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College is a Bubble

I don't talk macro much, but this thought has been in the back of my mind since we started hearing about the spectacular gains from Ivy League endowments and why they aren't doling them out to at-need students. It's been hard for me to put this out properly in writing, and this will be a set of posts that provide data behind my thoughts. But for now, let's lay the ground work for my thesis that college, as an asset class, is a bubble.

The best way for me to start this discussion is to make a comparison between college and home ownership. The amount of paralells are dizzying-- and although they are not completely alike, tertiary education does bear some of the similar threads that are now derided about housing.

The Common Threads of Housing and College

1. It is the "American Dream" and socially expected to own the asset class.

Among many social circles, owning a college degree is one of those expected attributes of success. Hearing the word "dropout" leaves a sour taste in one's mouth, and will bring the dropout down a notch in their peer's perception of them. We see television commercials about the greatness of a college education and how it will prepare you for the real world.

Just until recently, home ownership was viewed in the same light. If you were a renter, you were looked down upon by your peers due to not being a savvy investor in your future. You also catch a commercial or two from the National Association of Realtors about how this is a great time to buy and the benefits you would bring to your family.

2. The Asset classes are heavily financed.

We now know the horrors of no-doc, no money down home loans that are now underwater, and a wave of foreclosures have hit the American suburbs as mortgage holders that were not able to make payments when the loan was originated are now defaulting on these loans. The main point here is that if these lenders were asked to make significant down payments on housing, they would not be able to pay at current market prices.

It is the same with college tuition. If there was not a steady stream of financing available to students, there would be many that would not be able to purchase that asset at current market prices. But why lenders are still willing to buy up college debt? Well...

3. The financing of the Asset class is subsidized by the U.S. Federal government.

A big factor in the frothiness in the housing market was due to the government sponsored entities (FRE, FNM) that provided a liquidity backstop to financiers.

Sallie Mae (SLM) is the GSE provides a backstop for college debt. As the credit bubble continues to deflate, we may see waves in this company as well. But unlike the demonization of Fannie and Freddie, Sallie Mae has yet to come under any scrutiny as we still consider that everyone has the right to a tertiary education. Over the past few months, the debt for SLM has been downgraded by the wonderful timing of the rating agencies.

4. There are tax advantages provided by the U.S. Federal Government for asset ownership

Home expenses are deductible, and interest on the financing of a house is deductible as well.

The Taxpayer Relief Act of 1997 allows you to deduct interest on the financing of a college education.

5. The "Alternative" is not fairly valued

When it comes to weighing the cost of home ownership versus renting a property, a true, objective analysis of the options rarely comes into account. That is due to the subjective addition of "intangibles" of home ownership, generally related to point 1. But truly going through and analyzing the financial risk/reward of owning a home versus renting can bring renting into much more favor in the decision.

I believe that the same "intangible" analysis occurs in college; you not only pay for the education, you pay for the experience, and that price carries a premium. But my hypothesis is that the income gap between those owning a college degree and those that aren't is narrowing, especially when you include any financing of the asset class. I also believe that this is narrowing much more in fields where specific, technical knowledge is not required for the profession-- for example an Engineering degree will provide a higher income gap versus a Communication degree.

6. There are Shady businesses operating in the field.

Countrywide; University of Phoenix.

7. People refuse to believe that the asset class could have the possibility of a bubble

I know this post is going to piss a lot of people off, especially those who own the asset class. And that fact also brings me to support the fact that a little contrarianism is healthy right now.

This video reminds me of the current "absurdity" of my claim that college could possibly be in a bubble. This video is from 2005:

In future posts, I'll be examining data points on the affordability of college, the amount of credit available to students, and how much state budgets have an effect on supply and demand of this asset class.

All feedback is welcome and appreciated, and I will make modifications to my argument when needed.

by Steven Place

Steven Place is the founder and head trader at