Peter Thiel and other college skeptics: Is higher education a waste of money?

Commentary about business and finance.
May 11 2011 5:35 PM

Is College a Rotten Investment?

Why student loans are not like subprime mortgages.

College graduate. Click image to expand.
Why is this woman smiling?

Here's a familiar story. Americans had a near-religious belief in the soundness of this investment. Uncle Sam encouraged it with tax breaks and subsidized it with government-backed loans. But then, in the 1990s and especially the 2000s, easy money perverted the market. Prices detached from reality. Suddenly, millions of Americans found themselves holding wildly overvalued assets. They also found themselves without the salaries or jobs necessary to pay off the huge loans they took out to buy the assets.

This is not just the story of American real estate. It is also the story of higher education, at least if you believe the dozens of different thinkers and publications that have come to this conclusion in the past few months. They say that higher education is a bubble, just like housing was a bubble, and that it is getting ready to burst. Famed entrepreneur Peter Thiel, for instance, insists that just about every degree is worth little more than the paper it is printed on: Schooling is not education, he says, and ambitious kids should drop out and skip forward to the workplace. New York magazine calls it one of "this year's most fashionable ideas." But is it really true?

Advertisement

The housing and higher-ed narratives do align in some instructive ways. First, they share the same middle-class aspirational roots. A house and a college degree were for decades considered foundational parts of a good, stable, upwardly mobile life. Nobody ever thought a diploma would be worth less than what you paid for it, just as nobody ever thought that housing prices would decline.

Prices for the two goods spiked about the same time, too. The average sale price of a new home was $155,600 in Sept. 1995. It peaked at $329,400 in March 2007. The rise in the price of new homes tripled in comparison with the rise in the price of everything else. The same happened for college tuition, whose spiraling costs bounded past the general rate of inflation. The average price of tuition at four-year colleges, in constant 2007 dollars, climbed from $8,552 in 1980 to $20,154 in 2009.

There was no logical reason for these price escalations. Neither college educations nor homes had become less plentiful in relation to the size of the population, justifying a dramatic increase in price. Nor had a four-year education or an average new home improved significantly, at least not enough to justify the extraordinary costs. Irrational exuberance had seized both markets.

So how did Americans pay for their newly pricey houses and diplomas? Credit, for the most part. Easy money and the advent of securitzation—bundling loans into tranches and selling them to investors around the world—meant that banks and financial firms could afford to provide trillions of dollars in loans to individuals. Government backing—in education's case, from Sallie Mae and federal loan programs, and in housing's case, from Fannie, Freddie, and the home-loan banks—helped.

But rising unemployment and stagnating wages vitiated those McMansions and paper diplomas. You cannot afford your University of Minnesota degree if you don't earn a decent salary. Similarly, you cannot afford your terraced three-bedroom outside of Phoenix if you just lost your construction job. Prices got very high, then the economy started to sour. For housing, the bubble burst fast. So is higher ed about to do the same?

Probably not. The analogy is much feebler than it superficially seems, as a house and an education are fantastically different kinds of assets or investments.

TODAY IN SLATE

Medical Examiner

Here’s Where We Stand With Ebola

Even experienced international disaster responders are shocked at how bad it’s gotten.

Why Are Lighter-Skinned Latinos and Asians More Likely to Vote Republican?

A Woman Who Escaped the Extreme Babymaking Christian Fundamentalism of Quiverfull

The XX Factor
Sept. 22 2014 12:29 PM A Woman Who Escaped the Extreme Babymaking Christian Fundamentalism of Quiverfull

Subprime Loans Are Back

And believe it or not, that’s a good thing.

It Is Very Stupid to Compare Hope Solo to Ray Rice

Building a Better Workplace

In Defense of HR

Startups and small businesses shouldn’t skip over a human resources department.

How Ted Cruz and Scott Brown Misunderstand What It Means to Be an American Citizen

Divestment Is Fine but Mostly Symbolic. There’s a Better Way for Universities to Fight Climate Change.

  News & Politics
Politics
Sept. 22 2014 6:30 PM What Does It Mean to Be an American? Ted Cruz and Scott Brown think it’s about ideology. It’s really about culture.
  Business
Moneybox
Sept. 22 2014 5:38 PM Apple Won't Shut Down Beats Music After All (But Will Probably Rename It)
  Life
Outward
Sept. 22 2014 4:45 PM Why Can’t the Census Count Gay Couples Accurately?
  Double X
The XX Factor
Sept. 22 2014 7:43 PM Emma Watson Threatened With Nude Photo Leak for Speaking Out About Women's Equality
  Slate Plus
Slate Plus
Sept. 22 2014 1:52 PM Tell Us What You Think About Slate Plus Help us improve our new membership program.
  Arts
Brow Beat
Sept. 22 2014 9:17 PM Trent Reznor’s Gone Girl Soundtrack Sounds Like an Eerie, Innovative Success
  Technology
Future Tense
Sept. 22 2014 6:27 PM Should We All Be Learning How to Type in Virtual Reality?
  Health & Science
Medical Examiner
Sept. 22 2014 4:34 PM Here’s Where We Stand With Ebola Even experienced international disaster responders are shocked at how bad it’s gotten.
  Sports
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.