Higher Education Bubble – The Economist Misses the Lessons of the Housing Bubble

[Rough Draft]

Anyone that’s read Sowell, Roubini or Raghuram Rajan knows the housing bubble and the great recession were driven (either in part or by whole) by the following:

  • *Excessive risk taking ( caused by the Greenspan / Bernanke put, low interest rates & ninja loans)
  • *Moral Hazard (caused by the bailouts)
  • *Miss-Perceptions / Miss-information (Which causes prices in the market to be off target)

What does this have to do with education bubble?

  • Low interest rates – causes people to borrow more than they normally would
  • Easy Money – No pre-filtering just like the housing bubble ninja loans allows people that shouldn’t go to college to go into crippling amount of debt
  • Miss-Perceptions / Miss-information / transparency – Ever ask a MBA Dean what the average salary of their graduating class is? Or job placement rate post graduation? The typical answer is “we don’t track our students post graduation”. Just like the housing bubble, a lack of transparency is a major driver for inflated tuition rates. Once the post-graduation job placement rates and salary info are public, the market will price tuition rates off of something more accurate than marketing hype.
  • Moral Hazard – What happens when students can’t pay? Well they can’t get rid of the debt with bankruptcy.

Our higher educational system has every incentive in the world to drown kids in debt they simply won’t be able to afford.

The Economist also wonders why a cheaper alternative hasn’t been produced. Well it has, and it’s called khanacademy.org. We just need to get past the stigma of an online degree.

Sources:
http://www.economist.com/blogs/democracyinamerica/2011/05/higher-education_bubble
http://www.economist.com/blogs/freeexchange/2011/05/education

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