Nearly a decade ago, my then colleague Andrew Gillen suggested that one could say that higher education was in a bit of a “bubble”: over-exuberant “investors” in human capital, better known as students, were potentially misallocating their resources, becoming increasingly underemployed after graduation, leading to adverse financial consequences. In the private sector, bubbles, like those in the housing or stock markets, usually lead to “crashes” and sharp falls in prices along with diminished volumes of activity. In higher education, massive government subsidies mute the decline in volume (enrollment) and prevent big price (tuition fee) crashes, but some sort of correction is nonetheless observable.
Lots of signs show the bursting of the bubble is underway. Enrollments are down, lower today than six years ago –a first decline of that duration in modern peacetime American history (including the Great Depression). Tuition increases are moderating and a few colleges are even starting to cut published tuition fees (sticker prices). Even some prestigious schools such as Oberlin College are having financial problems because their freshman class is smaller than anticipated. Student loan delinquency is high and rising, remarkable since the economy has been having the best performance in years, with real output growing at over a three percent annual rate and the unemployment rate at a very low 4.1 percent.