Popping the Higher Education Bubble How to Navigate the Impending Student Loan Crisis Mike Fishbein Copyright © 2014 Mike Fishbein All rights reserved http://higheredbubble.com Table of Contents Introduction…4 Definition of an Economic Bubble Current State of the United States Economy 14 Is Higher Education a Bubble? 20 Comparing Higher Education and Student Loans to Housing and Mortgages 22 Harmful Effects of The Higher Education Bubble 35 Causes of the Higher Education Bubble 40 What Will Cause the Higher Education Bubble to Pop? 48 Potential Effects of a Higher Education or Student Loan Collapse 59 How to Profit From The Higher Education Bubble 70 10 Problems Facing the Higher Education Industry 76 11 Potential Solutions to The Higher Education Bubble 85 12 Why Corporations Should Open Schools 94 13 How Not to Solve The Problems 105 14 What Prospective Students and Graduates Can Do to Prosper in the “New Economy” 107 15 The Future of Higher Education 121 Conclusion 127 Introduction I fear that America be facing a bubble relating to the price of higher education It has many similarities to the housing bubble and proceeding collapse in 2008 Cheap credit, coupled with widespread beliefs of ever-increasing returns on investment, have caused college tuition to vastly outpace inflation and family incomes From 1976 to 2010, commodities prices rose 280% and house prices rose 400%, while private education rose an incredible 1000% While the price of education has skyrocketed, the value of a degree has not kept pace The increase in supply of degree holders has created an imbalance in the labor market In 1940, only one in 20 Americans held a college degree By 1977, that number had soared to one in four Over the past 30 years, higher education has gone from facilitating upward mobility to exacerbating inequality For the first time in history, the majority of unemployed Americans attended college, and it’s more expensive than ever to go attend college Student debt is now greater than $1 trillion; many graduates are unable to secure employment sufficient to replay their student loans This book covers causes of the higher education bubble, the harmful effects it's had on students and the economy, potential solutions, and more About the Author It’s May of 2009, the peak of the recession caused by the housing bubble The stock market hit record lows, home prices plummeted, and hiring was limited The class of 2009, and the years closely surrounding it, faced mounding student debt and a difficult labor market College was “what you do” after high school - it was one of the best investments to make Having a degree would help graduates stand out from the pack to get the job of their dreams Many of my fellow graduates soon realized that their degree from a mid-tier school, may be actually limiting their upward mobility than contributing to it Some degrees actually made me implicitly ineligible for certain employment opportunities It didn’t matter how capable I was of excelling at a given role, I was instantly removed from the stacks of resumes, without even a chance to interview I applied to hundreds, if not thousands of jobs in the Summer of 2009 Because the economy was so stagnant, and because so many other people with degrees, many from schools more prestigious than mine, were competing for the same positions, it was nearly impossible to get a job Most of my peers were having the same trouble Many were “underemployed,” working less hours than they desired or working a job that they were overqualified for, such as waiting tables It was around this time that I began realizing the many problems with higher education, the labor market, and the economy I’ve been studying the problems and trends ever since I wrote this book to summarize all my research and learning and share it with others to create more awareness for the problems In 2014 I started an education company called Startup College (stpcollege.com) It’s doing it’s small part to solve one of the many problems with education I’ve written and self-published four other books: “How to Build an Awesome Professional Network”, “Customer Development for Entrepreneurs”, “Growth Hacking with Content Marketing”, and “Do More Better Faster & Happier” My writing has been featured in Huffington Post, Entrepreneur.com, Lifehack.org, and more You can learn more about me and connect with me by visiting my personal blog at http://mfishbein.com/ and on Twitter at https://twitter.com/mfishbein Definition of an Economic Bubble This section defines economic bubbles in broad terms and give examples outside of higher education Later in the book you, will see how this information applies to higher education What is a Bubble? A bubble is a period in which the price of an asset is inflated far beyond the intrinsic value of the asset Price is equal to the collective market’s estimates of intrinsic value Intrinsic value is equal to the net present value of future cash flow Cash flow comes in the form of profits, dividends, cost savings, and/or sale Prices increase as estimates of intrinsic values increase What causes a bubble? In the case of a financial bubble, estimates of intrinsic value can increase as a result of increased expectations of future price, overestimating intrinsic value, or market interferences that alter one’s evaluation process or opportunity cost, or change in belief about the consequences of one’s actions Here are illustrations of each of these: If an investor expects the price of a given stock to rise, the investor may purchase the stock to earn a return If the investor buys simply because others are buying and expects to to be able to sell at a higher price in the future, regardless of the asset’s intrinsic value, prices can rise beyond intrinsic value Once investors realize that price and value are out of sync, they stop buying and prices fall (the bubble bursts) If an investor overestimates the intrinsic value of an asset, the investor may be willing to pay a price that matches it’s estimate of intrinsic value (above actual intrinsic value) The intrinsic value of an asset is equal to the present value of future cash flows from the asset Cash flows come in the form of profits or dividends, or selling the asset For example, during the “dot com bubble,” many investors believed technology companies would generate cash flow in the future, despite in some cases not generating revenue When companies did not become profitable, estimates of intrinsic value decreased, as did price If price is manipulated by forces other than market forces, it can become detached from intrinsic value, as the purchasing decision less dependent on intrinsic value For example, lowering interest rates Interest rates can be understood as the price of money When rates are at nothing, market players may chase risk to avoid capital erosion When money is cheap, many risky investments become more favorable than they would be otherwise Lower interest rates caused by market forces indicates increased savings, likely indicating pent up demand This would be a signal to a producer (i.e entrepreneur), to produce because it’s less expensive to borrow and because there is unmet demand If the low rates were not correlated to excess demand, the entrepreneur would lose money A person's belief that they are responsible for the consequences of their own actions is an essential aspect of rational behavior If one believes that he/she will lose money from making a bad investment, he/she will not make that investment If one does not believe that he will lose money from making a bad investment, he/she may still make that bad investment For example, if a hedge fund believed that if an asset would be supported by the government to certain prices, or that the hedge fund itself would receive government funding if it’s investments did not perform well, it could take on more risk What are the signs of a bubble? It’s hard to tell if the price is inflated beyond intrinsic value because it’s often difficult to evaluate intrinsic values Bubbles are often identified only in retrospect, when a sudden drop in prices appears Signs of a bubble can be more qualitatively measured than quantitatively When there is a near widespread belief, it can be a sign of a bubble For example, if every market investor believed a given stock was worth more than it’s current price, every market investor would buy Once the buying occurs, there would be virtually no one left to act on that belief and continue to carry that trend any further in the same direction Indications that a widespread belief is held, especially as it pertains to an investment opportunity, would include people with little experience evaluating investment opportunities recommending the investment If you ask most people if they think a college degree is a good investment, they will give you a strong “yes.” If you tell people not to go to college, or that it’s a bad investment, many will look at you like you just told a five year old that there’s no Santa Claus What causes a bubble to burst? A bubble bursts when the collective market’s estimate of the asset's intrinsic value falls below the price At which point, investors would begin selling the asset because if they don’t expect the price or intrinsic value to increase beyond it’s current price, it would not be a good investment holding Estimates of intrinsic value can change for a number of reasons In the example of the "dot com bubble," investors overestimated the future cash flows of technology companies, some of which were not even generating revenue Once investors' estimates of intrinsic value decreased, stocks were sold to match price to value In the example of higher education, people are finally realizing that their earnings potential won't increase enough to warrant the investment at current prices In the example of the tulip bubble, ("tulip mania") people stopped believing that people would continue to buy tulips at higher and higher prices, so estimates of intrinsic value decreased, and so did price 14 What Prospective Students and Graduates Can Do to Prosper in the “New Economy” With the price of education as high as it is, technology and the economy changing at rapid pace, and student loan debt at record highs, prospective students and graduates may need to start thinking outside the box about how to prosper in this “new economy.” The section below provides some analysis on whether or not students should go to college, and proposes some potential alternatives to college Is College a Wise Purchase? Considering the discussion of the economics of higher education and the conclusions about whether or not higher education is overpriced, this chapter evaluates whether or not people should still go to college College does in fact have many benefits As I’m sure you’re not surprised if you’ve read other parts of this books, I conclude that higher education is indeed no longer a good investment at current prices In the chapter following this chapter, I offer suggestions to what students can instead of college, to get more value Purchasing Decisions Why you buy the things you buy? Most people buy goods and services because they provide more value than other goods and services of the same price Value can come in many forms Forms of value include making money, saving money, increasing safety or reducing risk, saving time, entertainment, social status, etc Many people go to college so they can make more money In that sense, higher education can be considered an investment Higher education can also be considered a service, similar to hiring a cleaning lady, or going to the movies The service higher education provides is teaching, networking opportunities and more The Benefits of College There are many benefits of going to college Despite this book’s focus on higher education as an economic bubble, I believe there is value in going to college Unlike a traditional investment decisions that generates monetary returns, some of the below “assets” are difficult to value a Real Estate Many schools provide students with a campus that includes dorms, a library, dining halls, classrooms, labs, and more b Professional Networking College is a great place to form professional relationships People in the same programs will likely be working in the same industry.In addition, some schools have strong alumni networks that you can reach out to Having a shared bond over college builds rapport c Learning The most commonly acknowledged benefit of going to college is the education Higher education can teach you skills and information needed to perform at a job d Credential When you graduate from college you have an accomplishment on your resume that indicates your abilities to potential employers A degree from a top tier school indicates that you are a top tier candidate and a degree from a mid tier school indicates that you are a mid tier candidate After gaining sufficient professional experience, experience and accomplishments become additional indicators of capabilities e Exposure to New Ideas Many programs require students to take courses outside of their major A student might not otherwise have exposure to these topics In addition, many people to move to different towns than they grew up in and therefore have an opportunity to observe different cultures f Fun As depicted in movies like “Animal House,” college can be a great place to make friends and “party.” Friends and partying are important to many people I honestly believe it is important for young adults, and everyone for that matter, to have fun How to Evaluate the Investment Decision While college degree holders typically earn more than non-degree holders, the gap is narrowing In addition, the crippling amount of student debt one must take on to go to college might not justify the increased earnings The below post provides a framework for evaluating the decision to go to college along with some analysis on key considerations Discounted Cash Flow (DCF) analysis is one of the most common methodologies used to evaluate investment decisions It is calculated as: DCF Value = future cash flow / (1 + discount rate)^number of periods Future cash flow in the case of a degree is the additional wages earned above that of not having a degree and net of debt repayments In the case of, for example, buying a house as in investment, the future cash flow would be in the form of the sale price at a future date and the rental income generated The discount rate in the formula is the Opportunity Cost The opportunity cost accounts for the Time Value of Money According to the time value of money, a dollar today is worth more than a dollar tomorrow because you can earn income on it In the case of higher education, the opportunity cost is the sum of the wages forgone while studying, and the interest that could be earned on the cost of the degree Let’s examine each of these factors for determining value in more detail and in the context of deciding to go to college a Price It’s irresponsible to evaluate a purchasing decision simply based on it’s benefits For example, I would love a Lamborghini, but it would come at a great expense As a second example, consider two stores right next to each other selling the same piece of steak The first store is selling it for $10 and the second store is selling it for $5 While the first store is delivering the same value as the second store, the second store is delivering it for a lower price, therefore it would be more wise to purchase the steak from the second store The price of higher education decreases cash flow, as inputted to the discounted cash flow calculation It is either an upfront cost, or, more frequently, paid off over several years Supply of low interest rate student loans by government and private lenders has increased demand for higher education and a corresponding increase in price The price of higher education has increased by about 1,000% since 1975 Yes that’s thousand four digits Key takeaway: Higher education is really expensive b Wages Many people attend college because of the added job opportunities and corresponding wages Studies show the gap between degree holders and non-degree holders is narrowing by measures of unemployment and wages Intended to increase supply of educated labor, the abundance of supply of student loans at artificially low interest rates may have increased supply too far Labor markets may have mis-allocated themselves to jobs requiring degrees The resulting increased supply leads to lower prices (wages), and the decreased supply of non degree requiring price leads to higher prices (wages) Increases in wage earnings potential may also vary from school to school For example, from my personal perspective, it seems like graduating from Harvard still presents amazing opportunities, while a degree from the bottom 75% or so of schools seems to be a “non-differentiator” that just lumps people in to the large population of other people that have degrees Key takeaway: a college degree may still increase wage earning potential, but it may be decreasing and/or the opportunity cost may be increasing c Opportunity Cost Tuition could be invested in the stock market, bonds, or savings, to earn returns The time could be used to earn wages The time could be used to learn and otherwise acquire the value propositions that higher education offers Key takeaway: Higher education requires a huge investment of both time and money The time and money could be allocated to other opportunities that generate value d Asset Value A degree has no intrinsic value You can’t sell your degree when you’re done with it Conversely, when you own a company’s stock, or real estate, you can sell it with some degree of ease A degree only has value, in the form of added wage potential, because employers think it has value e Forecasting If employers stop perceiving the degree to be valuable, it may not generate the forecasted increase in wages People may not consider the price of higher education when making the investment decision They instead assume college is “what you do,” and pay for it regardless of price Therefore, the price of higher education may not match it’s value, and may not be a fair value There may be some variances in additional earnings potential between graduates of different schools For example, a student who graduates from an Ivy League school may be able to earn more than someone who graduates from a “mid-tier” school Therefore, one should consider the increased earnings potential on a school by school basis, and not based on college as a whole Key takeaway: Lack of information may have lead to poor decision making assumptions and forecasting inputs Poor evaluation methods and/or input assumptions may have lead to ineffective decision making and/or a divergence between a degree's price and value Bottom Line A college education may not be the best investment for every student's financial future The additional cash flow from college does not exceed the cost and opportunity cost in many cases Ultimately I think it depends on the price of the program and the wages that graduates of those programs can earn There is variation from program to program For example, it seems Ivy League schools still provide a strong return on investment What to Do Instead of College While I believe there are many benefits of going to college, I also believe that in some cases it would be better not to go I think there is value in buying a Ferrari, but I also don’t think everyone should buy a Ferrari Part of the problem is that degrees from some schools and programs are worth less than others schools and programs, despite having similar price tags In addition, some people have career aspirations that not require a degree (such as entrepreneurship) You can get most every benefit you get from college better and/or cheaper from other sources This section discusses ways you can get the benefits of going to college without the crippling amounts of debt Learning a Online The Internet makes information abundantly available and easy to find As a result it’s become cheaper and easier to learn Online learning can happen by reading a blog post or taking a course on Coursera Udemy enables anyone learn or teach from anyone I’ve produced several courses on Udemy b Offline Offline learning opportunities are increasingly available A company called CourseHorse aggregates offline classes so students no longer have to rely on a school to get access to education A company called Flatiron School teaches 12 week software development classes As of April 2014, 98% of their graduates have found paid work Flatiron School also makes money through recruiting, so they reimburse part of their graduates’ tuition if they are hired According to the school, everyone they place in a job sees a starting salary of at least $70,000 c Work for Free Ask to shadow someone’s day in exchange for helping out with with various tasks Take an internship or apprenticeship It’s a great opportunity to learn the skills you need to be successful, build a relationship with a potential employer, prove your work ethic to a potential employers, and see if you like the work d Start a Company Find ways to help people Try to sell something Try to market something Learn how to build a product As part of the founding team of a startup, I learned more in a year and a half than I did in four years in college and two years in finance combined Exposure to New Ideas a Travel Backpack in Europe Move to a different country Move to a different part of your country Get exposure to different cultures b Attend Lectures and Workshop Many major cities have many opportunities to attend events and get exposure to new fields Networking Networking is arguably one of the most necessary factors for getting a job College is a great place to network There are also many other places to meet people a Meetup.com Meetup.com is a social networking site where people create groups and shared interests and organize offline events Sometimes the events have speakers or lectures, other times they are just for networking There are Meetup groups for all kinds of interests b Go on a Group Vacation I’m not sure what companies provide this, but I would have loved to go on a long vacation with other people my age after graduating high school I wasn’t mature enough to focus on my career and it would have been a great learning and networking opportunity c Industry Conferences and Events Big cities often have industry conferences and events throughout the year There is often no requirement to attend these events They can be a great way to meet people in the industry d Online Social Networking Blogging can help you meet and be found by people you want to meet If and when your target audience finds you, they can get to know you based on the personality of your writing, see that you are an expert in your field, and benefit from your advice Being helpful, displaying your expertise, and being authentic are great ways to network, and blogging can help you all three! Blogging can lead to additional networking opportunities, such as being invited to speak at events, attend events, be interviewed, and more You can also interview people on your blog which could enable you to meet some great people and help them out by publicizing their message In many industries, “top players” are getting increasingly active on Twitter Twitter is a public forum When someone posts on Twitter, they are doing so to be heard and to engage with their followers That’s an open invitation to engage with them! I can’t think of an easier way to be able to start a conversation with someone Here are a few tactics you could use: Reply to their tweets with value added commentary and questions Tweet their blog posts and add your unique commentary “Mention” them when you share your blog posts, or write a personalized tweet such as “@[your idol] I read your blog post about [topic a] and thought you might be interested in my latest on [topic b] [link].” These tactic can enable your idols to see you, get to know you, and eventually learn that you are someone that they want to meet Credentials a Blog Blogging is a great way to display what you know to a potential employer Write about your industry, or your favorite tips for your trade For example, if you are interested in sales, you could write a blog post called “10 tips for prospecting sales leads.” b Side Projects If you want to get into marketing, you could consider marketing your own product, or marketing someone else’s as an affiliate marketer What better way to prove that you can market a product then by marketing a product If you have experience successfully driving traffic to a site, it’s reasonable to believe you are capable of doing it again Fun a Go Somewhere In a city like New York there are so many people and so many different things to You could also take a group trip as described above, or go to something like a summer camp for young adults if there is such a thing 15 The Future of Higher Education Given the student loan crisis, the bubble in the price of higher education, and the financial conditions of schools, the higher education industry is bound to change People will always need to learn and companies will always need to hire So I don’t think the industry will disappear The problems discussed throughout this book can be solved with improved solutions that take advantage of new technologies Below are a few themes I see affecting the future of education Some of these are already beginning to happen Decentralization Many industries have maintained bureaucratic and hierarchical organizational and communication structures New technologies are enabling more efficient structures For example, in book publishing, an author has historically needed to pitch to dozens of publishing companies, potentially hire an agent to get those meetings, and then the publishing company decides whether or not they want to publish the author’s book That process can take months, and most authors never get signed by a publisher For readers, the publisher decides which books they have access to., and buy it from one of the publishers distributors Network based models are changing the publishing industry Now, an author can write a book, selfpublish it on Amazon, and gain access to millions of active shoppers all within hours and almost zero cost The author has less need for for the publisher’s distribution because he can self-distribute An author can gain access to customers simply being on Amazon’s marketplace, or by marketing it using other free networks like blogging, podcasting, and social media The members of the network decide which content they want to consume, and the best content is surfaced based on ratings and order counts A similar model could be applied to education Currently a school hires teachers and the students pay the teacher for access to the teachers The schools make a profit for “brokering” the deal The teacher accepts less pay in part for not having to find the customers The students pay a higher rate for the school’s “services.” Network based models make that entire process more efficient Educational marketplaces like Skillshare and Udemy are creating networks of teachers and students Students decide which teachers they want to learn from and teachers get access to the marketplace’s student base Information Wants to be Free “Information wants to be free” is a slogan technologists use to describe how the Internet makes information abundantly available and easily accessible Anyone with an Internet connection can share information on the Internet As a result, information becomes abundantly available and it’s easily findable because of search engines Educational content seems to be facing this trend as well Schools compete in part because of their “proprietary” information Traditionally it has been hard to learn some of the topics that students teach outside of a school However a teacher now has access to millions of students by self-publishing on Amazon or Udemy I believe it will eventually be hard for schools (for profit or non) to compete on the basis of providing information Credentialing One of the most valuable benefits of going to college is that when you graduate, you have a degree that indicates your capabilities to potential employers Colleges are valuable to employers because they screen and credential students, ensuring some level of quality Therefore, employers often require employees to have degrees If there were a more efficient means for students to display their abilities and/or for employers to assess a candidate’s capabilities, there would be less need for students to go to college Students could take advantage of far cheaper, and potentially superior, sources of education and then validate that they have the skills Because many people go to college in order to get a job, the new credentialing system would need to be “approved” by employers A “school” could simply be a testing center (online or offline) Unbundling As discussed previously, there are many benefits to going to college The school bundles all of these value propositions into a “one size fits all” offering However some of the benefits are less valuable or not valuable at all to students For example, it’s pretty easy to learn at a fraction of the price it costs to learn at a school, so one of the main benefits of going to college is getting “credentialed.” Therefore the student is overpaying because he/she is paying for all the benefits despite potentially not needing them A company could theoretically compete by providing individual components of college’s benefits, enabling students to pay for what they want and nothing more It’s getting cheaper and easier to start a business and bring it to market In addition, companies that provide just one service can become more specialized, and potentially provide superior service In the future, education might become unbundled Students might buy learning from one company, networking from another company, partying from a third company, and credentialing from a fourth Students might learn statistics from one company that specializes in statistics, and chemistry from another company that specializes in chemistry Alignment of Incentives Higher education has a layered communication system involving students, schools, and employers The interest of schools is in enrolling students and charging for their services Students enroll in the school because they’re interested in getting a job The school gets paid regardless of whether or not the student gets a job A laundry detergent company makes money by providing a product that helps people clean their clothes People pay the laundry detergent company to help them clean their clothes The communication lag is very short If after just a small purchase price and one load of laundry, if the detergent does not clean the customer’s clothes, the customer will not buy it again A venture capital firm’s revenue is tied to the performance of the investments it makes on behalf of it’s customers (limited partners) A recruiter is incentivized to help it’s customer hire because the recruiter doesn’t get paid unless the company makes a hire An employee is incentivized to serve it’s customer (employer) because the employee’s compensation and career track are dependent on it The incentives between schools and students are different Because a school makes money by students taking classes, it actually has some incentive to keep students in school rather than letting them graduate If graduates of a given school aren’t getting the jobs they want, students would theoretically stop attending, so schools have some incentive to make sure students get jobs However there’s a huge communication gap between employers schools and students Students don’t know if the degree will help them get a job for four years (or more) and after a hundred thousand dollars or so in tuition I am much more motivated to buy something from someone if their incentives are in line with mine I would much rather attend a school that was incentivized to get me a job I would like to see schools charge students based on their ability to get the students a job With enough collective bargaining I think this could become a reality A school that competed on this basis could potentially be quite attractive and competitive to existing models An employer could provide a school and compete on this basis because they would be incentivized by hiring Conclusion An economic bubble is a state where price significantly exceeds intrinsic value The price of many higher education programs have exceeded intrinsic value It has been caused by a number of factors including irresponsible borrowing by students, and lending by government The high price of education has lead to a generation of students being crippled by student loan debt and oversupply of labor leading to lower wages and/or higher unemployment As a result of the inefficiencies the bubble has caused, many students and graduates are at risk of defaulting on student loans If more students begin defaulting on student loans it could cause harm to the entire economy Learn More Stay in touch by signing up for the email newsletter at higheredbubble.com You can connect with Mike or reach out to him at twitter.com/mfishbein Check Out Mike’s Other Books “Customer Development for Entrepreneurs: How to Test Startup Ideas and Build Products People Love” “How to Build an Awesome Professional Network” “Do More, Better, Faster & Happier: How to Boost Energy for Happiness and Productivity” “Growth Hacking with Content Marketing: How to Increase Website Traffic.” ... of the Higher Education Bubble 40 What Will Cause the Higher Education Bubble to Pop? 48 Potential Effects of a Higher Education or Student Loan Collapse 59 How to Profit From The Higher Education. . .Popping the Higher Education Bubble How to Navigate the Impending Student Loan Crisis Mike Fishbein Copyright © 2014 Mike Fishbein All rights reserved http://higheredbubble.com... the consequences of one’s actions Here are illustrations of each of these: If an investor expects the price of a given stock to rise, the investor may purchase the stock to earn a return If the