2008 May 10 Saturday
Education Financial Bubble Bursting?
Writing for the Wall Street Journal George Anders argues rising student loan default rates suggest America is in an "education bubble".
Has the U.S. created an "education bubble" fueled by easy money and overborrowing by families desperate to pay rising tuition costs?
Expect a hastily sputtered "no way" from economists, university officials and student-lending specialists. They attach a high monetary value to academic degrees, no matter how fast tuition rises. As proof, they cite the big and growing income gap between college graduates and people with just a high-school degree.
The problem with the income gap measurement: Other qualities of college attendees are responsible for much of it:
- The smarts needed to get into college and do college work.
- The discipline needed to do college work.
- The motivation and drive for greater success that cause people to want that college degree.
- Employers use the college degree requirement to allow them to justify not hiring from some groups of people.
People who have the smarts, discipline, and motivation for success are going to do better regardless of whether they go to college. Granted, some college attendees learn some useful skills in college. But a lot of people earn their livings doing things unrelated to almost everything they learned in college.
This bursting financial bubble is a positive development which will cause less demand for education and hence limit tuition increases. Higher educational institutions waste huge amounts of resources. Some market discipline will force them to cut costs. Student loan providers are getting hit by rising defaults and even bankruptcies.
First Marblehead Corp. shares fell sharply Friday after the student-loan services provider reported a quarterly loss, as the market for bundles of loans stayed frozen.
The Boston company's stock dropped 25 cents, or 7 percent, to $3.47 in afternoon trading. In the past year, it has ranged from $3.12 to $42.50.
Bank of America decided to stop doing business with First Marblehead after private loan insurer The Education Resources Institute (TERI) filed for bankruptcy. First Marblehead now has lots of risks that it can't push off on an insurer. JPMorgan Chase looks likely to follow Bank of America and cut off First Marblehead dealings as well. First Marblehead just reported a $229.6 million loss.
Student loan availability has dropped.
Students in the United States have lost access to more than $6.7 billion a year in education loans since private lenders fled the market, spurring schools including Pennsylvania State University and Northeastern University to turn to the Education Department's Direct Loan Program.
Availability is dropping for a variety of types of student loans.
Hardest hit by the nation's economic woes is the single cheapest education loan, the 5 percent Perkins loan. Colleges surveyed by U.S. News said they are cutting the number and size of Perkins loans they offer students by anywhere from 10 to 50 percent.
And dozens of lenders who offered comparatively good deals on the 6.8 percent student Stafford loans and 8.5 percent parent plus loans last year have stopped making loans entirely. Surprisingly, at least a dozen lenders have also stopped making private loans, too, even though they can charge market rates that cover their costs. "I cannot get anybody to finance any alternative loans," says René Drouin of the New Hampshire Higher Education Assistance Foundation.
We need to move toward more automated ways to deliver educational services. Lectures should be pre-recorded. Tests should be delivered via automated web interfaces. Labor productivity in education is abysmally low and that needs to change. Tying up lots of smart people as college professors wastes a dwindling pool of smart people who would be better used in industry.
During the last 20 years, the salaries of many university professors have risen far above the inflation rate. This is because there is a global paranoia among all families that unless their children enter a good college, they are condemned to misery. The competition to enter the top 30 schools has become fiercer than ever. I am not talking about the top 10 Ivy League schools, even a school that ranks below the top 30 can reject a lot of highly qualified students with very high grades and test scores.
But with the internet and computer revolution, it will soon become possible to create very user-friendly course packs that can be studied at home. So far, MIT has resisted putting its best course materials in video format, only some of their sketchy lecture notes and homework problems are posted at their web site. And in fact, if I understood what I have read, I believe that MIT actually charges money to outsiders for auditing their courses. But as rival institutions that are entirely web based start flourishing, some excellent course packs will be assembled, and these programs will compete with the quality of the top schools. Then in the future, even the poorest people will be able to get the best education, provided that they have the necessary mental horsepower.
So far, the Kindle offered by Amazon is a step in the right direction, but it is still at a very low resolution to read detailed diagrams and pictures that are in science books. But ultimately these things will improve dramatically.
Who cares, Wolf-Dog? Those schools aren't about the coursework - never have, never were - but about the connections you can get by getting in.
The "connections' are exaggerated. For MBA, etc, there are "connections", but a talented person will ultimately get hired and promoted. Also, despite the connections, if an engineer from a top school that later turns out to be mediocre, will be terminated. The reason the top companies want to interview students from top schools is because most of the talented kids are there. But this is gradually changing, because kids are able to find the same education in a more decentralized way everywhere. Already state universities offer very good programs for undergraduates in all areas. For some esoteric laboratories will still be financed by the top schools, but for undergraduate education, most of the possibilities will be decentralized.
People who have the smarts, discipline, and motivation for success are going to do better regardless of whether they go to college.
Disagree. That could be true in a different country or a different time, but in the United States in the present, the right degree is a necessity to get into a high paying career track.
I've read reports of research which shows that where you get your college degree really only helps you get your first job.
Right degree: I have a degree in biology. I supervise software developers with degrees in math, physics, and other topics. One of the highest paid software consultants I know never went to college. He's brilliant.
High paying career track: Exactly what do you mean by that? I suspect you are thinking about a small number of occupations such as investment banker.