Malcolm Harris at N+1 argues that higher education is headed for a popped-bubble reckoning on the order of the recent real estate apocalypse. It’s a tempting analogy—I’ve indulged in it myself—but I don’t think Harris gets the bubble equation right.
To be sure, there are many parallels between the modern real estate and higher education industries. Both sell expensive products (homes, degrees) that are signals and sources of middle class prosperity. People who own both are seen as society’s winners, solid citizens with tangible assets. People who own neither are vulnerable and adrift.
In both industries, prices have shot upward on trajectories that far outstrip the growth of inflation and personal income. Both enjoy huge, politically bulletproof subsidies in the form of generous tax preferences and goverment grants that are meant to stimulate consumption. In both cases, the epic upward march of prices has been sustained in significant part by cheap credit and federal programs designed to extend loans to people who in past times would have been unable to borrow and unlikely to consume the good.
The debt markets in both industries were for a time dominated by former government entities (Fannie Mae, Sallie Mae) that morphed into enormously profitable corporations who used their money to buy influence and favorable treatment in Washington, D.C. Getting rich in the lending business depended, in both cases, on the machinery of securitization, whereby many smaller loans are packaged into financial instruments (Collatoralized Debt Obligations, Student Loan Asset-Backed Securities) that are sold on the global financial markets as allegedly low-risk bonds and thus provide fresh capital for more loans.
This created incentives for lenders to extend credit to nontraditional borrowers, and for entangling relationships between lenders and producers (tract housing developers, for-profit colleges) that catered to these riskier customers. The amount of debt generated in both cases was mind-boggling, in the trillions of dollars. In both industries, a large and growing number of borrowers have been unable to pay their loans back, leaving a trail of ruined financial lives and charges of predatory lending.
Yet while the market for real estatate and associated debt collapsed in an orgy of capitalist auto-cannibalism, there has been no such reckoning in higher education. Why? Because houses and degrees are very different things.
College degrees have value in the sense that they provide important signals to employers and in many industries serve as a passkey without which access to labor markets is closed. But they have no inherent worth. They are secondhand testimony of something valuable—the knowledge and skills associated with a unique person. You can’t transfer or sell your property rights in a degree to somebody else. There’s no open market where degrees are bought and sold, no cable TV show called Degree Flippers, no retirees planning to live off the accumulated equity in their degrees, no reverse degree mortgages or associated lines of credit, no shoeshine boys offering doom-portending tips about which degrees are likely to spike in value next week on the degree exchange.
When you take out a mortgage to buy a house, you own the whole house, right away. Assuming that you and the seller negotiated competently, the house is worth, at the moment of sale, what you paid for it. When you take out a loan to attend college, you still have to attend college for a while and do some work to graduate. The financial returns on your college investment accumulate gradually, in the form of marginally higher earnings over time. The value of your house is vulnerable to interest rate fluctuations after your purchase; if money becomes more expensive, people can’t pay as much for your house. Since you can’t transfer ownership of your degree, its value is not so dependent.
Mortgages are usually signed with no intent of actually paying off the loan on the stated terms—homeowners usually sell or refinance long before the 30 years are up, or the loans are abandoned in foreclosure. To be sure, many people take out student loans without a realistic plan for repaying them. But they don’t borrow with the plan of cashing out, trading down, or renting if circumstances change.
Demand for new housing can fluctuate wildly under different market conditions. Demand for degrees is much more stable, a function of the steady flow of new graduates from the nation’s high schools into college and workers into retirement. Almost everyone has a roof over their head but most people don’t have a college degree and labor economists at Georgetown University project that the economy will demand three million more degree holders in 2018 than our higher education system is currrently on track to produce.
One could argue that the values of both real estate and higher education are dangerously subject to collective delusion. Research suggesting that many college students don’t learn much of anything in college lends some credence to this idea. But it’s a lot easier for hot air to flow in and out of a market where assets can be freely bought and sold. In the late 1990s, stock market investors collectively decided that Internet companies with no actual plan to turn a profit were nonetheless worth billions of dollars. A year later they changed their minds and the stocks were worthless. In the 2000s, cookie-cutter homes in the Las Vegas suburbs doubled and then un-doubled in value. It was imaginary money; the homes themselves didn’t change.
Labor markets are different, and more complicated. Wages aren’t imaginary (unless paid in the form of over-valued company stock). Once college graduates enter the job market, the value signaled by their degrees is co-mingled with value signaled by their job experience. Over time, the latter becomes most important. For example, I don’t think The Chronicle of Higher Education would start paying me less to write columns and blog posts if it was suddenly revealed that, despite having a four-year degree, I only took about two years worth of legitimate college courses as an undergraduate. After all, I admitted exactly that in their pages last year.
What’s most likely, then, is not a 2008-style armageddon in the market for college degrees and related debt. Portable, non-expiring, universally accepted credentials of higher learning will continue to be valuable in a globally integrated economy. Besides, the United States Treasury is doing most of the student lending now and, various reports to the contrary, it isn’t going bankrupt.
There may, however, be a reckoning on the horizon for the producers of certain kinds of college degrees. Colleges that make a business of running admission tournaments will be fine since selectivity never goes out of style. So, too, with those that offer interpersonal connections and acculturation for the upper class.
Institutions whose degrees signal nothing other than knowledge and skill, by contrast, are highly dependent on the regulatory protections and ingrained cultural biases that limit the provision of portable, non-expiring, universally accepted credentials of higher learning to traditional higher-education institutions. It doesn’t have to be that way. Degrees are only testimony, and testimony that is offered with sufficient clarity, force, and evidence won’t be ignored by labor markets in the long run.
As the Open Educational Resource movement evolves from simple Web videos to sophisticated cognitive tutors and organized efforts to provide non-college-granted credentials, organizations whose pricing structures depend on a regulatory franchise may end up, if not on top of a bursting bubble, heading down a long slide.
