First Slide

Popping the

Higher Education Bubble

How to Navigate the Impending Student Loan Crisis

Topics

Causes

Who and what caused the bubble?

Effects

What harm has the bubble caused?

Solutions

What can be done to solve the problems?

The Future

What happens next?

Opportunities

What investment opportunities could present themselves?

Crash Proof

What prospective students can to do prosper in the new economy

Samples from the book

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9 Striking Similarities Between the Housing Bubble and The Higher Education Bubble

The collapse of the housing bubble and corresponding financial crisis of 2008 happened just six years ago as of this writing (2014). It’s amazing how many similarities there between what happened in housing and what’s happening in higher education. Considering the causes and outcomes of the housing bubble can help inform what might happen in higher education.

1. Same Players

The same “players” that were in the housing “game” are also in the higher education game: lenders, student loan borrowers, producers, and, perhaps the biggest, government.

a. Borrowers

In housing, the borrowers were home buyers. In higher education, the borrowers are students. In both cases, borrowers take on loans they can’t afford to pay back. They become swamped with debt on assets that won’t generate a return large enough to be able to pay off. “Owning” a house worth less than the mortgage is similar not earning enough to be able to pay off student loan debt.

Poor decisions were made by borrowers, in part because of being unable to value assets properly and/or forecast returns.

b. Producers

In housing, the producers were homebuilders. In higher education, the producers are schools.

Because of the abundant debt capital and corresponding demand, supplying a house or education seems attractive as prices continue to rise. However supplying the house or school means decreased supply of other goods or services. The reduced supply of other goods and services leads to an increase in price of other goods and services.

Schools, with poor cost management, are investing in fixed assets, not anticipating a declining price and revenue. If the prices decrease significantly they may be unable to continue to supply education, a service which our country needs. The reduced supply could prevent prices from dropping too low.

c. Government

The government’s role in the housing bubble of shouldering risk from lenders and encouraging or restricting lenders is similar in the housing bubble.

In the 1990s, the government encouraged banks to expand access to housing by reducing down payments and other risk reducing measures. Lenders’ concerns were eased because two quasi-governmental agencies, Fannie Mae and Freddie Mac, were formed to guarantee the loans, reducing lenders’ risk. Lenders could make loans, profit, and sell the loans to someone else where the government would pick up the proverbial “tab.”

In 1996, the Department of Housing and Urban Development encouraged Fannie Mae and Freddie Mac to make more than 40 percent of their loans to low-income borrowers. Simultaneously, the Federal Reserve pushed interest rates to historically low levels, making mortgages cheaper, encouraging people to borrow money to buy houses.

In the case of education, the government is actually the biggest lender of student loans. In addition, the government is essentially subsidizing schools, by giving them tax breaks. The subsidization discourages competition which would help students. What seems like a noble objective, encouraging people to go to college, may actually be causing more harm than good as students take on debt to buy an asset that won’t help them enough to be able to pay it back.

d. Lenders

In both housing and higher education, lenders are “guilty” of lending irresponsibly, putting themselves at risk despite their services being necessary for the economy to function, and putting the government, the economy, and taxpayers on the hook. In the case of housing, because banks took on too much risk, when people began defaulting on their mortgages, there was a risk that they could lose their customer’s reserves. In part to prevent a run on the banks and/or banks losing people’s savings, the government announced the bailout, giving massive amounts of taxpayer dollars to banks.

Lenders, such as banks, are profit seeking entities. Having profit potential with loss potential encourages lending. In some cases they were actually forced by the government to make bad loans (such as laws requiring lending to low income families or with reduced down payments). In the case of higher education, the biggest lender is actually the government.

The Future of Higher Education

Given the student loan crisis, the bubble in the price of higher education, and the financial strength 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.

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. Student 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 “credentialled.”

Therefore the student is overpaying because he/she is paying for all the benefits despite potentially not needing them.

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 would become highly 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.

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. Student 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).

How to Profit From The Higher Education Bubble

Considering the potential effects if the student loan bubble were to “pop”, and the current economics of higher education, several potential investment opportunities may present themselves. If higher education is in fact, a bubble, the market price of higher education would need to decrease to match intrinsic value, and/or intrinsic value would need to increase to match price.

The below investment ideas have been generated based on considering: a) who is hurt by mass student loan defaults (short selling opportunities), b) who benefits from mass student loan defaults (potential long positions), c) customer needs in a post-higher education bubble world (growing markets), d) solutions to problems caused as a result of the current economics of higher education.

11 Potential Investment Themes

Why Corporations Should Open Schools

The price of higher education has increased at rates far greater than both average inflation and the wages at which graduates earn. Despite the spending increase by students, many have a hard time finding work after graduating. In addition, studies have shown employers find graduates underskilled for many jobs.

The problems in higher educations have lead to students to taking on massive amounts of debt, not being able to make enough to compensate, and employers spending large budgets on recruiting and training. These economics are not sustainable.

There are several potential solutions to the higher education bubble. One of them is for companies to bridge the gap between what students learn and what employers need. Some big companies are actually already starting such initiatives. I’ll first explain what how a corporate university could be structured, then why it would be beneficial to both corporations and students.

 

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  • - The Future of Higher Education […]
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Popping the Higher Education Bubble 

How to Navigate the Impending Student Loan Crisis

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About the Author

Paid education. Graduate cap on a pile of money

Mike Fishbein

Mike is the Founder of Startup College, an online education company. Previously he worked at a venture studio and corporate innovation company in New York City.

Graduate

Mike graduated from Ithaca College in 2009, experiencing the harmful affects of the higher education bubble at one of the lowest points of the housing collapse.

Writer

Mike is the author of four other books including “How to Build an Awesome Professional Network.” He has been published in Huffington Post, Entrepreneur, and more.

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