Is College a Rotten Investment?
Why student loans are not like subprime mortgages.
A house is an investment vehicle much more like silver or stock shares than it is like a degree. It can be readily bought and sold. Americans had a housing bubble not just because they bought more homes, but because they speculated on homes, snatching them up, fixing them up, and pushing them back onto the overheated market. The asset-price bubble burst when people started defaulting and stopped buying.
No such market for college degrees exists: You cannot trade your University of Phoenix B.A. for a Yale degree when you start making the big money. In the words of Kevin Carey of the think tank Education Sector, "College degrees have value. ... But they have no inherent worth. They are secondhand testimony of something valuable—the knowledge and skills associated with a unique person."
A diploma is a polymorphous investment. It is a guarantor of higher lifetime earnings: The "college wage premium" for highly educated workers is in the tens of thousands of dollars per year. It is also an insurance policy against unemployment, a signaling device to employers and peers, a prestige line for your resume or New York Times wedding announcement, and a place to make friends and connections. Most importantly, it is a way to learn new skills and information.
It could be that Thiel is right, that college students, en masse, are overpaying for their educations. But it seems more likely that some college students attending certain types of schools are overpaying. If you want to be an aerospace engineer and have the chops to get into Caltech, the quality of the education, contacts, and fellow students on offer might really be worth $200,000 to you. A diploma from the school practically guarantees a good salary.
That is not true for many other institutions—particularly not for online, for-profit schools, the worst of which egregiously overcharge for worthless degrees. (The Washington Post Co., which owns Slate, also owns Kaplan, a for-profit higher education company.) But that marketplace is rapidly changing. The federal government is cracking down. Share prices for such companies have plummeted. Students have gotten savvier. Low-cost, high-quality competitors have entered the market. It might take some time. But tuition should drop too.
But what of the loan bubble, the outstanding pool of nearly $1 trillion in debt students have racked up paying those spiraling tuitions? It is worrisome, but mostly for the individuals on the hook for ballooning payments, not for the whole financial system, as with mortgage-backed debt.
For better or worse, students cannot discharge college loans through bankruptcy. (They can, of course, go belly up on their mortgages, credit cards, and other commitments.) Default rates are rising, but the government backstops against many losses and often actively pursues debtors. Plus, the pile of student-loan debt seems enormous. But in comparison with housing, it is peanuts. There is about $1 trillion in outstanding student-loan debt, versus $10 trillion in residential-mortgage debt. It seems unlikely it could trigger any kind of economy-wide crunch.
So, the broad question of whether a college degree is overpriced remains, particularly since many high-priced colleges seem incapable of competing for students on price and since wages have stagnated for so many sectors of the economy. But for now, nobody needs to beware a bubble.
Annie Lowrey, formerly Slate’s Moneybox columnist, is economic policy reporter for the New York Times.