Why College Isn't a Bubble

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... and why we should still think of new ways to educate young adults

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(Reuters)

College skeptics are whipping out the B-word. Many students are bulking up on loans and coming up empty on the job market while schools keep hiking tuition. Pretty soon, critics say, the bubble has to burst.

My former colleague Megan McArdle lays out a thoughtful version of that argument in the most recent issue of Newsweek. She's correct that there are a lot of people right now who aren't benefiting much from their education. But in spite of the country's growing load of education debt and the rough job market for recent grads, most students who make it through with a diploma are getting their money's worth. The problem isn't that higher ed has turned into a bubble that's ready to deflate as the market sours on its prospects; it's that the system might be working just well enough to continue business as usual without some much needed changes.

Tuition isn't soaring like you've heard

It's conventional wisdom by now that college tuition costs are rising and taking a greater and greater bite out of stagnant middle class incomes. How bad is it? Here's McArdle:

The price of a McDonald's hamburger has risen from 85 cents in 1995 to about a dollar today. The average price of all goods and services has risen about 50 percent. But the price of a college education has nearly doubled in that time.

Talking about "the price of a college education" is like talking about "the price of a car." Just as it's not so useful to discuss the cost of a BMW Z4 and a Ford Focus in the same breath, it's hard to put Harvard and Iowa State in the same discussion about tuition, because they operate on very different economic rules. Beyond that, your average undergrad probably won't pay the full sticker price for a degree. Need-based grants and scholarships play a big role in determining the final "net price" each student has to lay out for a year of school.

So what's a fair way to judge the cost of college? Consider an upper-middle-income student at a typically-priced public college. In 1995, that student would have paid an average of $12,618 in 2007 dollars, including room and board, according to the College Board. By the 2007-2008 academic year, the cost would have been $15,489.* A 23 percent increase over 12 years is a big deal for struggling families. But it's not a doubling, and for lower-income students, the cost has risen less. 

When it comes to figuring out whether we're in a bubble, however, we shouldn't just look at whether prices are increasing. We should also look at why. McArdle argues that student loan money has essentially given colleges carte blanche to keep raising their prices to pay for an arms race of amenities, which might be a perfectly apt description of some private colleges. But consider the barrage of budget cuts that have hit state institutions over the years. According to the State Higher Education Officers, legislatures across the country have snipped an average of $1,084 per student from public higher education funding since 1995. Tuition revenue -- the money, measured in current dollars, each full-time equivalent student is really paying, whether on their own, or with the help of the feds and family -- has risen $1,435 on average during that time period.

So if you set aside the increases meant to make up for money cut by politicians, schools are only charging 13 percent in real terms more since the days when Toy Story and Batman Forever were at the top of the box office. Colleges certainly haven't kept prices down like McDonald's. But how many businesses really can? 

College grads aren't doing that poorly on the job market

Bachelor's degree holders have about half the unemployment rate of the overall workforce, and they earn twice as much overall as high school grads. But, as some experts are quick to note, not all of them are earning a paycheck that justifies eight semesters on campus. This is the Barista Principle -- the argument that millions of college-educated young people are wasting their expensive educations serving coffee, bartending, waitressing, and otherwise toiling in low-wage work just to make their loan payments.

The Barista Principle is at the core of McArdle's argument that a large portion of young folks aren't getting a return on their educational investments. She references the findings of Northeastern University economist Andrew Sum,** who concluded that 53 percent of young graduates are either jobless or working in jobs that don't require a bachelor's degree, and of Ohio University's Richard Vedder, who found that, in 2008, 35 percent of all working college graduates were in jobs that didn't need a BA.

Those numbers aren't factually wrong, but they do require some context. First, recent college grads almost always have high levels of under-employment. At the peak of the dotcom bubble, 41 percent of new grads were still without work, or in a gig that supposedly didn't require their education, according to Sum. The jobless category, it should be noted, also includes recent grads who've decided to return back to school.

Second, as Stephen Rose of Georgetown University's Center on Education and the Workforce explained to me, the over-qualification problem is easily exaggerated. The BLS collects reams of data on different occupations and categorizes them by how much education you need to do the job. Vedder* uses those definitions to determine which jobs are college-grad appropriate, and which ones fall into the "barista" category. But Rose argues that the BLS numbers are out of date, and don't give a realistic picture of which jobs really require higher education.

Take insurance agents, he argues. According to the government, that job only requires a high school degree. And in 1960, that was true. Back then, only 20 percent of insurance agents had a BA, and those that did only took home 10 percent more pay compared to their colleagues. Today it's a different story. Half of all insurance agents now have a BA, and they make 40 percent more than their high school-educated peers. For men, that means a median salary of $78,000.

You see similar patterns with professions like police work and nursing, jobs that traditionally didn't take a four-year degree, but where having one can now mean higher pay and a better career path. Rose is working on his own estimates of college graduate underemployment, but says his preliminary estimate is that 15 percent of bachelor's holders are working in jobs that don't require their skills. Still not an ideal situation, but not disastrous, especially when you consider that many of those people may be moonlighting as they pursue other careers.

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Jordan Weissmann is a senior associate editor at The Atlantic.

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