Coming to Terms with the College Bubble

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Coming to Terms with the College Bubble

For many years, market forces didn't seem to apply to America's colleges and universities.

Just like the unquestioned belief that housing always increased in value, higher education had its own set of unquestioned beliefs. First, there was a widespread societal consensus that a college education was a good economic investment. Second, many believed that putting more young people through college would make us ever more prosperous. This implied that everyone should go to college and no one should be stopped by a lack of money.

So Congress passed student loan and grant programs to make it easier for people to pay for college and university tuitions, which potentially increased higher education revenues. Consequently, over the last three decades, college tuitions grew much faster than the economy grew.

For a long time, as Michael Barone, The Washington Examiner's senior political analyst, points out, that didn't seem to be a problem. College still seemed like a good investment during the quarter-century of low-inflation economic growth from 1982 to 2007. Students could pay off their loans with the increased earnings from their degrees.1

Meanwhile, colleges and universities competed for students whose test scores would improve their ratings in the U.S. News & World Report Best Colleges Rankings by giving "scholarships" that were actually discounts on the tuition list price.2

To attract these students, the educational institutions built fancy dormitories, gymnasiums and student centers—and they vastly increased the number of administrators to the point where colleges and universities had more administrators than teachers.

Government helped to produce an ever-increasing demand for higher education, so higher education administrators saw no need to compete on price. Higher tuitions just gave your school more prestige. But over the past few years, that bubble has finally begun the process of unwinding.

The Wall Street Journal recently reported that the average "tuition discount rate" offered to incoming freshmen last fall by private colleges and universities had reached an all-time high of 45 percent.3

At the same time, their "sticker price" tuitions have increased by the smallest amount in the last 12 years...

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