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.


  1. the more depressed tje job prospects, the more people are ready to pay for education (and the least the opportunity cost of being on the job market)

  2. Colleges always have an incentive to publish a very high tuition rate but the average cost students pay, called the discount rate, is much less than this because of financial aid.

    The higher education market obviously has a lot of imperfections, but to get a true sense of the distortions you would have to have data on the discount rate.

  3. I attended the University of Oregon from 1977 - 1981 where I earned my B.S. Finance degree. My total cost (in-state tuition, fees, room and board, personal expenses) totaled approximately $12,000 for the four years. I received no financial aid and didn't take out any loans.

    Prices have gone up around 200% since then, which translates into an inflation adjusted cost of $36,000 for the four years ($9,000 per year).

    Supposedly, it costs about $20k per year to attend the U of O now for an in-state student. So the cost of attending this school has gone up at over twice the rate of inflation. I'd have to agree it's a bubble.

  4. A nice take on this bit of information. But, can the bubble burst? So long as the federal government is willing to provide loans with no particular underwriting criteria to those investing in the asset isn't it possibly the perfect shell game?

  5. "A nice take on this bit of information. But, can the bubble burst? So long as the federal government is willing to provide loans with no particular underwriting criteria to those investing in the asset isn't it possibly the perfect shell game?"

    Agreed. It could also end when students figure out that an education from a state school that costs 1/3 the price of these school may be the better deal, which would put pressure on these "elite" schools or when corporations don't pay those that attended these elite schools more simply because they are elite.

    As someone who attended a state school for undegrad and a way-too-expensive b-school for my MBA I can assure you that my education was no better at the more expensive school. However, my salary spiked with the stamp of approval from "elite" school.

    Will that continue?

  6. While I appreciate you highlighting the explosive rise in education costs, not quite sure your "Chronicle" source is entirely accurate. Here is a well known school that should be in the top five or so.