Is Education the Next Bubble?

December 01, 2011

That may sound like a strange question but it’s one that a lot of people are beginning to ask. What makes a bubble a bubble is that it’s hard to tell when you’re in it until it’s too late. Let’s take a look at the housing bubble. It was based on widespread faith in home ownership as a key pillar of the American Dream that had paid off well for previous generations. It was then fueled with artificially cheap credit and government incentives that led millions of people to stretch their budget and buy as much home as they could with the expectation that rising home prices would make it a great long-term investment, even if they were barely able to afford those mortgage payments. Besides, owning a nice big home is so much fun! Substitute education for housing and student loans for mortgages, and you pretty much have the current state of higher education.

In many ways it’s actually worse though. A home at least has a tangible value. What passes for education in many colleges is too often a mix of courses with questionable value, and lots of drinking and partying. It may be a fun time but is it really worth starting your financial life deep in debt? The value of outstanding student loans has actually surpassed the amount owed on credit cards. But unlike credit card debt, you can’t get rid of them even through bankruptcy. Nor can you walk away from it like a home under water. President Obama didn’t even pay off his student loans until he wrote his best-selling memoir.

Doesn’t education pay off though? It is true that people with college degrees earn more over their lifetime than those without. The problem is that no one knows how much of that higher income is due to what they learned and having that pretty piece of paper on the wall, as opposed to their own innate intelligence. In other words, would they have done as well without going to college? After all, college dropouts Bill Gates, Steve Jobs, and Mark Zuckerberg didn’t do too badly.

What we do know is that there doesn’t seem to be much financial value for most people in going to a higher ranked school rather than a lower one. A recent study by two economists compared the future incomes of students who went to a higher ranked school with those that got into those same schools, but decided to attend a lower ranked school that gave them a scholarship. They were trying to compare students with similar levels of aptitude, although the ambition of those who chose the lower ranked schools may arguably be less. Despite this potential flaw, it turned out that the students who graduated from the lower ranked schools generally earned about the same but benefited financially from not having as much student loan debt.

Of course, there are certain fields like law and education that require degrees and others like management consulting in which the ranking of your school can make a big difference in your employment prospects. On the other hand, there are also plenty of careers for which you really don’t need a degree at all. (Check out this analysis by an economist who argues that a plumber can actually earn more than a teacher, and almost as much as a doctor over their lifetime, once you account for education costs and progressive income taxes.) Most people probably fall somewhere in the middle, where getting a degree can boost their income as long as they don’t buy more education than they can afford. So what is the future student to do? Whether you’re a student yourself or know someone who is, here are some ideas to minimize student loan debt:

If possible, take Advanced Placement classes. These are a great way for high school students to earn college credits in high school and avoid having to take them as prerequisites in college. In my high school, I was able to take AP Biology, Calculus, English, and French and didn’t have to take any math or science classes ever again (except for one course in Statistics as part of my Economics major). Even if your GPA suffers from the tougher coursework, taking these classes can still strengthen your overall college application. If your school doesn’t offer a particular AP class, see if you can just take the exam for credit. I did this with AP History and Government. As a result, I was able to graduate in 3 years and save a year’s worth of college expenses.

Follow the money. I attended NYU for my undergraduate degree and USD for law school even though I could have gotten into higher ranked schools because they gave me a considerable amount of scholarship money. This allowed me to graduate without ant debt. If you’re fortunate enough to get awarded some money, ask yourself if going to the higher ranked school will really pay off. In fact, the lower ranked school might even be higher ranked in your particular field of interest. For example, USD is ranked #67 overall but is in the top 10 for tax law, which was my area of focus.

Consider a state school. There are lots of excellent public universities that rival the top private schools. Don’t forget that you’ve already paid for some of their cost with your tax dollars so you might as well get something for your money. If you really want a degree from a particular private school, you can always start at the state school and then apply to transfer after a year or two.

What matters is where you end up. Speaking of transferring, another option is to start at a 2-yr community college and then transfer to a 4-yr school. If you do well at the community college, you might even be able to get into a better school than you would straight out of high school. In addition to saving a lot of money, it can also provide a nice transition from high school. Keep in mind that your degree will still have the 4-yr school on it. On the other hand, if you end up deciding that college isn’t for you, you’ll be happy that you didn’t waste a year or two paying for a 4-yr degree that you never even got.

Get to work. Regardless of where you go to school, you can always make some extra money by working your way through school just like previous generations used to. You might worry that it could hurt you academically, but studies show that students who work actually get better grades than those who don’t. Maybe it’s because they spend less time hung over or because we tend to take things more seriously when we have to work for them. You can also gain valuable skills, experience, and contacts that can be instrumental in landing a job after graduation. I know that my college jobs as a writer, salesperson, assistant sales manager, tour guide, and test prep instructor, all helped me along my career path.

The less student loan debt you have, the better financial position you’ll be in. This advantage will only compound as you’re able to use the money that would normally go to student loan payments to save for emergencies, retirement, and a home. Just make sure it’s a home that you can actually afford.