There is concern that the possible higher education bubble in the United States could have negative repercussions in the broader economy. Although college tuition payments are rising, the supply of college graduates in many fields of study is exceeding the demand for their skills, which aggravates graduate unemployment and underemployment while increasing the burden of student loan defaults on financial institutions and taxpayers. The higher education bubble might be even more serious than the load of student debts. Without safeguards in place for funding and loans, the government risks creating a moral hazard in which schools charge students expensive tuition fees without offering them marketable skills in return. There is a further concern that having an excess supply of college graduates exacerbates political instability, historically linked to having a bulge in the number of young degree holders, a phenomenon known as elite overproduction.
Some economists reject the notion of a higher education bubble, noting that the returns on higher education vastly outweigh the cost.Michael Simkovic, Risk-Based Student Loans (2012)Thomas Lemieux, Postsecondary Education And Increasing Wage Inequality, 96 AM. ECON. REVIEW 195 (2006)Sandy Baum and Michael McPherson, Job-Skill Trends and the College-Wage Premium, Chronicle of Higher Education, Sept. 21, 2010 However, this does not account for survival bias, given that around 40% of students at four-year universities will not graduate. As of 2012, 29% of student debtors never graduated, and those who did could take decades to pay back the money they owed.
Others believe number of institutions of higher education in the United States will fall in the 2020s and beyond, citing reasons of demographic decline, poor outcomes, economic problems, and changing public interests and attitudes. According to the U.S. Department of Education, by the late 2010s, people with technical or vocational trainings are slightly more likely to be employed than those with a bachelor's degree and significantly more likely to be employed in their fields of specialty. The United States currently suffers from a shortage of skilled tradespeople.
The Federal Reserve Bank of St. Louis noted in 2019 that investment in higher education has reached a point of diminishing marginal returns. Undergraduate and graduate enrollments have both been in decline, while trade schools continue to attract growing numbers of students. White men are a major group opting for alternatives to higher education. Many faculty members are leaving academia, especially those from the humanities. At the same time, university graduates are likely to regret having studied the humanities and liberal arts. While academics maintain that certain subjects are worth studying for their own sake, students are more concerned with increasing their earning potential. So far this century, numerous institutions of higher learning have permanently closed, especially rural liberal arts colleges, community colleges, and for-profit institutions.
It is possible that the bubble will not burst, but rather deflate.
Background
Due to the GI Bill and the population boom after World War II, demand for higher education grew significantly during the latter half of the twentieth century, making it one of the major growth sectors for the American economy. Historically, high schools separated students on career tracks, but this changed in the late 1980s and early 1990s, when the mission of high schools shifted to preparing students for college.
In 1987, U.S. Secretary of Education William Bennett suggested that the availability of loans was fueling an increase in tuition prices and an education bubble. The "Bennett hypothesis" claimed that readily available loans allow schools to increase tuition without regard to demand elasticity. In addition, college rankings were partially driven by spending levels, and higher tuition was also correlated with increased public perceptions of . From the 1980s to the 2010s, demand for higher education increased, especially after the Great Recession of 2007–2009 when Americans flocked back to school in order to adapt to the new economy.
A 2011 study from the Labor Department found that a bachelor's degree "represents a significant advantage in the job market." In 2011, The Chronicle of Higher Education ran an article which said that the future was bright for college graduates. The data also suggested that, notwithstanding a slight increase in 2008–09, student loan default rates had declined between the mid-1980s and 1990s and early 2010s. The management consulting firm McKinsey & Company projected in 2011 that a shortage of college-educated workers and a surplus of workers without college degrees, which would cause the wage premium to increase and cause differences in unemployment rates to become even more dramatic.McKinsey Global Institute, An Economy that Works: Job Creation and America's Future , June 2011
As of 2018, 70% of high school graduates in the United States enrolled in tertiary education. But only 60% of those students, that is 42% of high school graduates, will graduate within 6 years with at least a Bachelor's degree. Note that Bachelor's degrees in the United States are typically designed to be completed in four years of full-time study, and Master's programs in the US are normally two years (full-time) in length.
+Educational attainment in the United States (2018)Note that these add up to more than 100% because they are cumulative; e.g. it is assumed that all people with doctorates also have undergraduate and high school degrees, and are thus counted twice in the "lower" categories. Age 25 is used rather than age 18 because there are few people aged 18 or over with advanced degrees. Percentages are calculated based on census data by counting people that had attained that level or higher. Education Age 25 and over Age 25–30 High school diploma or GED 89.80% 92.95% Some college 61.28% 66.34% Associate degree 45.16% 46.72% Bachelor's degree 34.98% 36.98% Master's degree 13.04% 9.01% Professional degree 3.47% 2.02% Doctorate 2.03% 1.12%
Discussion
During the early 2010s, whether or not the "higher-education bubble" existed became a topic of debate among economists. Data has shown that although the wage premium (the difference in incomes between those with a four-year college degree and those with only a high school diploma) has increased dramatically since the 1970s, so has the 'debt load' incurred by students due to the tuition inflation. By 2019, the total college debt exceeded US$1.5 trillion, and two out of three college graduates were saddled with debt. Glenn Reynolds argued in his book, The Higher Education Bubble (2012), that higher education as a "product grows more and more elaborate—and more expensive—but the expense is offset by cheap credit provided by sellers who are eager to encourage buyers to buy." Reynolds called university degrees a marker of socioeconomic status. Economists Michael Spence and Joe Stiglitz suggest that much of the worth of a university degree lies not in the skills acquired, but rather market signaling. Because a university degree still had considerable value, higher education might be an example of a Veblen good, albeit a subtle rather than a conspicuous one. Students and schools increasingly view one another in purely transactional terms, with an overwhelming majority of Generation Z considers higher education to be a step towards lucrative careers.
Research from the Center for Household Financial Stability of the Federal Reserve Bank of St. Louis presented in 2018 predicted a positive albeit declining income premium for completing college but a declining wealth premium, which is almost indistinguishable from zero for the most recent cohort. Consequently, the average Millennial with a university degree earns 20% less than expected. It was thought that people with college degrees are much less likely than those without to be unemployed, even though they are more expensive to employ (they earn higher wages). In 2019, a report from the Federal Reserve Bank of St. Louis using data from the 2016 Survey of Consumer Finances concluded that after controlling for race and age cohort, families with heads of household with post-secondary education who were born before 1980 benefited from wealth and income premiums, while for families with heads of household with post-secondary education but born after 1980 the wealth premium has weakened to point of statistical insignificance due in part to the rising cost of college. Moreover, although the income premium remains positive, it had declined to historic lows with more pronounced downward trajectories with heads of household with postgraduate degrees.
This thesis came under stress in the 2010s, as institutions of higher education came under heightened skepticism due to high costs and disappointing results. People became increasingly concerned about debts and deficits, forcing institutions to prove their worth by clarifying how much money from which industry and company funded research, and how much it would cost to attend. Compared to the 1970s, the number of Americans with a university degree has quadrupled five decades later. Meanwhile, the skills in demand by the labor market has shifted. Technological advances have eliminated numerous low-skilled jobs while high-paying careers require highly specialized knowledge. Together, these factors have eroded the advantage of being a college graduate. By the 2020s, earning a degree from a prestigious university no longer guaranteed gainful employment immediately after graduation. According to Gallup, public confidence in higher education in the United States has declined considerably during the mid-2010s and the mid-2020s; even those with bachelor's or advanced degrees were less approving than before. Besides costs, skeptics voiced their concern over political bias and the lack of marketable skills of alumni.
An alternative thesis has suggested that there is no general bubble in higher education because, on average, higher education really does boost income and employment by more than enough to make it a good investment. The problem is that degrees in some specific fields may be overvalued because they do little to boost income or improve job prospects, and degrees in other fields may in fact be undervalued because students do not appreciate the extent to which these degrees could benefit their employment prospects and future income. Proponents of this argument have noted that schools charge equal prices for tuition regardless of what students study, but the interest rate on federal student loans is not adjusted according to risk. They have further noted that there is evidence that undergraduate students in their first three years of college are not very good at predicting future wages by major. Indeed, student interest has shifted away from low-paying programs towards those of greater value in the job market. (See chart below.)
Recent trends
For decades, institutions of higher education have operated under the assumption that the number of students would keep growing. But the 2010s were a turbulent period for the sector in the United States. Small private colleges from across the country faced deep financial trouble as they had to make high tuition discounts in order to attract students at a time when higher education costs were increasing, regulation was becoming more stringent, and demographic constraints were tightening. In fact, domestic undergraduate enrollment has been on the decline for some time. Between 2010 and 2021, domestic enrollments dropped by 15%. By the early 2020s, enrollments were declining at a growing rate as the number of high-school graduates continued to fall. By 2022, only 62% of high-school graduates were heading for college compared to 70% in 2015.