November 18, 2011

The next financial bubble is ready to burst: higher education

With college tuition rising and jobs scarce, students are stuck with 'bogus degrees that lead nowhere.'

By M.D. Harmon

As if we didn't have enough financial trouble, yet another trauma looms on the horizon.

Everyone's familiar with the "housing bubble," the falloff in real estate values created largely by political pressure to increase home ownership in various low-income groups that most banks deemed unqualified to take on long-term debt.

Instituted under the Clinton administration and expanded under both Presidents George W. Bush and Obama (with Rep. Barney Frank and Sen. Chris Dodd as chief advocates via the federally guaranteed loan agencies Freddie Mac and Fannie Mae), the policy encouraged investment firms to collect and sell those high-risk loans under the logical belief that the feds would stand behind them.

At first, prices rose with demand, but that was followed by an inevitable steep decline as borrowers defaulted, foreclosures rose, home values crashed and banks toppled (unless they were deemed "too big to fail," in which case government intervened when it should have let the market sort things out).

But many readers may not be familiar -- though they will be soon -- with the next economic debacle caused by government overinvestment in an economic sector: the "higher-education bubble."

In their own weird way, the Occupy Wall Street Obamavilles, now being uprooted nationally due to their threats to public safety and public health, offer some testimony to the impact of the higher-ed bubble.

One of the goals OWS denizens consistently supported was the forgiveness of college loans, which in many cases obligated new graduates to repay tens of thousands of dollars out of beginning-level salaries (assuming they had jobs at all).

University of Tennessee law professor Glenn Reynolds, who blogs as "Instapundit," has been collecting comments on this issue. His sources say the problem isn't just a paucity of jobs (though the current glacier-slow recovery isn't helping), but also that our colleges are producing too many graduates who are unemployable in their chosen fields.

Either new graduates 1) have degrees in subjects for which there are very few, if any, openings available; or 2) they were not really capable of profiting from a college degree to begin with, but, because of grade inflation or the desirability of their tuition income, they were coddled through to a degree anyway, even though they still can't write a decent English sentence.

Yet, the cost of a degree keeps rising, especially at prestige schools, not because of the increased value of a degree but because government subsidies (either directly to schools or via student loans) provide substantial incentives to inflate prices rather than keep costs down. Tuition has been rising far faster than inflation for decades and is up 8.3 percent in just the past year in public schools, and more in private ones.

As the heavily indebted Occupiers have found out, their liberal arts degrees have relatively few takers in the job market, which is far more interested in graduates in "STEM" subjects (science, technology, engineering and mathematics).

One of Reynolds' citations this month comes from Moorad Alexanian, a physics professor at the University of North Carolina, who put the issue plainly: "The nation is saddled with a trillion dollars in student loan debt ready to follow the housing bubble. The floodgates have been opened wide to campus admission with faculty responding by adding courses and programs that do not prepare students in the important basic areas, especially in the hard sciences and mathematics.

"Accordingly, students do not seek truly academic knowledge and skills but are just satisfied with a diploma, which is used by potential employees as a selection tool. Students are thus shackled with bogus degrees that lead nowhere."

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