Student debt is bursting the university bubble

University studentsArguably the biggest investment many of us make is in ourselves, when we learn skills to improve our "human capital", which we then use to earn a living. This is one of the main ways in which people invest in their future.

In the last few years many people have gone to university to obtain a degree of somewhat dubious value in the belief that any old degree guarantees them a high-paying job, as it did two decades ago. This was only the case then because there was a shortage of graduates; nowadays there's a big surplus so we're in a buyers' market.

It's a bubble

The situation was summed up last year in an article in the Evening Standard where the Chief Executive of the Institute for Securities & Investment said that most degrees were "only good for menial jobs in coffee shops." I think that's an exaggeration, but he makes a good point.

I believe (and I'm not alone in this as you'll see later) that there is a bubble in higher education because people are vastly overpaying for the financial benefits that some degrees are alleged to offer. They won't get the financial rewards that were promised because "any old degree" isn't enough to get a high-paying job on its own.
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Bubbles can remain inflated for many years, especially if the banks and/or the government are happy to lend money to buyers (student loans?), but eventually the bubble pops when the market realises that it is extremely overpriced.

The Underpants Gnomes

In an episode of the satirical cartoon series South Park, our heroes come across a group of gnomes who are sneaking into people's houses in order to steal their underpants. The gnomes are doing this because they have a cunning three-step business plan that says:

1) Collect underpants

2) ?

3) Profit

This episode first aired in 1998, during the dotcom bubble when many people thought that sticking '.com' (step 1) onto the end of a company's name would guarantee that it made a ton of money (step 3). They lost their shirts on internet startups like Boo.com and Pets.com.

The Underpants Gnomes is a great way to discover flaws in business plans and many other activities. When it comes to higher education, a lot of people are clearly following the Underpants Gnomes' plan by doing something like:

1) Study degree at university

2) ?

3) Get high-paying job

Unfortunately, many students haven't realised that times have changed, so they don't pay attention to step 2 and assume that a course of little or no commercial value will still guarantee them a good job. It won't.

State-supported bubble

Glenn Reynolds, a professor of Law at the University of Tennessee, has been saying for several years that the American university education system is a bubble. Reynolds argues that the system is propped up by student loans and the universities' insistence, despite all evidence to the contrary, that having one of their degrees all but guarantees that a student will get a high-paying job.

The universities have been incentivised to take on as many students as possible, so they've done this by offering easier courses, as the student loan guarantees transfers the financial risk from the universities onto the student loan system, the student and the taxpayer.

Don't think that Britain is immune from this; whatever happens in America tends to happen in Britain sooner rather than later. In contrast, China has been shutting down those university departments that specialise in producing unemployable graduates!

Ours must be better because it's more expensive

It was no surprise to me that most British universities chose to charge the maximum when the annual fees cap was raised to £9,000. In doing so, they're making as much money as possible whilst hoping that the high price sends out a signal that that they are offering the best quality education.

It's fine to take a degree that has little commercial value if you can afford to do so, or if your career expectations aren't focused upon your earning power and you don't mind taking on some debt.

Unfortunately, most students aren't in this position and many of them end up after three years with £30,000 or more of debt and a degree which doesn't give them the high-paying job that they were hoping for.

Don't be like the student who spent $35,000 on a master's degree in Puppetry and then found himself on the dole. Consider the return upon your educational investment.

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