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The Biggest Bubble In America – Is It A Gigantic Scam?

The market’s hottest sector hasn’t been biotech, tech, or some vertical within the most innovative business segments.

It’s been, of all things, for-profit education.

The sector is up a bit over 70% over the past year.

However, one can make the argument that this portion of the market is simply a gigantic bubble, peddling a business model that has very little value-add.

In a market where the Apples, Amazons, and Teslas of the world – perceivably “innovative” companies – the gains among the small number of for-profit higher-ed companies are surprising considering that higher education represents a business model that is perhaps the least innovative in the entire market. While technology’s value-add is fundamentally centered around creating efficiency in people’s lives, education is operating in reverse, with stagnating quality and ever-increasing costs.

Elements creating a higher-ed bubble

Part of the issue is that higher education in the US is subsidized by the federal government; namely, the taxpayer. This erodes some level of price sensitivity in the market, creating artificial demand, and permitting university officials to continually increase the price of attendance beyond what the free market might otherwise dictate.

Another big component of the issue is the intense social dynamics surrounding a college education. In the K-12 system in the US, kids are brought up under the assumption that you need to attend college – particular a good, name-brand variant – to secure themselves a strong future and there is little thought provided to any sort of alternative future.

People also point to how a college education provides higher wages throughout one’s adult life relative to simply having a high school diploma (i.e., “the million dollar gift”). It’s also typically applied to attending “elite” schools over not attending at all. This is often taken as ostensible evidence that it’s the education itself that’s leading to the higher wages rather than the self-selection and quality of the talent in the first place.

US adults now hold approximately $1.5 trillion in student debt, a lot of it for degrees that provide minimal value-add or skill acquisition. Many of which are merely cash cows for the university offering the program/major.

The ROI derived from a college education has been closing for approximately 20 years. Yet with constant cost of attendance hikes beyond the inflation rate, consumers (i.e., incoming, current, and future students) end up getting squeezed from both sides. Many of them are making an objectively poor decision altogether.

The dynamics are very similar to the tech/internet and housing bubbles experienced last decade and less recently, the high-yield and commercial real estate bubble of the late-80s/early-90s. Psychological and social elements have skewed perceptions of value and people are almost blindly consuming education without efficient decision-making simply because it seems like the “right thing to do” and “that’s what everybody else does” – similar to buying overpriced tech stocks and houses circa 1999 and 2006, respectively.

Motivation for higher-ed consumption

Is higher-ed increasingly becoming a poor investment decision, such as buying financial assets as they start becoming increasingly stretched from their fundamental valuations? It is similar to purchasing a form of insurance such that people have what could be a safety net to lean back on? Is it a consumption decision where education is merely for “the experience” and not wholly about ROI or stamping out future financial tail risks?

Whatever the case, the current market dynamics create inefficiencies and a market distorted from what pure supply and demand forces might dictate. Even if we take the fact that supply is essentially capped at “elite” universities – i.e., enrollments are not typically increased year-to-year – leading to some form of natural price hikes as demand grows. This can come in the form of population growth and increased desire to attend college (whether rational or not), but, importantly, the government subsidization of the student loan market enables price increases beyond fundamental valuations.

We also have a society where a lot of merit is placed on “education” even in the most abstract conceptual form, without critical thought placed into what form it must take to produce the desired outcome – i.e., utility maximization. There is an education involved in everything when it comes to the process of how to create value, but the notion that it must come from an expensive, formalized source is not always the correct line of thinking.

The most influential private universities in society tend to lead the charge, who have developed reputations that go back further than the world’s most valuable companies. Given generous financial aid packages, students whose families make under a certain amount per year can attend for low (or no) cost, while students from wealthy families can attend without much of a dent to their financial standing. It’s students in the middle class who are most disadvantaged.

Reform

Reformation via “free” college isn’t the answer. Nothing is free. It’s simply paid for by somebody else by attempting to redistribute the wealth pie. Stopping the subsidization of the student loan market is one necessary option. But changing the social dynamics surrounding the value-add of higher education is also necessary in order to trickle down and alter the economic dynamics as well.

The system doesn’t work efficiently – its bureaucratic, possesses a tenure-based system which leads to non-meritocratic faculty performance standards (professors have virtually no incentive to teach well outside of basic pride), and suffers from ideological homogeneity among faculty and student and often to an extreme extent (see Berkeley, for example). Very little about it is ruled by the free-market system, which renders it inherently resistant to outside change, and reform will need to come via outside pressure in order for change to come internally.

Unlike other types of bubbles we’ve had in the past – HY/CRE, tech, housing – measuring the value of an education is not a simple exercise.

There’s the tangible aspect – get a degree in field X, which is likely to turn a post-graduation salary running in an expected range from $Y-$Z, with a present value of career earnings that exceed the amount spent on the total cost of attendance, resulting in some type of positive expected ROI.

Then there’s the intangible aspect, wherein a college education is marketed as something that will make you think more critically, become more creative, introduce you to diverse perspectives (almost 100% bullshit), and various other personal qualities that will purportedly help over a multi-year or multi-decade time horizon.

Higher-ed today is marketed in ways similar to a gigantic scam where promotional drivel extended over an indefinite time horizon is used to distort conceptions of ultimate utility. Higher-ed is clearly in a bubble, though betting against for-profit public education companies or seeing a paradigm shift more generally could still be several years off.

Conclusion

To be clear, a college education – and education beyond that – is clearly necessary for some career paths and can and does have value-add for many people. But for many it does not, and the ROI is decreasing for nearly all individuals irrespective of one’s desired career path. How and when we’ll see reform in this sector is difficult to know given the profoundly deep-rooted elements encouraging it in the first place.