Peter Thiel on the "Higher Education Bubble"

Applying to College
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<p>Peter Thiel, PayPal co-founder, hedge fund manager and venture capitalist, makes a host of provocative statements in this interview with Mashable writer Sarah Lacy:</p>

<p>Peter</a> Thiel: We’re in a Bubble and It’s Not the Internet. It’s Higher Education.</p>

<p>On the similarity to the housing bubble:

[quote]
Like the housing bubble, the education bubble is about security and insurance against the future. Both whisper a seductive promise into the ears of worried Americans: Do this and you will be safe. The excesses of both were always excused by a core national belief that no matter what happens in the world, these were the best investments you could make. Housing prices would always go up, and you will always make more money if you are college educated.

[/quote]
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<p>On elite schools:

[quote]
[Thiel] thinks it’s fundamentally wrong for a society to pin people’s best hope for a better life on something that is by definition exclusionary. “If Harvard were really the best education, if it makes that much of a difference, why not franchise it so more people can attend? Why not create 100 Harvard affiliates?” he says. “It’s something about the scarcity and the status. In education your value depends on other people failing. Whenever Darwinism is invoked it’s usually a justification for doing something mean. It’s a way to ignore that people are falling through the cracks, because you pretend that if they could just go to Harvard, they’d be fine. Maybe that’s not true.”

[/quote]
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<p>While getting ready to post this, I stumbled across this story by Tamar Lewin of the NYTimes noting that student loans have outpaced credit card debt for the first time ever:
<a href="http://www.nytimes.com/2011/04/12/education/12college.html?_r=2&hp%5B/url%5D"&gt;http://www.nytimes.com/2011/04/12/education/12college.html?_r=2&hp&lt;/a&gt;&lt;/p>

<p>What do you think? Are we in a bubble? What will slow or reverse annual tuition increases?</p>

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<p>We absolutely are in a bubble. Andrew Ferguson discusses this at some length in Crazy U. As college costs soar, the value of the “product” sinks. How insane is that?</p>

<p>I don’t know what form the crash will take. I’m just glad my older son will be attending a school where he received a full ride (Alabama), so that he can graduate debt-free. I hope my younger son will have a similar opportunity. NO school is worth $50K per year and $250K in debt.</p>

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<p>It definitely is. The price of college is absolutely ridiculous. At some point, the price has to go down or only the rich will be able to afford it. People can’t keep taking out thousands in loans and I think the economic crisis has really shown us that.</p>

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<p>People tend to forget that education is a product. We get drawn in by Ivy-wrapped promises & often forget that less prestigious brands may offer the same quality as the name brands. I don’t agree with all of Thiel’s premises, some of which I consider misguided, but I do agree that it is alarming to see students mortgage their futures with excessive debt.</p>

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<p>At least for the most selective schools, despite ever-higher prices the demand is actually rising as shown by this year’s record low acceptance rates. In that environment, it’s hard to see a big push to cut tuition/costs.</p>

<p>Now, for other schools that may have trouble filling their seats with well-qualified students in the future, it’s a different story.</p>

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<p>Roger, I have been on the bandwagon for years here at College Confidential preaching the evils of large student loan debts to no avail. If you do a search for substantial debt, you will see a number of thread where parents justify this as showing their love for their special snowflake. I have even preached against spending a large amount of tuition if there is a much less expensive, quality state college in their own state. Again, to no avail. </p>

<p>Do I think the bubble will eventually break? Yes,but it will take a lot. As long as folks believe the hype that getting the most expensive quality education is worth it AT ANY PRICE, the bubble will continue. It does sadden me to see kids saddled with substantial undergraduate debt for many years, not to mention having this problem compounded with graduate or law school debt.</p>

<p>See: <a href=“http://talk.collegeconfidential.com/parents-forum/476132-should-you-incur-substantial-debt-dream-school-even-pay-dream-tuition.html?highlight=substantial+debt[/url]”>http://talk.collegeconfidential.com/parents-forum/476132-should-you-incur-substantial-debt-dream-school-even-pay-dream-tuition.html?highlight=substantial+debt&lt;/a&gt;&lt;/p&gt;

<p>See: <a href=“http://talk.collegeconfidential.com/law-school/999135-law-school-horror-stories.html?highlight=substantial+debt[/url]”>http://talk.collegeconfidential.com/law-school/999135-law-school-horror-stories.html?highlight=substantial+debt&lt;/a&gt;&lt;/p&gt;

<p>and: <a href=“http://talk.collegeconfidential.com/parents-forum/587875-im-graduating-college-i-can-t-afford-nyu.html?highlight=substantial+debt[/url]”>http://talk.collegeconfidential.com/parents-forum/587875-im-graduating-college-i-can-t-afford-nyu.html?highlight=substantial+debt&lt;/a&gt;&lt;/p&gt;

<p>and:<a href=“http://talk.collegeconfidential.com/college-confidential-cafe/910385-what-i-learned-my-year-unemployment.html?highlight=substantial+debt[/url]”>http://talk.collegeconfidential.com/college-confidential-cafe/910385-what-i-learned-my-year-unemployment.html?highlight=substantial+debt&lt;/a&gt;&lt;/p&gt;

<p>and here’s a scary thread:<a href=“http://talk.collegeconfidential.com/parents-forum/924689-college-debt-student-stories.html?highlight=substantial+debt[/url]”>http://talk.collegeconfidential.com/parents-forum/924689-college-debt-student-stories.html?highlight=substantial+debt&lt;/a&gt;&lt;/p&gt;

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<p>[For Ivies] despite ever-higher prices the demand is actually rising as shown by this year’s record low acceptance rates</p>

<p>Ferguson addresses this, too. It’s just insane. Yet people keep paying and paying.</p>

<p>Of course, people also kept paying and paying for overpriced McMansions in overbuilt areas. Then came the housing crash. When the education crash comes, perhaps it will affect the Ivies, too. Who knows? We’ll find out when it happens!</p>

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<p>Re law-school horror stories: This scares me a lot, as older son wants to become a lawyer. I’m not discouraging him, but I do tell him that he should at least consider becoming a teacher. In some states, public high school teachers make a whole lot more than many lawyers!</p>

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<p>Having lived in the Midwest and on the East Coast, the East seems much more frenzied and brand consious. We can only hope it will burst.</p>

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<p>A drop in demand leading to cost decreases is not the same as an economic bubble. The latter requires speculative demand fueled by layered institutional debt. There are many differences between housing and educational debt. Two of the more obvious are one, educational debt is not easily walked away from; and second, there is no secondary market for the product. An interesting question to me is whether a large grey derivatives market for education debt exists similar to the 2 ton elephant the housing market rode to its destruction.</p>

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<p>the East seems much more frenzied and brand consious</p>

<p>The East must be overrepresented on CC, LOL!</p>

<p>Diane, former Bostonian, now happy Southerner</p>

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<p>EricLG – you make good points. </p>

<p>Andrew Ferguson also compares soaring college costs with the rising price of health care…except that the health-care industry keeps producing a better product (advances in research, meds, medical technology) whereas colleges just keep dumbing down their “product.”</p>

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<p>Specifically on the most elite educations and the future of the bubble: I think an additional variable to look at when considering the rising costs of education is that the very very top schools have endowments that rival small countries’ GDPs (or exceed them by a large margin!). Before the recession, Congressmen were starting to put more pressure on them to spend their endowments for students’ benefit, but of course they shut up for a while because every endowment took a big hit. Within a few years, though, the top endowments are all going to be just plain absurd, and I’m almost certain that these schools will make it free to attend for everyone (think about it: if one does it, the others will jump on the bandwagon to remain competitive). That kind of paradoxically pops (part of) the bubble but also fuels it even more–it will inevitably increase the demand.</p>

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<p>Just my opinion – education is not over-priced. Colleges turned into country club resorts are, however, expensive. An enterprising student only interested in education could hire a host of private tutors for a fraction of the cost of many colleges and prove competency through testing. The actual diploma is the least expensive part of the package.</p>

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<p>Interesting articles:
[A</a> College Degree Is Still Worth It - BusinessWeek](<a href=“Bloomberg - Are you a robot?”>Bloomberg - Are you a robot?)
[What’s</a> Your College Degree Worth? - Businessweek](<a href=“Bloomberg - Are you a robot?”>Bloomberg - Are you a robot?)</p>

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<p>Regarding top schools, many are giving significant FA to over half their admitted students so for those families it can be the deal of the century. Those across the income line and forced to pay full freight have to really think hard about the value of the pedigree. Son who went to Harvard debt free only because we paid full freight tells us (lovingly) that we were really dumb and that he should have taken one of the scholarships to fine but not ultra-elite schools. He concentrated in economics!</p>

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<p>An enterprising student only interested in education could hire a host of private tutors for a fraction of the cost of many colleges and prove competency through testing.</p>

<p>I think this is 100% true. But then the kids wouldn’t get the “college experience” – beer-drenched parties, hookups, STDs, alcohol poisoning, and all that good stuff, LOL.</p>

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<p>The issue is that students must be much more selective on the disciplines they study. Unless you plan on graduate school (and the debt that may accompany it), then you basically can only major in a handful of subjects if you want to have a positive net present value return on your college investment.</p>

<p>The disciplines that come to mind are almost always hard skill sets. Engineering, accounting, finance (this can sometimes be a stretch), computer science, and MIS are ones that instantly come to mind. Then, you can consider majors like chemistry, math, and actuarial science that can also lead to jobs if you can find the right opportunities.</p>

<p>Unless you are willing to major in these areas (and maybe a couple that I forgot), then you are almost doomed to have a negative NPV if taking out any debt for your education–the returns simply are not available.</p>

<p>Taking out 100k in student loans for undergraduate like psychology, sociology, anthropology, biology, english, greek and roman studies, etc. that are all going to require advanced graduate school and potentially another 100-200k of loans and 2-5 years of foregone income are terrible financial decisions.</p>

<p>The only way you can study those areas without putting yourself in financial hardship for the rest of your life is to have close to full rides at both the undergraduate and graduate level. Otherwise, you just have to face the fact that you are making a poor financial decision–even if you do love the subject.</p>

<p>I think we will see an evolution within trade schools. They offer some of the greatest value when considering a cost-benefit analysis of time spent (2-3 years of school) and the demand for those services, paying at high hourly rates. Going to trade school for 2 years and then making $60k a year without debt and a guarantee of job placement will become more appealing as 4-year college value continues to diminish.</p>

<p>Point blank, too many people go to 4-year college. So many of my classmates are not fit to be in this environment. Making a 3.0 is not going to cut it.</p>

<p>However, if you make a 3.8+ and have internships and leaderships responsibilities during college, then one can almost always find a job if they choose the right major.</p>

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<p>This is exactly why I chose a cheap state school with a decent reputation as my choice. I was thinking some of the top selective schools but I realized that the price would just be astronomical. The debt is simply not worth it. Sure I’m paying for my education, but at about less than 10K a year it’s worth it. 50K for just one year is beyond ridiculous.</p>

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<p>I have some friends who work in for profit education, it’s amazing how much they charge in tuition.</p>