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Will the College Bubble Burst?

Updated on November 18, 2015

What is the College Bubble?

In recent years, we've started to hear a new term. It's called the "college bubble." Some people think it's getting ready to pop.

That's largely because the price of an education is more than the average family can bear. Tuition is ever rising and, at some private colleges, now tops $60,000 a year, if you factor in room and board.

For years, people have done whatever they could to finance a college education. It's long been considered a rite of passage and a passport to the American Dream.

In another age, this could have meant saving enough to put your kids through school. Or, if you weren't a good saver, you could borrow a little to make the numbers work.

At one time, you could send one or more children away to school, somewhere, without incurring crippling loans. Enterprising students could also squirrel away enough money working over the summer, and on weekends, to fund their own education

Lately, though, it's become increasingly clear these strategies no longer work. There's also a new realization dawning. Getting a four-year degree is still necessary. But spending $240,000 or more to do so isn't.

College Lenders are Tightening Credit

Colleges and universities across the country have gone on a building spree, adding state-of-the-art recreation centers and dorms that resemble luxury high rises. Dining hall fare has become gourmet cuisine. These costs are passed along to consumers.

So far, colleges kept raising tuition accordingly, but only because parents were able and willing to pay. If families didn't have the money, they borrowed.

Oftentimes, for parents, sticker shock set in after their child's financial aid packages. In a worst case scenario, even after applying to a number of schools, none were even remotely affordable.

Parents then found themselves in a very awkward position. They could tell their industrious high school senior, "sorry, we don't have the money for your education." Or they could borrow enough to finance a dream. That's what many families ended up doing.

Recently, though, the nation's largest bank (JPMorgan Chase) said it won't be issuing any more private student loans. This will prove devastating to the college industry if other lenders follow suit.

That's because unrealistically high tuition is made possible only through credit. College debt in America is has now hit about $1 trillion

Even Strict Budgeting Won't Meet Tuition Costs

Source

Families No Longer Write Blank Checks

Even some well-heeled families are now very price conscious when it comes to college. I've heard multiple stories of students turning down an Ivy League acceptance for a better financial aid package elsewhere, typically at a state flagship university. For a rich family, public schools are a relative bargain. That's because they may pay full cost at a private institute.

Harvard, for instance, gives no merit scholarships. All aid is based upon need, and, if you're not needy, a four-year degree is very expensive.

Nearly every family I've spoken with in recent years is saying the same thing, "We're giving our child a budget to work with. We're telling him, 'This is what we can spend. You're going to have to find a school you can afford.' "

The student loan crisis has been in the news a lot lately. Now, everyone knows that unchecked debt is not a good way to begin your adult life. It could prevent you from living on your own after graduation, and it could get in the way of your plans for marriage and starting a family.

This is another sign that today's model of higher education may be much different in five or ten years.

Will the Bubble Pop?

Do You Think the College Bubble Will Pop?

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The Realization that Colleges are in Business

There's increasing chatter in online forums that colleges are based upon a business model. Just like any other business, they need a certain amount of money to stay afloat.

People are waking up to the fact that these institutes of higher education, regardless of how lofty they try to portray themselves, are, in a sense, a little like a car dealership.

The term "sticker price" is now being used, by parents, students and guidance counselors, to describe full tuition. That is, before the "discounts" of merit aid and institutional grant aid.

That's why students are beginning to stay away from the higher-priced models (small, private colleges) and flocking toward the economy models (in-state public schools). Even state flagships, however, are getting expensive. The annual cost of attendance at some is now around $30,000.

Public sentiment, terms of how colleges are viewed, is another sign the end may be near.

Many Graduates Incur Large Education Debt

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Small Private Colleges are Struggling

A number of small, private colleges are now hanging by a thread, due to lack of students and finances. St. Paul's College, founded as a black institute of higher education in Lawrenceville, Virginia, saw its last graduating class last June. Its enrollment had shrunk to just 111.

Indiana's University of Evansville, a Methodist College, announced a tuition freeze amid concerns that some families are now frightened of private colleges and the relatively high cost of attendance, according to an article that appeared in another online publication.

Earlier this year, the Boston Globe ran an article highlighting a failed New England College, which mentioned that several other small colleges in the region are now running in the red.

Harvard University in Cambridge, Massachusetts also just reported an operating deficit, as well as a need to institute new cost-cutting measures.

Are We Looking at a College Bubble?

Source

Lou Dobbs on the Higher Education Bubble

Students aren't the Only Ones in Debt

The building spree has come at a very high cost. Colleges are now under pressure to repay their outstanding loans.

One of the most clear signs that they've lost their secure footing came last April, when Moody's Investor Reports downgraded the prospects for the entire higher education sector in the United States. This shift includes top-ranking research universities.

Some of the reasons cited for this negative report include decreased consumer demand across the board, except at the most elite institutes.

Tuition hikes have already greatly exceeded what people are willing to pay. Other forms of college revenue have also fallen victim to the economy, including research grants and public funding.

Many College Have Gone on a Building Spree

Source

What the Future Holds

However, none of the experts foresee immediate closings on a widespread scale. Earlier predictions of the entire system crashing down, made decades ago, haven't come to pass. What the future holds, though, is a lot of uncertainty, especially as parents are showing increasing resistance to forfeiting their future financial security to pay for an inflated tuition tab.

Some observers see parallels to the sub-prime housing market, a run up caused by easy credit. If and when a major higher educational shakeout happens, you don't want to be holding an upside down degree, one that cost you $240,000 to obtain.

If the education bubble does pop, it will be much worse than the housing market crisis, at least for those caught in the crunch. Many homeowners simply walked away from distressed properties. Student loan debt, however, can't be discharged in bankruptcy. It's the kind of debt that will follow you to your grave.

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  • Ericdierker profile image

    Eric Dierker 3 years ago from Spring Valley, CA. U.S.A.

    It would seem to me that we are getting closer in this "information technology age" that community colleges that begin to offer a degree in how to learn will be the waive of the future. A guy I worked for back a ways named Melvin Belli told me that the best lawyers he ever worked with were not the ones that learned the law the best, but were the ones who learned to learn the best. I think it is more so true today.

  • ologsinquito profile image
    Author

    ologsinquito 3 years ago from USA

    All I know is that things are changing quickly. Imagine getting a degree in how to learn.

  • FlourishAnyway profile image

    FlourishAnyway 3 years ago from USA

    When I was growing up, my parents sent three of us to college at the same time that my mother had also gone back to school. Even on an excellent income, these days that would be absolutely undoable. Excellent hub. I cannot imagine that the cost of college can continue to outpace everything else too much longer. Voted up and more, pinned.

  • ologsinquito profile image
    Author

    ologsinquito 3 years ago from USA

    Things will certainly be changing. Thank you so much for reading and for pinning.

  • Rebeccasutton profile image

    Rebecca Sutton 2 years ago from Rock Hill, SC

    I think it is dangerous how expensive college tuition is now. I fear for my future because I am getting a degree....shouldn't it be the other way around?

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