It isn't going to be as bad as the housing market crash, because degrees are revenue producing assets for the overwhelming majority of people and houses are costs for the overwhelming majority of people. Also, student loans do not have any mechanisms in them which are designed to induce payment shock, like ARM resets are. (I am only half sardonic there.)
If your loan repayments are $700 a month when you graduate, they will be $700 a month for the next ten years. There is no mechanism by which they'll suddenly jump to $3,000.
Even for degrees which you wouldn't expect great things from -- like, say, English -- the value of the degree exceeds the price by huge amounts. The NPV of a bachelor's degree in English is about a million bucks. You still come out ahead with virtually any college/loan combination possible, as long as you find a job with it, and unemployment among college graduates is still at ~4.5%.
There are a few degrees which are exceptionally bad decisions, but they are the exceptions rather than the rule. One example is culinary school, particularly the ones which will load you with the federal max of loans so that you can get a $12 an hour job as a line cook. There is one glaring sore thumb in the data for master's degrees, too.
If folks are interested, I'll blog about this in a few weeks. I did a project for a client looking at government data and a few other sources to try to get numbers on the worth of degrees by majors. The work is 99% over but, clients being clients, there are some more steps it has to go through before they want to launch it publicly.
Whoa, there! What discount rate are you using? For the median degree, I get an NPV less cost of $47K. Here are my assumptions:
* Discount rate of 6% (we're talking about an asset with a 40-year lifespan and zero terminal value).
* $25K in annual school costs.
* $25K in annual opportunity costs. (May be conservative for people who are college material but didn't get a degree.)
* Four years to complete the degree. Which is very aggressive.
* $23K earnings differential. (The current average.)
* Forty years of post-degree work.
In this model, you get to breakeven 26 years after you start school. So, to the current high-school senior: assuming the job market in 2036 looks pretty much like it does now, treat these projections as solid.
It gets worse. If you assume a more realistic graduation timeframe of six years, the value is -$18K after 40 years. Of course, you can keep working; you'll hit breakeven after 54 years (at age 72).
I think you're overestimating the annual cost of school. I know it doesn't cost $25k/yr for me to go. I pay around $6k/yr for tuition, plus another $1k or so for books. According to College Board [1], that's about $1k less than the average for a student going to a public school, in-state.
Your figure matches about what it costs to go to a private school, but, from my experience, public schools are also more likely to give scholarships [2]. Even still, no one is forced to go to a private school.
[2]: I went to a private school my first year. It was around $30k/yr, but I was also given a scholarship that cut that price to around $18k/yr. Most of the people I met on campus also received scholarships of some sort as well.
The school I'm at costs ~ $55k per year in the end, and the grants I get bring it down to about $30ish, and my parents make not much more than $100k (by working a full time and a part time job each)
The public schools I applied to that weren't rolling-admission 5th year of highschool types ended up costing the same in the end, because they didn't give need-based aid, and their merit scholarships were not large for people who don't play sports.
Need based aid isn't really targeted towards people who's parents who make more than 100k (more than the national average).
Merit scholarships are easy to achieve, given that you are exceptional. But if you are middle class and not especially proficient, I do agree that you have one of the hardest college experiences in america.
It's unfair to use your public school costs as evidence because they are not comparable to his numbers. Here are the numbers across the board for all college students [1]:
Median: $9K
Mean: $26K
Also, if we were to put opportunity cost into the calculations (because you could work/work more if not going to school), it would quickly approach the $25K figure.
We both linked to the same article, so I'm well aware that my tuition costs are not what everyone else will experience.
A median of $9k is still less than half of what the GP used, and my cost of tuition is a lot closer to the average than the $25k the GP used.
Also, if we were to put opportunity cost into the calculations (because you could work/work more if not going to school), it would quickly approach the $25K figure.
Part of the cost is often borne by the government. For the purpose of identifying a bubble, you have to look at that cost, too--because the problem is too much aggregate investment in education, not that it's a bad deal for everyone.
I graduated in 3.5 years and school cost 17k/year. Also, opportunity costs is not 25K because you still have basic cost of living either way and you can work in the summer.
So run those numbers assuming school costs of 15K, opportunity costs of 5k, 23K earnings differential, and student loan costs of 3.5% tax deductable.
PS: A friend of mine worked his way through school making 7.50$ an hour as a cook at without student loans. He worked 80hours a week in the summer and 40 hours a week during school and graduated in 4.5 years. He also lived in a trailer with his wife and child and got an internship his senior year at 13$ an hour it was a major pay raise.
Opportunity cost is what you give up. If you are capable of finishing school in four years, you're capable of averaging a $25K income over that time.
You're right about summer jobs, but the vast majority of summer jobs pay less than 1/4 of what you'd get working the full year (plus you have to do a job search for a three-month job, versus a job-search for a multi-year job). Outside of law school summer associates, I don't know of anyone for whom summer jobs routinely mean a raise.
I like your friend's story! But imagine if, after four years, he had credible evidence that he could work extremely hard, plus tens of thousands of dollars in savings. A good situation to be in if he wants to start a business.
Choosing an arbitrary cutoff of 6 years and then assuming that everyone who didn't complete their degree within 6 years is a college dropout is not a particularly valid way to measure dropout rates. I completed my degree after the 6-year mark and I'm certainly not the only one to do so. These statistics erroneously include people like me in the dropout category. A more accurate method of measurement would be to track each cohort of students from entrance through graduation and chart a histogram of the elapsed time from initial enrollment to graduation. Once you've collected these histograms for several cohorts, you're then in a position to construct a model of the statistical distribution. Then you can make accurate estimates of the true dropout rate by fitting the known graduation data for a given cohort to the model to estimate how many of the students are in the tail of the distribution that will eventually graduate.
You're backing it up with your own personal anecdote?
That's not valid.
If you found data that said, for example, 30% of college graduates took longer than 6 years to earn their undergraduate degrees, then I would agree with you.
If it's less than 10%, then the using 6 years as a cutoff would be a very good rule of thumb estimate.
Maybe the reason why the 6 year cutoff is so often used is because someone already crunched the numbers and found it was good enough?
"You're backing it up with your own personal anecdote?"
No. I provided a counterexample that falsifies an implicit assumption of the 6-year cutoff model of the college dropout rate. If you measure your dropout rate as the percentage of students who have not graduated within 6 years of enrollment, it is provably true that your measurement is an overestimate of the true value.
"Maybe the reason why the 6 year cutoff is so often used is because someone already crunched the numbers and found it was good enough?"
If someone had already crunched the numbers, the appropriate correction factor to apply to the 6-year measurement would be well-known and, instead of reporting the 6-year cutoff value, a distribution-corrected 6-year cutoff value would have been reported instead. If nobody crunched the numbers to find out what the characteristics of the distribution's tail are, then the methodology is sloppy. If a correction factor was applied but not explicitly mentioned where the value is reported, then the reporting is sloppy. Either way, a reasonable person is justified in regarding the reported value as merely an upper bound on the dropout rate and rejecting the assertion that it is an accurate measurement of the true value.
Well, I really enjoyed college and I wasn't in any hurry to graduate. I took a lot of classes that had absolutely nothing to do with computer science, had a lot of fun doing so, and I think I am a much more well-rounded human being for having taken that route. I had about 70 credit-hours more than what was actually required for my degree by the time I completed the last required class.
Lifetime earnings should be a better predictor than median salary at a given point in one's career given the point made upthread about unemployment being lower for college graduates.
Even if diploma-wielding programmers can command high salaries in boom times, they have a tougher time getting jobs when there are unemployed programmers with degrees applying for the same jobs during a recession.
> It isn't going to be as bad as the housing market crash
then do you think that there will be a crash in this area, and if so, how bad do you think it will be?
i imagine it wouldn't sneak up on us like the housing crash because of the nature of the loans, but that it could lead to a longer, lingering problem kicked off by the housing crash.
It might not be as bad as the housing market crash but keep in mind that more people will be going to college in the future and take out student loans. I think higher education loans will grow at a staggering rate which will ultimately crash. If it crashed on its own, it wouldn't be devastating. If it happened right after the housing market crash, it could destroy our economy.
IMO it will be far less devastating, because it will be biased towards a higher earning, lower unemployment group of people (see statistics elsewhere in this thread).
Can you point me to more information about master's degrees being a bad idea? My wife is about to start a master's program, and it'd be good to know ahead of time.
"It isn't going to be as bad as the housing market crash, because degrees are revenue producing assets for the overwhelming majority of people and houses are costs for the overwhelming majority of people. Also, student loans do not have any mechanisms in them which are designed to induce payment shock, like ARM resets are. (I am only half sardonic there.)"
Degrees clearly are great revenue producing machines for the portion of the workforce currently unemployed with degrees. I remember a few years ago, "The housing market can't crash, it's impossible, it's the only safe investment vehicle after all of those silly tech stocks".
"Degrees clearly are great revenue producing machines for the portion of the workforce currently unemployed with degrees."
The unemployment rate for degree-holders in the US is currently 4.5%, compared to 10.5% overall. The bulk of the unemployed are in blue-collar sectors and among those who have graduated with a high school diploma or less. We can argue about what is or isn't an "acceptable rate" of unemployment, but typically for America it's been 4-5% unemployment. That even in this Great Recession, degree-holding citizen unemployment sits within the "acceptable" range, tells you that there is tons of value to getting better educated in this country at this time, and even in this climate.
One of my friends is finishing up her P.hD in entymology at Cal and she's somewhere around $175k in debt now with no expectation of ever making more than $50k/year in her field (if she can work in it at all). Another went to a private university for undergrad, then Temple for Med school, she's just now gone through Match and is around $225k in debt. She's chosen a career path that once through her residency (with a $40k/year salary expectation for 5 years through a triple-discipline program) should land her a comfortable $250k/year salary in the middle of nowhere. The $225k she'll have was a good investment, but my friend who likes beetles?She expects to pay 20-25% of her salary to pay it off for the rest of her life.
But as the parent stated later in his post, not only do college graduates earn more money, but the unemployment rate of college graduates is also far below the average unemployment rate.
In fact, it looks like the unemployment rate for college-educated workers is falling:
If your loan repayments are $700 a month when you graduate, they will be $700 a month for the next ten years. There is no mechanism by which they'll suddenly jump to $3,000.
Even for degrees which you wouldn't expect great things from -- like, say, English -- the value of the degree exceeds the price by huge amounts. The NPV of a bachelor's degree in English is about a million bucks. You still come out ahead with virtually any college/loan combination possible, as long as you find a job with it, and unemployment among college graduates is still at ~4.5%.
There are a few degrees which are exceptionally bad decisions, but they are the exceptions rather than the rule. One example is culinary school, particularly the ones which will load you with the federal max of loans so that you can get a $12 an hour job as a line cook. There is one glaring sore thumb in the data for master's degrees, too.
If folks are interested, I'll blog about this in a few weeks. I did a project for a client looking at government data and a few other sources to try to get numbers on the worth of degrees by majors. The work is 99% over but, clients being clients, there are some more steps it has to go through before they want to launch it publicly.