Why College Isn't a Bubble

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

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.

Students are learning (probably)

In an ideal world, the purpose of college isn't just to get a degree and get hired. It's to learn, whether that means improving your writing skills or figuring out the basics of accounting. And on this measure, McArdle argues that many students also may not be getting their money's worth. She refers to the findings of Academically Adrift, a much discussed study by Richard Arum and Josipa Roksa that found 45 percent of undergraduates don't acquire any measurable writing or reasoning skills during college. 

If this were true, it would be an overwhelming indictment of our education system and a sign that college diplomas had truly joined mcmansions, junk bonds, and tulips among the ranks of disastrous investment fads. After all, as McArdle notes, we're handing out more college degrees than ever. And it they're nothing but credentials used by employers to sort job candidates at a glance, then the more diplomas we give out, the less valuable they become.

Thankfully, there are reasons to be skeptical of Academically Adrift's bleak assessment. The University of California's Alexander Astin has torn into the study's methodology, arguing that its statistical findings don't back up the authors' conclusions. But others locate more fundamental fault in the fact that the analysis is based on a single standardized test, the Collegiate Learning Assessment. As Oklahoma State University Provost Robert Sternberg has noted, a student's performance on the exam correlates very closely with how they do on the SAT and ACT. A young person's score on those old warhorses, meanwhile, tends to correlate with regular old IQ tests. So what CLA performance may actually reveal is that colleges aren't any good at increasing IQ -- or training 22-year-olds for the tests that measure it. 

For a counterpoint to Academically Adrift, McArdle quotes Noble Prize-winner James Heckman, who has also researched the returns to college graduates. She writes: 

Heckman thinks the credentialism argument--what economists call "signaling" -- is "way overstated." His work does show that a lot depends on outside factors like cognitive ability and early childhood health. But he says flatly that "no one thinks that schooling has no effect on ability."

That seems like a more reasonable conclusion. We may be giving out more degrees than ever, but they're not quite empty pieces of paper yet. 

We're not in a bubble, but there are still problems

Prices aren't really doubling by the decade. Half of all graduates aren't really working at Starbucks or Kinkos. Most of the kids on campus are probably learning a thing or two, even if they're sandwiching in reading assignments between football games and keggers. Unemployment among college grads might be higher than usual, but in comparison with their high school-educated peers, bachelor's holders felt the recession as more of an unpleasant thunderstorm, instead of a hurricane.

The more you look at the data, the more dubious the proposition that higher education is really a bubble on the verge of popping begins to seem. There are still too many real rewards available to young people who are willing and able to pay for four years of school.  

And then there's this: Young people don't really have a better option, nor will they any time soon. Since the 1970s, nearly all of America's job growth has happened in occupations that require at least some college. Meanwhile, earnings for high school graduates have barely budged in more than 20 years. We simply don't have another reliable path to the middle class. The great experiments in mass education coming out Silicon Valley -- massively open online courses that can teach thousands of students for free, new tests that certify business skills -- are still in such early stages that we don't know how well they serve as teaching or credentialing tools. In her piece, McArdle, pointed to the recent fall-off in law school applications, which has occurred after years of warnings from journalists about the deteriorating legal market, as proof that the market can wise up about the value of a degree. But there's a key difference between a JD and a BA: The former used to be one way of many that a student could try and climb into the 1 percent; the latter is just about the only safe way to assure you don't get stuck in the bottom 50.

And that is why I actually agree with the final thrust of McArdle's piece, where she suggests it may be time to consider new ways of training young people for jobs, such as apprenticeship systems that would introduce them directly into the workplace. If you think higher education is in for a reckoning, this might seem like a happy inevitability. If you don't, then it's an urgent imperative.   

While colleges offer a good deal for those who can finish a degree, the system is riddled with problems like high debt and poor graduation rates. It shouldn't be the only sure route our country offers to a decent, stable, middle-class life. 

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*The college board relies on Department of Education data for its figures. In 2012, the government released a report covering the 2008-2009 school year, but it doesn't exactly allow for an apples to apples comparison with 1995. The final tuition figures are still fairly similar. 

**She doesn't reference Sum by name, but writes, "More than half of recent graduates are unemployed or in jobs that do not require a degree...."

***Correction, April 9, 2013: An earlier version of this article incorrectly lumped together Vedder's and Sum's respective methods for calculating underemployment when they are, in fact, quite different. Sum's research, meanwhile, does not actually argue that half of graduates are "unemployed or in jobs that do not require a degree." The AP article that originally reported his unpublished findings used the word "jobless,' which it failed to mention included students who had left to labor force to go back to school. My suspicion, however, is that's still the article McArdle was referring to. Sum did not return an email prior to the publication of this article seeking clarification, but did respond to me months later after I wrote a related piece