrowing against to increase.
In a booming market, it makes sense to buy a house you can’t quite afford, because it will increase in value enough to make the debt seem trivial, or at least manageable – so long as the market continues to boom.
But there’s a catch. Once the boom is over, of course, all that debt is still there, but the return thereon is much diminished. And since the boom is based on expectations, things can go south with amazing speed, once those expectations start to shift.
Right now, people are still borrowing heavily to pay the steadily increasing tuitions levied by higher education. But that borrowing is based on the expectation that students will earn enough to pay off their loans with a portion of the extra income their educations generate. Once people doubt that, the bubble will burst.
So my advice to students faced with choosing colleges (and graduate schools, and law schools) this coming year is simple: Don’t go to colleges or schools that will require you to borrow a lot of money to attend. There’s a good chance you’ll find yourself deep in debt to no purpose. And maybe you should rethink college entirely.
Many people with college educations are already jumping the tracks to become skilled manual laborers: plumbers, electricians, and the like. And the Bureau of Labor Statistics predicts that seven of the ten fastest-growing jobs in the next decade will be based on on-the-job training rather than higher education. (And they’ll be hands-on jobs hard to outsource to foreigners). If this is right, a bursting of the bubble is growing likelier.
What about higher education folks? What should they (er, we?) do? Well, once again, what can’t go on forever, won’t.
For the past several decades, colleges and universities have built endowments, played moneyball-style faculty hiring games, and constructed grand new buildings, while jacking up tuitions to pay for things (and, in the case of state schools, to make up for gradually diminishing public support).
That has been made possible by an ocean of money borrowed by students — often with the encouragement and assistance of the universities. Business plans that are based on this continuing are likely to fare poorly.
Just as I advised students not to go into debt, my advice to universities is similar: Don’t go on spending binges now that you expect to pay for with tuition revenues later. Those may not be there as expected.
Post-bubble, students are likely to be far more concerned about getting actual value for their educational dollars. Faced with straitened circumstances, colleges and universities will have to look at cutting costs.
Online education, and programs focused more on things that can help students earn more than on what faculty want to teach, will help to deliver more value for the dollar. In some areas, we may even see a move to apprenticeship models, or other approaches that provide more genuine skills upon graduation.
Meanwhile, for the states, and big donors, who fund those portions of higher education that the students don’t, a post-bubble world will bring some changes, too. Many states have been cutting aid to higher education, content to let higher tuition pick up the slack.
Some may choose to change that (if they can afford it) but regardless I expect more direct oversight of state institutions from those who fund them. Universities’ priorities will be brought closer to states’ priorities.
For private schools, government oversight is less direct — but to an even greater extent than state schools, private institutions have been dependent on a flood of government-guaranteed credit, and they are likely to see more scrutiny as well if that is to continue.
As former British Prime Minister Margaret Thatcher famously remarked, the problem with socialism is that you eventually run out of other people’s money, and that’s likely to be the problem facing higher education, too.
Graduation rates, employment after graduation, loan default rates, and so on are likely to get a lot more attention. Institutions may even be forced to absorb some of the cost of student loan defaults, as an incentive not to encourage students to take on more debt than they can repay.
Finally, for the entrepreneurs out there, this bubble-bursting may be an opportunity. One of the underpinnings of higher education is its value as a credential to employers: A college degree demonstrates, at least, moderate intelligence – and, more importantly, the ability to show up and perform on a reasonably reliable basis, something that is of considerable interest when hiring people, a surprisingly large number of whom do neither.
But a college degree is an expensive way to get an entry-level credential. New approaches to credentialing, approaches that inform employers more reliably, while costing less than a college degree, are likely to become increasingly appealing over the coming decade.
Those who find a way to provide them will do well. So to any entrepreneurs reading this: Good luck. And after the bubble bursts, and you get rich, please do what you can for a poor law professor . . . . .
Glenn Harlan Reynolds is a law professor at the University of Tennessee. He hosts “InstaVision” on PJTV.com and is the author of the Instapundit blog of longstanding fame.
