Wednesday, September 22, 2010

The staggering college debt bubble

Andrew Gillen, Research Director of the Center for College Affordability and Productivity, breaks down some numbers.
The best estimate we have for the amount of money that Americans borrow for college is $126 billion. 

The resources devoted to administration, athletics, new buildings, and low payoff research is simply staggering. The most recent example comes from Jay P. Greene, Brian Kisida and Jonathan Mills, who report that "Wake Forest, Yale, MIT, Harvard, and Dartmouth spend more solely on administration per student than the average university spends on everything per student. The nearly $75,000 at Wake Forest and the nearly $60,000 at Yale per student spent on administration must buy some truly excellent administration." All of this money must come from somewhere, and as state budgets continue to be squeezed by the economic turmoil, colleges will increasingly turn to students, and the students will increasingly turn to debt.  

Baumol's cost disease does apply to higher education, but it explains very little of the cost explosion. Bob Samuels recently calculated that given current class size and staffing patterns, "the total average annual instructional cost per student is $1,456." It should be emphasized that this figure was not arrived at by assuming cuts to current instructional spending. As Samuels summarized, "public universities charge on average $7,000 per student and they get another $8,000 per student from the state, but in reality, it only cost about a tenth of this amount to teach each student."Rather, it represents what colleges currently spend on instruction.

Just a few decades ago, there was no student loan bubble, because the cost to the student and cost of provision were much more closely aligned. The current high debt loads are an artifact of peculiar circumstances that allowed the cost of college for students to deviate very far from the cost of providing a college education. If costs for students declined to where they should be, there would be no need for students to take out so much debt. Just as we now consider housing pre-2007 a bubble because of the deviation of housing prices from their fundamentals (such as price to rent ratios and price to income ratios), we will consider the deviation in the cost of provision and the cost to students of college to be a student debt bubble.

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