{"id":3684,"date":"2009-10-29T11:46:07","date_gmt":"2009-10-29T18:46:07","guid":{"rendered":"http:\/\/dabacon.org\/pontiff\/?p=3684"},"modified":"2009-10-29T11:46:07","modified_gmt":"2009-10-29T18:46:07","slug":"is-college-tuition-a-bubble","status":"publish","type":"post","link":"https:\/\/dabacon.org\/pontiff\/2009\/10\/29\/is-college-tuition-a-bubble\/","title":{"rendered":"Is College Tuition a Bubble?"},"content":{"rendered":"

Over at Life as a Physicist<\/a>, the Physicist for Life gets on a well deserved soap box<\/a> and laments certain comments<\/a> concerning articles about a recent College Board study: Trends in College Pricing 2009<\/a>. The gist of the Physicist for Life’s comments concern the fact that one should not be surprised at rising tuition costs at public universities, given that state budgets have been shot to all hell in the present downturn.
\nBut what I find interesting, and what I’ve never been able to figure out, is the larger trend (ignore the last two years, please). Why are tuition prices increasing at such a fast rate for four year colleges? For example, see slide 5 of this presentation<\/a> where one sees that over the last three decades, the inflation adjusted price of college has more than tripled at public four year universities and gone up nearly as much a private four year universities. So that is question number one for me. Question number two is really related, and is where is this money going? (And of course the real question, as a pseudo-professor, how do I get some of it?)
\nSpeculation below the fold.
\n
\nMy own theory is that we are in the middle of a leverage driven bubble. Okay, yeah, its a stretch, but its fun to look at the numbers.
\nFirst I’d point to the evidence. Total student loans in the last decade (in 2008) dollars have gone from 44.6 billion dollars in 1998 to 94.5 billion dollars in 2008 (27th slide from here<\/a>). During that time the number of undergraduates has only increased by a small percent (see Table A-7 here) from around 12 million to 14 million. Taken together these imply that the average indebtedness of the student has skyrocketed. In effect a large amount of the increase in tuition has been “paid” for by an increase in federal loans.
\nOf course there is a reason for this. There is a perceived (and actual) value in a college degree, so people are willing to lever themselves up to pay for this value. And, if you are a university president, and you consider the costs of raising tuitions, you have a very good out. Make a proposed raise and then calculate not how much the tuition will actually go up, but how much the students will have to pay excluding the federal loans. This number, of course, will be much less significant than the actual tuition raise and thus you can say “well it will only cost you X amount” where X is not as scary.
\nSo the question is, does the fact that people are increasingly leveraging themselves really mean that there is a bubble? Well in order to make that argument, one would have to argue that the leverage that the students are taking is not worth it. If you look at the total earnings benefit over a lifetime, then it’s pretty clear<\/a> than even with today’s amount of indebitness there is value on average from a degree from a four year institution. But I wonder if this is the correct metric. For example, if I were to have analyzed the recent housing boom in terms of value of a home 40 years from now (which is morally what one is doing when looking at lifetime earnings) then you would not have spotted the bubble. I’m willing to bet that forty years from now, assuming that you don’t default, even a house bought at the height of the bubble will be worth a considerable amount more than it currently is.
\nSo what is the correct metric for deciding whether the leverage being taken on is too much? Well I’d guess it has something to do with whether the loans are causes severe hardship in the short term. One proxy for this is default rate for loans, but this data is going to lag significantly behind the increases in tuition. The most recent data does show an increase in student loan defaults (it’s going to be hard to separate out the financial crisis in future data.) But what I find more interesting is that because of the lagging nature of defaults for student loans (a built in four year window) we won’t know whether students are taking on too much debt until, well, until the bubble bursts.
\nThere are, of course, many flaws in this argument. The first is how is such a bubble going to burst? Demand for entrance into four year colleges doesn’t seem to show any sign<\/p>\n","protected":false},"excerpt":{"rendered":"

Over at Life as a Physicist, the Physicist for Life gets on a well deserved soap box and laments certain comments concerning articles about a recent College Board study: Trends in College Pricing 2009. The gist of the Physicist for Life’s comments concern the fact that one should not be surprised at rising tuition costs … <\/p>\n

Continue reading “Is College Tuition a Bubble?”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[32],"tags":[],"class_list":["post-3684","post","type-post","status-publish","format-standard","hentry","category-general"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/dabacon.org\/pontiff\/wp-json\/wp\/v2\/posts\/3684","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/dabacon.org\/pontiff\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/dabacon.org\/pontiff\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/dabacon.org\/pontiff\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/dabacon.org\/pontiff\/wp-json\/wp\/v2\/comments?post=3684"}],"version-history":[{"count":0,"href":"https:\/\/dabacon.org\/pontiff\/wp-json\/wp\/v2\/posts\/3684\/revisions"}],"wp:attachment":[{"href":"https:\/\/dabacon.org\/pontiff\/wp-json\/wp\/v2\/media?parent=3684"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/dabacon.org\/pontiff\/wp-json\/wp\/v2\/categories?post=3684"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/dabacon.org\/pontiff\/wp-json\/wp\/v2\/tags?post=3684"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}