Wednesday, November 10, 2010

Undergrad Tuition Bubble?

Investor Glossary details that bubbles are formed:

When excessive speculation enters a market. Instead of viewing the intrinsic value of an asset, speculators in a bubble market instead focus on the resale value of the asset. This is sometimes referred to as the greater fool theory of investing. In a bubble, it doesn't seem to matter that a price is irrationally high - it only matters that it can be sold for an even more irrational price at a later date. Bubbles often end with steep declines, where most of the speculative gains are quickly wiped out.
Chronicle (hat tip Infectious Greed) details that almost 10% of private undergraduate schools now cost more than $50k / year to attend (bold mine):
The ranks of the most expensive colleges have grown again: 100 institutions are charging $50,000 or more for tuition, fees, room, and board in 2010-11, according to a Chronicle analysis of data released last week by the College Board. That's well above the 58 universities and colleges that charged that much in 2009-10, and a major jump from the year before, when only five colleges were priced over $50,000.

This year marks a milestone as the first public institution has joined that elite club: the University of California at Berkeley is charging out-of-state residents $50,649 for tuition, fees, room, and board. (The price for in-state residents is only $27,770.)

Below is a chart of the top 20 such schools.

My thoughts:
  1. education is not necessarily a traditional "asset", but an undergraduate education definitely has an intrinsic value
  2. the cost of many / most private school undergraduate educations are (insanely) over-inflated relative to their intrinsic value; simply compare the cost to similar, yet more affordable alternatives (i.e. schools that don't cost more per year than GDP per capita)
  3. the perceived benefit of these schools is in many cases focused on the resale value of the education (i.e. the value a corporation may perceive of that brand, which may be re-sold in the form of higher compensation, rather than what was actually learned)
Based on the above, I am comfortable claiming that private school tuitions are now in a bubble.

Amazing (to me) is that these schools have not only been able to raise the price of tuition / room / board to levels that are ridiculous in both absolute ($50k a year x 4 = $200k!!!) and relative (the national average is a still unreal $21k / year) terms, but they have done it in the years directly following the worst economic downturn since the Great Depression.