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The college bubble

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Interesting essay:

The National Inflation Association (NIA) is pleased to officially announce that it will soon be releasing its hour long documentary 'College Conspiracy', which will expose the U.S. college education system as the largest scam in U.S. history. NIA has been producing 'College Conspiracy' for the past six months and plans to release the movie on May 15th.

American college tuition inflation has been out of control for the past decade. During the financial crisis of late-2008/early-2009, almost all goods and services in America at least temporarily declined in price. The only service in America that continued to rise in price throughout the financial crisis, besides health care, was college education.

The current college education bubble is one of the largest bubbles in U.S. history. The college bubble has been fueled by the U.S. government's willingness to give out cheap and easy student loans to anybody who applied for them, regardless of if they will ever have the ability to pay the loans back. Student loan debt in America is now larger than credit card debt, but unlike credit card debt, student loan debt can't be discharged in bankruptcy.

NIA believes that the future of college education is over the Internet and that Americans in the future will be able to receive a better quality education from the best professors from all around the world at only a fraction of the cost of a traditional brick and mortar college education.

For the vast majority of college courses, there is absolutely nothing that students can learn in a huge multi-million dollar lecture hall with hundreds of other students that they can't learn at home listening to that same professor on a computer.
 
I believe I blogged about this three times (http://ilyaquant.wordpress.com), but yes, the fact is that university education prices are through the roof, and the education at the absolute top tier universities (MIT, Stanford, etc...) is probably only marginally better than at a good state school (EG Rutgers, UMich, and UC Berkeley is one of the elite schools anyway despite being a state school), if that. Add that to the fact that you probably learn far more on the job in the first two years than in your college degree and the only reason that college degrees cost as much as they do is that you wouldn't get hired otherwise.

But universities have always sold themselves on the fact that "what we teach can be found in many textbooks and wikipedia and so on...however, we provide access to professors who will answer questions about any confusion you may have, and assess you as to whether or not you truly know the material", and at the end of the day, that's what employers care about--that there's already a system to vet you and provide you with a degree that states "you're not going to lose $100,000 over the next two years hiring this bozo" to employers.

If you want to do a little thought experiment, what if it was illegal to discriminate based upon educational background, and every employer had to have his or her own way of vetting the candidate without having to depend on "degree from XYZ in major ABC with GPA 3.21"? How fast would university price plummet?
 
There are several processes going on here.

China is the first, and probably the most important factor with India being significant as well.

In the 15 years up until the crisis we had a sweet combination of growth and low inflation. Good growth normally helps fuel inflation because people have more money to buy stuff. However, China had the effect of reducing the cost of manufactured goods due to its low labour costs which were largely decoupled from the West (note I say they were decoupled)

Inflation is a basket of prices, and its different for each type of spending, and the headline figure is a fiction based upon "average" consumption.
Because the price paid for skilled labour went up relative to the cost of manufactured goods (AKA we get richer), the ratios changed.
Services that use a lot of labour (healthcare, education, police etc) had a higher rate of inflation than goods. Many types of goods actually went down in price in both real and nominal terms.

So education was pretty much inevitably going to go up relative to "average" inflation.
The size of the middle class China and India with increasing size and wealth in hard currency pushed up demand for education in Western countries. Because very few Chinese or Indian people speak German and not many speak French a combination of language and historical ties meant they came to the US and UK. Also the top branded universities in the world are all in English speaking countries.
More demand + higher cost of staff = higher prices

Ilya's insight is also important here.
The single most common question on this site is about the brand value of a given form of education.
It outnumbers "how well is it taught" by at least a factor of ten.

In effect one can buy your way into looking smarter.

Because of the opaque and complex way that all universities choose students for courses we have not (yet) reached the point where places on popular courses are auctioned to the highest bidder, but having rich parents really doesn't hurt your chances at all.

Something is going wrong when you can stand in the lobby of Goldman Sachs or the lobby of a business school and think "GS must be in hard times because the business school is more impressive"
 
Add that to the fact that you probably learn far more on the job in the first two years than in your college degree and the only reason that college degrees cost as much as they do is that you wouldn't get hired otherwise.

I think the argument in this piece (and others of its ilk) is subtly different: it is that universities advertise the (supposed) cachet of their degrees by convincing students they won't get hired without the imprimatur their certificate affords. To do this, the "college-industrial" racket pushes phony statistics (placement numbers, starting salaries, cost-benefit analysis, and wage differential over the course of a career) to justify sky-high costs of tuition. The American public has been indoctrinated into the virtues of college education and furthermore into believing that the more prestigious names justify disproportionately higher fees. The successful pushing of this pack of lies has ensured that a new class of certified indentured serfs has come into being -- a class whose wages (such as they are) means they cannot discharge their student loans.
 
Class of 2011, Most Indebted Ever!
$22,900: Average student debt of newly minted college graduates
The Class of 2011 will graduate this spring from America's colleges and universities with a dubious distinction: the most indebted ever.

Even as the average U.S. household pares down its debts, the new degree-holders who represent the country's best hope for future prosperity are headed in the opposite direction. With tuition rising at an annual rate of about 5% and cash-strapped parents less able to help, the mean student-debt burden at graduation will reach nearly $18,000 this year, estimates Mark Kantrowitz, publisher of student-aid websites Fastweb.com and FinAid.org. Together with loans parents take on to finance their children's college educations -- loans that the students often pay themselves -- the estimate comes to about $22,900. That's 8% more than last year and, in inflation-adjusted terms, 47% more than a decade ago.

In the long run, the investment is probably worth it. Education is a much better reason to borrow money than buying cars or McMansions, and it endows people with economic advantages that the recession and slow recovery have only accentuated. As of 2009, the annual pre-tax income of households headed by people with at least a college degree exceeded that of less-educated households by 101%, up from 91% in 2006. As of April, the unemployment rate among college graduates stood at 4.5%, compared to 9.7% for those with only a high-school diploma and 14.6% for those who never finished high school.

Also, graduating with debt might not be all bad. If one buys the argument -- popular among private-equity investors who buy companies using large amounts of debt -- that the need to meet regular loan payments helps focus people on finding ways to make money, then high student-debt levels might help the country derive more benefit from its best-educated residents (as long as they don't spend their energy creating financial products that ultimately blow up).

Still, the growth in student debt marks a shift toward a form of obligation that can be a lot more onerous than credit cards or home loans. Student debt can carry interest rates as high as those on subprime mortgages, and it's much harder to shed in the event of trouble. There's no house to give back to the bank, and even bankruptcy rarely offers relief. As of December 2010, total student debt outstanding stood at $530 billion in the U.S., up 29% from December 2007, according to the Federal Reserve Bank of New York. Other types of household debt shrank 8% over the same period. Given the state of the job market, many degree-holders will face a long slog to get debt-free: The Collegiate Employment Research Institute estimates that the average salary for holders of new bachelor degrees will be $36,866 this year, down from $46,500 in 2009.

In the near term, the debt burden could weigh on both the housing market and the broader economy. College graduates struggling to pay off debts are more likely to put off major milestones such as leaving home, getting married and buying a house, at a time when the creation of new households in the U.S. remains well below its long-term average.

http://finance.yahoo.com/college-education/article/112701/class-2011-most-indebted-wsj

One of the comments below the article: Jarrod 40 seconds ago Report Abuse
I'm looking at $148,000+ when I graduate.​
 
Disclaimer: I love education and it is why I am doing a second MS (MSFE).

The universities in the US have a lot of fluff. What I mean by "fluff" is, all the other stuff that is not required for learning (purpose of going to university or college). For example, lavish buildings, stadiums, insane number of pools, sports facilities, each department needs it own building (God Forbid), and the list goes on. Now having some fluff is good, but the universities spend an unjustified amount of money on this fluff. This is obviously done to attract the mature undergrads (sarcasm- and not all undergrads are that immature) who are mainly there to party. All this fluff, raises the cost of a degree. To most undergrads, the cost of education is just a number, whether it is 20K or 200k, it does not matter to them now. All they want is to have fun and maybe earn a degree on the way. Plus most want to go to the best party school they can get into and a campus that looks nice (aka fluff).

From what I have read and it makes sense: The cost of education should not be more than 10% of your average salary for the next 10 years after education. So say you save approx. 10% of you paycheck once you start working, you will be able to payoff your loan in 10 years (assuming very little help from parents). Saving more than that is possible but difficult (depends on spending habits). Now, if the economy is not good upon graduation, there is no salary, the debt piles up. The economy will play an important role in bursting this bubble.
 
Speaking of overpriced education, I know parents here in NYC who pays upwards of 35k (!!!!) for private high school. The lawyer I am using now, she paid over 26k for the last year of his son's private school (8th grade) before putting him in public schools.
 
Speaking of overpriced education, I know parents here in NYC who pays upwards of 35k (!!!!) for private high school. The lawyer I am using now, she paid over 26k for the last year of his son's private school (8th grade) before putting him in public schools.
There is a believe that going to a considered elite private school will help the kids getting into a better recognized college. I could see the value on this. You might think it is outrageous but, wait until you have children. Your way of thinking will change a lot. You will do anything in your power to put your kid in what you think is a better position, including paying a lot (if you can) to give him an advantage.
 
There is a believe that going to a considered elite private school will help the kids getting into a better recognized college. I could see the value on this. You might think it is outrageous but, wait until you have children. Your way of thinking will change a lot. You will do anything in your power to put your kid in what you think is a better position, including paying a lot (if you can) to give him an advantage.

I asked the parents who is paying this amount, and their response is far from "elite highschool". I don't know the statistics, but the kid who went to 8th grade private, then 4 year of public is now going to George Washington U. A very good school, but not the elite (not trying to be snobby here). My colleague who's oldest son will be graduating from private next year, and she doesn't think he can get into any Ivys. Is it really worth 35k to get into a decent school?

Btw, I have a 3 year old daughter. I have been struggling with this issue because the public schools zoned in my neighborhood is terrible. That's why we are selling our condos and moving to a suburb to NJ. Despite the ridiculous real estate tax in most of commutable towns in NJ, at least the many of the public schools are excellent. At least there is no incremental cost in having another kid in school even if I am paying 12k/year in tax.

There is a line in how much I will pay to educate my kid. I am willing to do a lot, but I will never consider 35k/year for secondary/high school.
 
Forget about 35K/year for grade school. How about 35K/year for pre-K education?
Yes, that's how much wealthy people in certain area of Manhattan are paying to put their little ones in private schools that are rumored to be the brewing ground for future Harvard grads. There is a strong belief that if you want your kid to get into Harvard and other Ivy, you have to put them in the right program while they are 3-4 years old.
There are lot of extremely rich people in NYC who are going nut over this issue every year.
I have a 3yo son as well and I haven't gone nut yet.
 
There is a believe that going to a considered elite private school will help the kids getting into a better recognized college. I could see the value on this. You might think it is outrageous but, wait until you have children. Your way of thinking will change a lot. You will do anything in your power to put your kid in what you think is a better position, including paying a lot (if you can) to give him an advantage.

Numbers like $35k are still minute amounts for the rich. I keep getting email notifications from an agency in England that has private tutoring positions available in Russia, Greece, occasionally the USA, even India (once). They usually stipulate "Oxbridge graduate," occasionally with "public school background" thrown in (i.e., Eton, Harrow, Winchester). That is to say, not only are they spending on private schools but also for additional individual tutors, who are often live-in, or are given an apartment on their estates. The new global rich expect their offspring to go to top-drawer universities.

It's the beleaguered middle classes that are suffering -- as university costs spiral upwards and state schools suffer from underfunding, overcrowding, and poor quality of teachers (few capable people go into this line of work).
 
From what I hear there's a lot of bribing going on in these elite private high schools. Parents will pay good money to have their students make up bad exams, rewrite essays, or even have grades inflated without having the kid do anything. If you send your kid to one of these schools, your rivals are the multimillionaires down the block whose money speaks louder than yours. When it comes to getting into an Ivy League, a high school senior's biggest competition is his graduating class, so if you really want your kid to go to Harvard, you have a better chance sending him to the run of the mill local high school where he can easily finish in the top of his class.
 
I asked the parents who is paying this amount, and their response is far from "elite highschool". I don't know the statistics, but the kid who went to 8th grade private, then 4 year of public is now going to George Washington U. A very good school, but not the elite (not trying to be snobby here).

The question would be, would the the private school education have helped him to get into that college or an elite college? what about friends and environment? peer pressure is a huge component when your kid is going through teenage years.

My colleague who's oldest son will be graduating from private next year, and she doesn't think he can get into any Ivys. Is it really worth 35k to get into a decent school?

This is hard to answer. I have an acquaintance with 3 kids. The oldest went to private school. The middle didn't and now they decided to send the third one to private school again. They said the public school experience was not as expected.

Btw, I have a 3 year old daughter. I have been struggling with this issue because the public schools zoned in my neighborhood is terrible. That's why we are selling our condos and moving to a suburb to NJ. Despite the ridiculous real estate tax in most of commutable towns in NJ, at least the many of the public schools are excellent. At least there is no incremental cost in having another kid in school even if I am paying 12k/year in tax.

Taxes are not as high as in Nassau county. I live in a suburb in NJ with a very good school system. My wife grew in the same town I live now so I sort of have a historical perspective. She was also a teacher so she knows how the system works.
 
The question would be, would the the private school education have helped him to get into that college or an elite college? what about friends and environment? peer pressure is a huge component when your kid is going through teenage years.

All good questions, and I don't have answers!

This is hard to answer. I have an acquaintance with 3 kids. The oldest went to private school. The middle didn't and now they decided to send the third one to private school again. They said the public school experience was not as expected.

Do you know what public school they go to, and if it is any good?

Taxes are not as high as in Nassau county. I live in a suburb in NJ with a very good school system. My wife grew in the same town I live now so I sort of have a historical perspective. She was also a teacher so she knows how the system works.

I have heard the absurd Nassau county tax... I ruled out LI immediately. We can take it to PM, but I do want to ask your wife if she knows some of the towns I am considering in NJ!
 
...When it comes to getting into an Ivy League, a high school senior's biggest competition is his graduating class, so if you really want your kid to go to Harvard, you have a better chance sending him to the run of the mill local high school where he can easily finish in the top of his class.
are you sure about this? maybe he/she doesn't finish at the top of his class because his friends have no interest in school because it is a "run of the mill high school". Then he/she will be a top of the mill student from a top of the mill high school. The odds start to be stacked against him or her.
 
maybe he/she doesn't finish at the top of his class because his friends have no interest in school because it is a "run of the mill high school"
Where are his parents/siblings roles in this? Family plays a crucial role in one's success/failure. It helps to be born a smart kid but getting a smart 3 yo all the way through Harvard takes enormous collective resources.
It takes a village to raise a kid.
 
Money opens doors. Look at that son of Libyan leader Gaddafy, whose PhD thesis at LSE was written for him by supportive staff -- thanks to a 2m pound donation to LSE. Or the pal of Donald Trump who paid Harvard $2.5m (in some fashion) to get his son admitted. To be bright but poor can be a tragic experience in a world where the rich call the shots.
 
are you sure about this? maybe he/she doesn't finish at the top of his class because his friends have no interest in school because it is a "run of the mill high school". Then he/she will be a top of the mill student from a top of the mill high school. The odds start to be stacked against him or her.

Harvard will take the top students from all over the place. So if you're the valedictorian of your high school, you were on the debate team, you did sports, you did volunteer work, and you were overall a star in your school, Harvard will take you, whether your high school was run of the mill or not. After all, the point was to get your kid into Harvard, not to turn your kid into the smartest 17 year old in the country. When it comes to getting into a top college, we all know it's better to be the top student in an average high school than an average kid in the top school.
 
Do you know what public school they go to, and if it is any good?

I have heard the absurd Nassau county tax... I ruled out LI immediately. We can take it to PM, but I do want to ask your wife if she knows some of the towns I am considering in NJ!

I know the HS and I know most of the schools around where I live. PM me with specific questions, I don't think these specifics are appropriate for QN.
 
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