DIY U: 'POP!' Goes the Bubble

A while back, I suggested that there might be a bubble in the higher education market, and that students taking on large amounts of debt to go to non-elite schools could be analogous to sub-prime mortgage customers. Well, somebody else has picked up on the theme, and that somebody is none other than Steven Eisman, a hedge fund manager featured in The Big Short as one of the few people who made tons of money by betting against the housing market before it crashed. In particular, he is pointing to the for-profit education providers as the sub-prime lenders and claims that the bubble could pop if Congress tightens lending rules:

“Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry” said Eisman, 47, one of the sellers featured in “The Big Short: Inside the Doomsday Machine” (Norton, 2010), Michael Lewis’s book about investors who anticipated the housing bust. “I was wrong. The for-profit education industry has proven equal to the task.”…

“Default rates are already starting to skyrocket,” Eisman said at the Ira Sohn Investment Research Conference, in New York. “It’s just like subprime, which grew at any cost and kept weakening its underwriting standards to grow.”

Just as bond-rating firms gave high grades to securities backed by risky mortgages, so the accrediting associations responsible for monitoring educational quality of for-profit colleges don’t provide thorough and independent scrutiny, said Eisman. Because accreditation is a peer-review system, in many instances representatives of for-profit colleges sit on the board of the body that certifies them, he said.

The whole article is worth reading.

“Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry” said Eisman, 47, one of the sellers featured in “The Big Short: Inside the Doomsday Machine” (Norton, 2010), Michael Lewis’s book about investors who anticipated the housing bust. “I was wrong. The for-profit education industry has proven equal to the task.”
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About Michael Feldstein

Michael Feldstein is co-Publisher of e-Literate, co-Producer of e-Literate TV, and Partner in MindWires Consulting. For more information, see his profile page.
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4 Responses to DIY U: 'POP!' Goes the Bubble

  1. Rob Abel says:

    Michael- Certainly I agree that some of the for-profits deserve the scrutiny they continue to get. But, is this a bubble in for-profits or higher education in the U.S. in general? Times are tough for new grads right now – including those coming out of non-profits – and they also have huge debt burdens. My thought is that now is a GREAT time for students and potential students to be asking colleges to give them proof that their graduates today are getting the types of jobs and careers they expected. That’s what we should be looking at right now around the world. I certainly know many new grads from non-profits with “good names” that would answer “no” to that question. The reality going forward is that college as a means of social mobility in the U.S. is being challenged for the middle class. And, for the underserved/disadvantaged higher ed has not responded to the degree it needs to. It’s all about being responsive to what students need TODAY. So, I think the bubble is across the board with transparency needed. Let’s have an annual survey of graduates so they can tell us how well their college delivered.

    -Rob Abel

  2. Rob, if you read the original post that this one follows up, you’d see that I argued the entire higher education market could be in a bubble. The for-profits (as well as not-for-profits that charge elite-level tuition without providing an elite-level education) are simply the sub-prime market. If they collapse and student default rates climb, banks may tighten their student loan business, which may cause the infection to spread to other parts of the market.

  3. Rob Abel says:

    OK – thanks. My main point is that the U.S. needs some way to monitor how well colleges deliver in terms of jobs, careers, and life preparation. Some other countries do this sort of thing, although not clear how well.

  4. Describing the current financial crisis in higher education as a bubble certainly is a fresh and illuminating way of framing the challenges we’re facing today. Still, like any analogy it has limitations and is likely to skew our understanding if we pursue it too far. Bubbles connote the idea of something insubstantial, ephemeral, whose value and substance is imagined rather than based on something real and concrete. While this may be true of many financial bubbles its an imperfect description of what is going on in higher education. To be sure, students (and I count myself as one of these) may not be getting great monetary returns on all the years that we’ve wiled away in the library and the classroom. But society is still benefiting and other forms of capital are being created. Kamenetz herself says as much:

    “Let’s be clear. When you shuck off the signaling effect and the sheepskin effect and the social-sorting effect, I believe, higher education still retains some irreducible value, a pearl inside the oyster. It may be very difficult to define, but its power over individuals and populations is too real to be ignored.” (p. 35)

    Put another way, the assets that are produced by higher education are real (if perhaps somewhat inflated). And, unlike the real estate bubble, the assets are much less toxic.

    BTW, thanks for highlighting Kamenetz’ book. It’s turning into a very engaging read. And the fact that Sakai — which I once heard called “the country club LMS” — is inviting Kamenetz as the keynote speaker suggests that perhaps we can put that elitist reputation (whether deserved or not) firmly to bed.

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