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.

Inside the college bubble

Deliver $$$ here.

People are writing more and more about the rising cost of going to college and the debt students are incurring the pay for it. Some leading thinkers believe we're witnessing a bubble that will sooner rather than later burst.

A new book, Higher Education? How Colleges Are Wasting Our Money and Failing Our Kids and What We Can Do About It, follows the money.

Writing in the Los Angeles Times, authors Andrew Hacker of Queens College and Claudia Dreifus of Columbia University, have this to say:

If you look at how that added revenue is being spent, it's hard to argue that students are getting a lot of extra value for all that extra money. Why? Colleges aren't spending their extra revenues, which we calculate to be about $40 billion a year nationally over 1980 revenues, in ways that most benefit students.

Universities are spending more on athletics, teacher salaries and administrators.

Since 1980, the number of administrators per student at colleges has about doubled; on most campuses their numbers now match the number of faculty. Here are some of their titles: senior specialist of assessment; director for learning communities; assistant dean of students for substance education; director of knowledge access services.

And many college presidents have seen their salaries double in inflation-adjusted dollars.

Carleton's president today gets 2.4 times more than the president did 19 years ago; at NYU, pay has risen by 2.7 times. Measured another way, it takes the tuitions of 31 Vanderbilt students to cover their president's $1.2-million annual stipend. We have yet to see evidence that lofting more money to the top enhances the quality of instruction.

"The travesty of high tuition," the authors conclude "is that most of the extra charges aren't going for education. Administrators, athletics and amenities get funded, while history departments are denied new assistant professors. A whole generation of young Americans is being shortchanged, largely by adults who have carved out good careers in places we call colleges."

It's a bubble we all contribute to through taxes, tuition payments and student loans.

Bubble, bubble: coming to a campus near you

The impending toil and trouble on college campuses may well dward that in housing. Carpe Diem:

The chart illustrates a much, much bigger bubble than the real estate bubble - the "higher education bubble" - based on an annual comparison of the CPI, median new home prices and the CPI for "College Tuition and Fees" (data here).  

Note that the housing bubble resulted from about a 4-time increase in home prices between 1978 and 2006, and college tuition has now increased by more than twice that amount since 1978 - it's gone up by more than a factor of ten times.  The college tuition bubble makes the housing price bubble seem pretty lame by comparison.

What does the bubble look like on a personal level? Glenn Reynolds:

A New York Times profile last week described Courtney Munna, a 26-year-old graduate of New York University with nearly $100,000 in student loan debt -- debt that her degree in Religious and Women's Studies did not equip her to repay. Payments on the debt are about $700 per month, equivalent to a respectable house payment, and a major bite on her monthly income of $2,300 as a photographer's assistant earning an hourly wage.

And, unlike a bad mortgage on an underwater house, Munna can't simply walk away from her student loans, which cannot be expunged in a bankruptcy. She's stuck in a financial trap.

Pretty much like the housing market, easy money, given to people who can't afford it, has created a bubble.