Another Looming Bubble: Higher Education

College enrollment has been booming. Schools have not only been adding new seats to existing programs but also adding new programs. And, unlike the free-market process where the supply of a good is expanding dramatically, the price of these seats has been increasing dramatically – much faster than the CPI. The increased attendance at increased prices is only possible through the dramatic expansion of loans to students.

The U.S. government and the banking sector are promiscuously loaning money to prospective students, and are fueling a bubble. Students are taking on huge loans, expecting to be able to pay them back thanks to the great job that lies in their future, thanks to their degree. However, as the number college graduates entering the market dramatically grows, the market clearing wage they can charge drops. An increasing number of graduates will find themselves trapped in the horrible circumstance of trying to repay huge loans from their low take-home pay.

This phenomenon will lead to huge unrest; at any given time 8 million U.S. citizens are attending college. Something like 90% of them have loans. We can expect that as their situation deteriorates, graduates will demand political action that will provide them with debt relief. And the politicians are almost guaranteed to react poorly.

The solution to this problem is for the government to stop providing subsidized loans. Better yet, the government might try to dismantle the disaster called public education, which has gone from spending $275 per student to $7,000 per student (figures in 2000 dollars) to achieve worse results. A free market educational regime would consist less of warehousing and more of useful education that prepares young people for professions that best suit their natures.

I am an anarcho-capitalist living just west of Boston Massachussetts. I am married, have two children, and am trying to start my own computer consulting company.
  • David Wilson

    I am a Political Science student that did a project on the Bennett Hypothesis using both qualitative and quantitative method. While you are right, and tuition is rising as a response to increased demand fueled by public subsidy, a lot of the cost is made up by charging higher prices for campus housing and out of state tuition, much more significantly than the increase in the price of tuition overall. However, many states are beginning to lag behind on funding for public higher education, and this is being reflected in significantly higher tuition (The tuition increase for this and next semester is expected to be around 5%, although budget shortfalls could exacerbate that).

  • Quincy

    David –

    Did your analysis look at the inefficiency allowed by the subsidies? Most colleges I know are hideously inefficient, and using subsidies to make more money available for college only allows these inefficiencies to grow worse.

    Google “Gammon’s Law” to get the idea.