Thursday, April 14, 2011

Peter Thiel on the Higher Education Bubble

From a TechCrunch interview with  Peter Thiel (PayPal co-founder, hedge fund manager and venture capitalist) that starts with the warning: "This article will piss off a lot of you."

"For Thiel, the bubble that has taken the place of housing is the higher education bubble (see chart above). 

“A true bubble is when something is overvalued and intensely believed,” he says. “Education may be the only thing people still believe in in the United States. To question education is really dangerous. It is the absolute taboo. It’s like telling the world there’s no Santa Claus.”

Like the housing bubble, the education bubble is about security and insurance against the future. Both whisper a seductive promise into the ears of worried Americans: Do this and you will be safe. The excesses of both were always excused by a core national belief that no matter what happens in the world, these were the best investments you could make. Housing prices would always go up, and you will always make more money if you are college educated.
Like any good bubble, this belief– while rooted in truth– gets pushed to unhealthy levels. 

Thiel talks about consumption masquerading as investment during the housing bubble, as people would take out speculative interest-only loans to get a bigger house with a pool and tell themselves they were being frugal and saving for retirement. Similarly, the idea that attending Harvard is all about learning? Yeah. No one pays a quarter of a million dollars just to read Chaucer. The implicit promise is that you work hard to get there, and then you are set for life.  It can lead to an unhealthy sense of entitlement. “It’s what you’ve been told all your life, and it’s how schools rationalize a quarter of a million dollars in debt,” Thiel says.

Thiel isn’t totally alone in the first part of his education bubble assertion. It used to be a given that a college education was always worth the investment– even if you had to take out student loans to get one. But over the last year, as unemployment hovers around double digits, the cost of universities soars and kids graduate and move back home with their parents, the once-heretical question of whether education is worth the exorbitant price has started to be re-examined even by the most hard-core members of American intelligensia.

Making matters worse was a 2005 President George W. Bush decree that student loan debt is the one thing you can’t wriggle away from by declaring personal bankruptcy, says Thiel. “It’s actually worse than a bad mortgage,” he says. “You have to get rid of the future you wanted to pay off all the debt from the fancy school that was supposed to give you that future.”


At 4/14/2011 10:25 AM, Blogger Bill said...

Interesting piece. The Big Education is overdue for a correction in my view.

It should be noted though that student loans were non-dischargeable in bankruptcy before the 2005 bankruptcy law was signed by Bush. As I recall, the law was changed in 1998 to allow student loans to be discharged only with a showing by the Debtor that the repayment of them constituted an "undue hardship" (i.e. the Debtor was sick and unable to work).

At 4/14/2011 10:53 AM, Blogger Buddy R Pacifico said...

From Harvard College, Financial Aid Office:

"Can students really expect to graduate from Harvard with no debt now?

Yes. For the past decade, as we have increased our scholarship program, we have seen our median graduating student debt decline from over $16,000 to just $11,000 for the Class of 2010 with the number of students graduating with debt declining from 976 to 561. We are particularly pleased with this result because average debt upon graduation from private colleges nationally is close to $24,000."

So, apply to universities and colleges with generous endowments and gifts from public and private sources.

It would be great if, every college and university mission statement included the wording to "continously cut institutional costs".

At 4/14/2011 11:07 AM, Blogger morganovich said...

the college tuition bubble likely has a great deal to do with leverage.

when you introduce mortgages into a housing market for the first time, prices go up 3-400% in a few years. look at russia and lebanon for excellent recent examples.

this same thing happened in higher education. student loans become more available and government loans and loan guarantees became a major factor over this period. this caused precisely the same sort of price appreciation.

then, price hikes lead to well intentioned (but wrongheaded0 government subsidies and grant that just push prices up further.

this has some significant social effects. tuition at my alma mater is now over $51k a year. that is far beyond the reach of most middle class families, especially if they have multiple children.

if you are rich, you can go. if you are poor, you get scholarships or grants, but the middle class gets massive student loans. the more expensive it gets, the more grants for the poor, and the harder the door slams on the middle class.

not all can qualify and many just see $200k+ of debt at 22 to be too great a handicap.

thus, we see a barbelling of the student body - you get rich kids and poor kids, but no middle. this makes for a polarized campus and shuts middle class kids out of the best educational opportunities.

so, ironically, tuition grants for the poor are, in part, a direct cause of the middle class being unable to go to the best schools.

this is precisely the sort of distortion that the government never figures out. they keep adding more money for the poor, and driving the middle class further down all the while thinking they are helping.

At 4/14/2011 11:11 AM, Blogger morganovich said...


a few of the ivy leagues (harvard, princeton, yale i think) are now using a graduated tuition scale based on family income. this is indeed helping. that said, they did not come to it on their own. they were threatened with the loss of the tax advantaged status of their endowments if they didn't start using them to reduce tuition.

i applaud what they are doing and think it will also attract more applicants and up acceptance rates of those who are offered places, making the schools better.

unfortunately, it is an option available only to a few schools with large endowments. not many universities have the investment income to be able to run consistent operating deficits of that magnitude on a sustainable basis.

At 4/14/2011 11:15 AM, Blogger Buddy R Pacifico said...

morganovich, I agree with your comments and "barbelling" seems to be a growing problem.

At 4/14/2011 12:36 PM, Blogger Benjamin Cole said...

Any agency that operates away from the free market--colleges, social welfare, police departments, the military--becomes coprolitic.

I have yet to see an exception.

At 4/14/2011 6:43 PM, Anonymous Anonymous said...

Thiel seems to have the general problem with colleges figured out, unlike most people who don't have a clue, but what's he doing about it? Paying some students to take a couple years off? Like that's going to accomplish anything: the whole reason people don't normally do that is because of the risk, risk which he's taking away in his special program but which isn't broadly applicable for others who don't have such a benefactor.

If he actually wanted to do something, he'd kickstart online learning, so that people could actually learn online and get those tech jobs with online credentials, rather than needing the college credential to get a job. Of course, like all these business people who bitch and whine about the state of college education, they just go back to their companies and continue blindly throwing out all the resumes without college degrees listed on them. Business people like Thiel have all the power to get rid of the useless college credentials, but they do nothing about it because they are too lazy to create the alternative: online learning. That will have to wait for some real entrepreneur to do it.

At 4/14/2011 7:50 PM, Blogger bix1951 said...

isn't it obvious by now that there was no housing bubble.
Calling it a bubble is part of the big lie.
The problem was with the lax financing. Bubbles are when prices move up much more sharply than housing ever did.
This chart tells the story that housing was not a bubble.
100% leverage done us in.

At 4/14/2011 7:53 PM, Blogger bix1951 said...

"so, ironically, tuition grants for the poor are, in part, a direct cause of the middle class being unable to go to the best schools."

I agree, I am sending my kids to UC.
Can't afford the private schools any more. Don't qualify for any assistance.

At 4/15/2011 10:59 AM, Blogger morganovich said...


i think you are making some very questionable claims about the housing bubble.

average US housing prices went up over 73% in less than a decade with accelerating gains at the top just before a huge blow off.

in key markets, the gains were at least twice that and the losses have been severe.

at the top, buying was based on greater fool assumptions, not economic factors such as price to rental income ratios.

that's pretty much the definition of a bubble.

i think you are just letting the scaling on that chart fool you.


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