College, as an Asset Class, is a Bubble.(investingwithoptions.com)
investingwithoptions.com
College, as an Asset Class, is a Bubble.
http://www.investingwithoptions.com/2009/08/college-is-a-bubble/
11 comments
The measurable benefits of college (i.e. technical abilities) are largely obtainable without going to college. A substantial investment in effort and materials is required, and perhaps the final product does not attain that achieved by a college education. But the difference in achievable technical skill probably does not warrant the difference in price between the two options (excepting cases like certain sciences where experience with specific laboratory procedures is highly valuable).
The price of college is therefore primarily the price of a credential, and of the "intangibles." As my parent argues, credentials are bubblable; and as the OP argues, the market value of intangibles is (nearly by definition) a product of social factors, and advertising - hence subject to "bubbles" (by which I take it we mean wild price fluctuations unrelated to the underlying asset's value).
Personally, I think the price of college is really the price of a credential of the intangibles - belonging to a certain class in which there are a set of prioritized attitudes and shared cultural idioms, and a shared experience. This hypothesis suggests an incentive toward uniformity of experience among educational institutions - which (I opine) can be observed quite widely.
The price of college is therefore primarily the price of a credential, and of the "intangibles." As my parent argues, credentials are bubblable; and as the OP argues, the market value of intangibles is (nearly by definition) a product of social factors, and advertising - hence subject to "bubbles" (by which I take it we mean wild price fluctuations unrelated to the underlying asset's value).
Personally, I think the price of college is really the price of a credential of the intangibles - belonging to a certain class in which there are a set of prioritized attitudes and shared cultural idioms, and a shared experience. This hypothesis suggests an incentive toward uniformity of experience among educational institutions - which (I opine) can be observed quite widely.
I disagree with your first point, but I upvoted because it is a well-stated, intelligent argument.
While it's true that you can get an education without going to college, college is a more efficient mechanism than most. They typically cover a variety of things that are not obviously important to someone studying independently (algorithmic complexity would be a good example), and (much like with a startup) the possibility of failure is an effective motivator.
It's certainly not the best solution for everyone -- not everyone learns the same way -- but there are a lot of people for whom it is a good choice.
While it's true that you can get an education without going to college, college is a more efficient mechanism than most. They typically cover a variety of things that are not obviously important to someone studying independently (algorithmic complexity would be a good example), and (much like with a startup) the possibility of failure is an effective motivator.
It's certainly not the best solution for everyone -- not everyone learns the same way -- but there are a lot of people for whom it is a good choice.
I learned yesterday that Edward Fredkin had a high-school diploma (and one year at Caltech) when he became a full professor at MIT in 1968.
The value of a sheepskin is less now than it was then. It ain't what you know.
The value of a sheepskin is less now than it was then. It ain't what you know.
Hi, post author here. A couple notes:
1. It seems that the comments are focusing on the value as related to the student-- that's certainly one part of the equation, but don't forget that there is value for the financing companies that give easy credit access to students, and I feel that is where the excess demand is coming from.
2. This is a very volatile argument, especially in educated circles because people take it personally. Whenever I have this discussion it seems to boil down to anecdotes and how my degree is of value. That's something to avoid.
3. This is part one in a series and I'm currently working on the data to test the hypothesis. I will be looking at per-major opportunity cost, total amount financed versus {cost, time} and a couple others.
4. Just because I'm calling it a Bubble does not mean I'm calling a top in either tuition rates or financing. As the recession begins to hit states harder, more budget cuts will trickle into state public education and revenue gaps will need to be filled somehow. IDK if it's through fed stimulus or spending cuts, but it possibly could lead to an increase in tuition rates as financing is still available and the students won't recognize the true monthly cost until after graduation.
1. It seems that the comments are focusing on the value as related to the student-- that's certainly one part of the equation, but don't forget that there is value for the financing companies that give easy credit access to students, and I feel that is where the excess demand is coming from.
2. This is a very volatile argument, especially in educated circles because people take it personally. Whenever I have this discussion it seems to boil down to anecdotes and how my degree is of value. That's something to avoid.
3. This is part one in a series and I'm currently working on the data to test the hypothesis. I will be looking at per-major opportunity cost, total amount financed versus {cost, time} and a couple others.
4. Just because I'm calling it a Bubble does not mean I'm calling a top in either tuition rates or financing. As the recession begins to hit states harder, more budget cuts will trickle into state public education and revenue gaps will need to be filled somehow. IDK if it's through fed stimulus or spending cuts, but it possibly could lead to an increase in tuition rates as financing is still available and the students won't recognize the true monthly cost until after graduation.
The difference is that your education is not transferable. You only have one education level, and it is only useful for you.
The housing bubble was driven by speculation and people owning multiple properties, some as "investments" that they flipped for a profit.
There is no equivalent for that in education.
Education is more like health care, the cost is rising fast and we need to do something about it. It is not a "bubble".
The housing bubble was driven by speculation and people owning multiple properties, some as "investments" that they flipped for a profit.
There is no equivalent for that in education.
Education is more like health care, the cost is rising fast and we need to do something about it. It is not a "bubble".
While there are certainly similarities between real estate and tertiary education, the title claim is obvious and unmitigated rubbish. A bubble is only possible when prices are drive up by speculation. Where exactly is there a speculative market in college degrees?
Thanks for the feedback. Let's look at your statement:
A bubble is only possible when prices are drive up by speculation.
And who says they aren't? There are two sides to college: the actual paper, and the underlying financing. The latter is where I think we will find the bubble.
Analagous to the housing market, the demand for college would not be as great if easy-credit financing were not available. And college loan companies would have less incentive to give out finaid if it were not backed by the federal government. That's where the speculation lies, in the packaging and securitization of tuition loans.
Or it could be rubbish.
A bubble is only possible when prices are drive up by speculation.
And who says they aren't? There are two sides to college: the actual paper, and the underlying financing. The latter is where I think we will find the bubble.
Analagous to the housing market, the demand for college would not be as great if easy-credit financing were not available. And college loan companies would have less incentive to give out finaid if it were not backed by the federal government. That's where the speculation lies, in the packaging and securitization of tuition loans.
Or it could be rubbish.
Maybe I'm not up to date on trading fads, but as far as I'm aware, the "packaging and securitization of tuition" is an exception rather than the norm. At most, it creates a theoretical potential for a speculative market and thus a bubble.
But there's still a fundamental difference: a degree cannot be sold, and acquiring one is a multi-year undertaking, which puts a tight limit on the number of degrees on person can hold.
Even the securitized aspect of the housing bubble depended very much on the inflated resale price of the underlying asset to yield ROI fairy tales. With tuition, there is no resale price, and basing valuation on the cost would be absurd. The only sensible base is the income gap - and for that to be driven up by speculation would require a rather different world from ours, where companies buy and sell ivy leage graduates at inflated wages and with inflated severance payments to the previous employer.
Oh yes, there is a market that works like that. Only, it's not in college graduates but in professional soccer players.
But there's still a fundamental difference: a degree cannot be sold, and acquiring one is a multi-year undertaking, which puts a tight limit on the number of degrees on person can hold.
Even the securitized aspect of the housing bubble depended very much on the inflated resale price of the underlying asset to yield ROI fairy tales. With tuition, there is no resale price, and basing valuation on the cost would be absurd. The only sensible base is the income gap - and for that to be driven up by speculation would require a rather different world from ours, where companies buy and sell ivy leage graduates at inflated wages and with inflated severance payments to the previous employer.
Oh yes, there is a market that works like that. Only, it's not in college graduates but in professional soccer players.
i'm also not sure what you mean. how does the speculative bubble come from the government guaranty? doesn't the guaranty make it intrinsically _less_ speculative? FFELP loans also have fixed interest rates. less common in private (not govt-backed) student loans.
another thing to consider would be the Obama administration's clear intention to end FFELP in favor of direct federal lending and other programs (no middleman bank's balance sheet involved, so no need to securitize)
another thing to consider would be the Obama administration's clear intention to end FFELP in favor of direct federal lending and other programs (no middleman bank's balance sheet involved, so no need to securitize)
Students and parents believe a college degree and graduate degrees are a path to riches. Believing that, they go further into debt, justified by the promise of higher incomes.
http://www.nytimes.com/2009/08/26/business/26lawyers.html?_r... Downturn Dims Prospects Even at Top Law Schools
http://www.nytimes.com/2009/08/26/business/26lawyers.html?_r... Downturn Dims Prospects Even at Top Law Schools
This is only true for degrees that are easy and/or economically unjustified. For the forseeable future, I don't think this applies to someone majoring in molecular biology (for example).
Useful degrees are still useful, just as good real-estate during the bubble was still good real-estate.
But the bubble question is simply: are the costs inflated beyond their 'fair' value? And for even good degrees, I think they are.
But the bubble question is simply: are the costs inflated beyond their 'fair' value? And for even good degrees, I think they are.
Absolutely. I'm currently mining data by degrees to analyze the true opportunity cost for various fields. A degree in communications, for example, may not be economically justifiable in the current environment. But we can flip it around and say a doctorate in medicine may not be viable due to the cost and amount of debt on the student. It's all anecdotal until I pull up some real data.
Hope to see your results when you finish.
Quite true - but even in the midst of housing bubbles or any asset bubbles for that matter, you can always find underappreciated/undervalued assets (markets tend to be a lot more nuanced with the property markets being different in Austin, TX than say, Miami, FL). I suspect that's going to be the case for a lot of degrees where you don't need to an ivy league school and can get the same level of education elsewhere.
Of course, the question is at what point can kids and their parents be convinced that an ivy league degree just isn't worth it anymore (since like film industry investors, the returns tend to be more about glamour/sexiness than simple financial returns)
Of course, the question is at what point can kids and their parents be convinced that an ivy league degree just isn't worth it anymore (since like film industry investors, the returns tend to be more about glamour/sexiness than simple financial returns)
This is true. In fact, he points out in the original article that a degree in engineering will hold value better than one in communications.
With that said, you can get into at least some of those fields without the degree if you wish. I have for instance known a few very successful programmers with good jobs and no degree. They are in a minority compared to those with degrees and they had to break into the industry, but once they were in they earned just as much as those with degrees.
With that said, you can get into at least some of those fields without the degree if you wish. I have for instance known a few very successful programmers with good jobs and no degree. They are in a minority compared to those with degrees and they had to break into the industry, but once they were in they earned just as much as those with degrees.
>...this thought has been in the back of my mind since we started hearing about the spectacular gains from Ivy League endowments and why they aren’t doling them out to at-need students.
This is a very frustrating statement. First, unless I'm missing something, endowments aren't showing "spectacular gains" as of late. Additionally, Ivy League schools are doling out financial aid to at-need students. For example, Harvard has "no expected parent contribution" for students whose parents make less than $60k per year. (http://www.admissions.college.harvard.edu/financial_aid/hfai...). Cornell has replaced any offered loans with grants for students whose parents make less than $75k per year. (http://cornellsun.com/node/26757). As a hypothetical example, parents who make $50k per year are expected to contribute $5000 per year. The student is expected to contribute $2000 and have a work-study paying $1800 per year. The student takes on no loans, gets $39,000 in grants per year, and graduates debt-free. (http://www.news.cornell.edu/stories/Jan08/finAid.html)
This is a very frustrating statement. First, unless I'm missing something, endowments aren't showing "spectacular gains" as of late. Additionally, Ivy League schools are doling out financial aid to at-need students. For example, Harvard has "no expected parent contribution" for students whose parents make less than $60k per year. (http://www.admissions.college.harvard.edu/financial_aid/hfai...). Cornell has replaced any offered loans with grants for students whose parents make less than $75k per year. (http://cornellsun.com/node/26757). As a hypothetical example, parents who make $50k per year are expected to contribute $5000 per year. The student is expected to contribute $2000 and have a work-study paying $1800 per year. The student takes on no loans, gets $39,000 in grants per year, and graduates debt-free. (http://www.news.cornell.edu/stories/Jan08/finAid.html)
Well I may have mistyped, but the "since" part of the statement dates back to the summer of '07 when we started hearing about the great moves in university portfolios due to alternative asset classes like VCPE and timber. Clearly that has changed a little bit.
7 - People refuse to believe that the asset class could have the possibility of a bubble
I'm not so sure that people refuse to believe. The clip from Barney Frank is interesting as it shows how the blow hards on the hill put a "its for the people" spin on their policies. Now maybe Barney Frank is actually in it for the people and simply does not understand anything about economics and credit markets. But of this I am certain: if you look at the very long list of interests that lobbied for extending more credit to homeowners, the list does not include "The lobby for irresponsible middle-class that want to buy jet skis". The bubble was created by a multitude of interests that all profited from extending credit. Its not that they didn't believe they were creating a bubble. They simply did not care. This is the same with the dot com bubble. The people committing fraud knew very well they were lying, but it was making them rich or possibly so, and this sort of fraud is hard to pin down and prosecute.
The net effect of item 7 is the same without regard to my perspective. The ability to keep something like this from happening again may matter whether it was a matter of "belief" or "greed". The greed part can be solved by separating the politicians from the money.
As for education. There are probably a lot who refuse to believe that some aspects of education are unnecessary.
I'm not so sure that people refuse to believe. The clip from Barney Frank is interesting as it shows how the blow hards on the hill put a "its for the people" spin on their policies. Now maybe Barney Frank is actually in it for the people and simply does not understand anything about economics and credit markets. But of this I am certain: if you look at the very long list of interests that lobbied for extending more credit to homeowners, the list does not include "The lobby for irresponsible middle-class that want to buy jet skis". The bubble was created by a multitude of interests that all profited from extending credit. Its not that they didn't believe they were creating a bubble. They simply did not care. This is the same with the dot com bubble. The people committing fraud knew very well they were lying, but it was making them rich or possibly so, and this sort of fraud is hard to pin down and prosecute.
The net effect of item 7 is the same without regard to my perspective. The ability to keep something like this from happening again may matter whether it was a matter of "belief" or "greed". The greed part can be solved by separating the politicians from the money.
As for education. There are probably a lot who refuse to believe that some aspects of education are unnecessary.
I think the comparison with housing is interesting, especially given the social status implications. RE: tuition vs. CPI, I think it has been pretty well documented that tuition increases have far exceeded CPI, at least over the last 20-30 years.
It would be interesting to also examine what educational institutions will have to do should they come under pricing pressure. If tuition has to go down, how can they increase revenues from other streams or cut costs?
And as Howard Lindzon alludes to in the comments, is there a social cost? Is there an important element of kids achieving quasi-independence in the shelter of a university setting apart from the educational material itself, and if so how can this be replaced?
It would be interesting to also examine what educational institutions will have to do should they come under pricing pressure. If tuition has to go down, how can they increase revenues from other streams or cut costs?
And as Howard Lindzon alludes to in the comments, is there a social cost? Is there an important element of kids achieving quasi-independence in the shelter of a university setting apart from the educational material itself, and if so how can this be replaced?
Maybe signing up for a few years of service work helps replace this. A number of my peers made the decision to pursue a year or two of service after graduating from undergrad, where a wide range of jobs are available (working at an orphanage, teaching at an inner city school, etc). Not only does this give you some social awakening (albeit, not quite the same as party school xyz), but now you're benefiting society a bit more too.
I hope your peers aren't unaware of the class privileges they are enjoying. Getting an undergrad and then going into a low-paying service job is tough if you're poor.
I'm glad more and more people are realizing this. If you think about it for a short while, you can use the similarity between college and other bubbles to take advantage of the situation.
How? It's hard to buy some education, wait a month, and sell it.
Actually if you assume education is information transfer it's quite easy. You can even sell it twice or more times.
Not like that. I mean, for example, that value investing principles can be applied.
It is so annoying when some finance person decides to apply rules of finance to things they do not apply, and then pats himself on the back for being oh so clever.
No college is not a bubble, because the definition of bubble does not include things like college education. A bubble refers to things that can be re-sold. More specifically a bubble refers to things whose sale value is much higher than their intrinsic value because of irrational expectation of ever-increasing resale value.
Education cannot be resold. Once you get some education it is yours. The only value of education is its intrinsic value, there is no resale value.
So there is no college bubble unless you are referring to college stocks. Now is college education too expensive, or overvalued? Perhaps. Are university of phoenix diplomas not worth the tuition? Probably. But one can express these ideas without making nonsensical comparisons with bubbles for tradeable commodities.
Talking about bubbles, anybody know how one becomes a "professional derivatives trader"? None of those guys seem very smart and yet they seem to make a lot of money.
No college is not a bubble, because the definition of bubble does not include things like college education. A bubble refers to things that can be re-sold. More specifically a bubble refers to things whose sale value is much higher than their intrinsic value because of irrational expectation of ever-increasing resale value.
Education cannot be resold. Once you get some education it is yours. The only value of education is its intrinsic value, there is no resale value.
So there is no college bubble unless you are referring to college stocks. Now is college education too expensive, or overvalued? Perhaps. Are university of phoenix diplomas not worth the tuition? Probably. But one can express these ideas without making nonsensical comparisons with bubbles for tradeable commodities.
Talking about bubbles, anybody know how one becomes a "professional derivatives trader"? None of those guys seem very smart and yet they seem to make a lot of money.
I would say college cannot be resold, but it is sold in the first place. I looked up the Wikipedia article for "Economic Bubble", which defined it as "trade in high volumes at prices that are considerably at variance with intrinsic values." A college education is definitely a product, even though it is completely illiquid. I would definitely agree that many or even most people are paying more for college than it is worth, though not in every field and not at every school.
Talking about bubbles, anybody know how one becomes a "professional derivatives trader"? None of those guys seem very smart and yet they seem to make a lot of money.
Being a professional derivatives trader means that I trade options, full time, for a living. And no, you don't have to be smart to trade. And I'm not a finance guy, how insulting!
Being a professional derivatives trader means that I trade options, full time, for a living. And no, you don't have to be smart to trade. And I'm not a finance guy, how insulting!
Seems more like an arms race to me. The people who sit out might save some money, however they could also be left out in the cold when even mcdonalds starts requiring college educations (because they can).
Credentials are a tricky subject as well. The particular credentials we're talking about have value because people trust in their correlation with education. These are much closer to a commodity, because the job market is aware of credentials. Demand for credentials can increase their value. Credentials can, therefore, bubble.
Now, if you're going to college for the education, that's fine. You'll get the same result regardless of what the market for credentials does. If you're going for credentials, you might get caught in the bubble. What's worse, if you're going for the credentials, your education will be of a lower quality than someone going for the education.