The Higher-Ed Bubble

I am writing in response to the 12 percent tuition hike at the University of Tennessee campus in Knoxville. While I acknowledge that tuition hikes are necessary to make up for state funding cuts, I feel that the magnitude of rising tuition prices at UT reflect what is happening at institutions around the country: a higher education bubble.

I am not an economics expert, but I see a lot of similarities between what is going on in higher education right now and the events that led to the housing market crash.

Just as people purchased bigger, more expensive houses because they believed homeownership is a safe investment, students are paying more and more for undergraduate degrees. A degree at UT now costs more than twice what it cost a decade ago. However, Chancellor Jimmy Cheek stressed the focus on "net tuition," or the cost of enrollment after the HOPE scholarship is taken into account.

Cheek's comment further arouses my suspicion of the existence of a bubble. Subprime mortgages fueled the rise of the housing bubble as people began to buy houses that they previously couldn't afford. This was due to the widespread availability of low-interest loans. Speculators realized that people would be willing to pay higher prices for houses since people had access to such low interest rates. Also, the long held belief that appreciation of home values is constant rationalized peoples' decisions to pay these higher home prices.

In the same way, Cheek's "net tuition" comment shows that he is aware that students' access to the HOPE scholarship allows them to pay higher prices for education. In addition to the HOPE, federal student loans give many students more resources to achieve an education. Combined, these extra resources are playing the same role as subprime mortgages in the housing crisis by giving students more ability to accept higher education prices.

However, many people contend that rising tuition prices are a worthy investment in education. Cheek emphasized that $5.8 million raised from the 12 percent tuition hike will be put into a pool to finance UT's goal of becoming a top-25 school. The problem I see with this is that school rankings give considerable weight to how much money universities spend per student. The more tuition UT charges, the more money per student it will spend. Thus, it is very likely that raising tuition would improve UT's ranking, which would improve the perceived value of a UT degree.

However, spending more money per student does not automatically ensure higher quality education. It just ensures more expensive education. If UT uses the funds generated by a 12 percent tuition hike to give faculty and staff a state-mandated pay raise across the board, does that mean that overnight the faculty would become better professors? Not necessarily, but it does mean that they would become better paid professors.

The perceived symbiotic relationship between price and quality caused victims of the housing bubble to believe that their homes were worth the money that the homes were bought for. Looking back though, it is now clear people paid more for their homes than their homes were actually worth. Likewise, people now are being told to believe that more money must lead to better quality education. How long will it be before today's students look back and realize they paid more than their degrees are worth?

The above belief will fuel the continued rise of tuition as universities justify that more money is needed to finance the better quality education that they offer as a result of spending more money per student that was generated in part through higher tuition prices. This logical fallacy is called circular reasoning.

It can be summarized as follows: I pay higher tuition at this school because my education is worth more; my education is worth more because my school spends more money on me that was raised through my tuition.

It is worth restating that UT's tuition has more than doubled in the past decade. Another fact of note is that UT's federal student loan debt default rate for 2008 was 4.6 percent (This information was found at the U.S. Department of Education and Federal Student Aid website). That is below the state average and may not sound like much, but in 2006 it was only 2.1 percent. So taken together, UT's "value" has risen in the past decade as its tuition, and student loan default rate, have doubled. So if the school value has really risen, then why are more students unable to use their degrees to pay their loans?

It's possible I am just being paranoid, but I'm not alone is suspecting a higher education bubble. I urge anyone who is curious to do a quick google news search for "higher education bubble" to judge for themselves if this theory is justified.

Richard Graves