Tuesday, February 5, 2013

Higher Education Bubble Bursting

When the housing bubble burst a few years ago, a lot of folks starting to take a long, hard look at the higher education sector. Like housing, higher ed is mostly financed by borrowing, and the "cheap money" bubble that built up during the housing boom had, by some standards, also produced a "higher education boom". Various wags and talking heads wondered about how long it would be before state and private universities started to go bust, while college administrations have been quietly concerned about the same thing for the past several years.

It turns out that there was a bubble in higher education, and it is bursting - fairly impressively. It's just not where we thought it would be. Traditional universities, while things have been lean for a few years, are doing more or less OK. But the collapse in the for-profit university sector is both spectacular and ongoing. Consider this latest:
For-Profit Backlash: Campuses Close in Milwaukee
The case of Everest College is interesting for the spectacular nature of its failure. But notice how many others are retrenching: Kaplan, Sanford-Brown, and Phoenix, some of the biggest names in for-profit education. If this were the automobile sector, there would be a massive hullabaloo in Congress about "saving American jobs".

As it is, we shouldn't be surprised that the "frothy" part of the higher ed bubble landed in the for-profit arena. Bubbles are enabled by cheap money, but they are driven by people looking to use that cheap money to make a quick buck, usually in some market segment that's not being served. In this case, the for-profits picked on underprepared first-generation college students from poorer families - a market segment largely ignored by "traditional" universities, and one ripe for fleecing servicing.

The thing is, there's a reason why many of these young adults weren't going to college before: they weren't prepared, and they couldn't afford it. Fancy debt accounting doesn't make either of those problems go away - it's just a means of extracting some money from them before they fail, just as complex no-doc balloon loans were a way for banks to make money before people went bust in foreclosure.

In a few years we may look back on much of the current experimentation with for-profit higher education with the same eye that we currently view Lehman Brothers, Bear Stearns, and stories of Wall Street vampire squids. Yes, some companies may actually figure out how to run a university sustainably and still turn a profit. But in the meantime, we'll continue to see implosions and investigations across the country as the for-profit higher-ed bubble continues to deflate.

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