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A fellowship pays students who are entrepreneurial minded to drop out of college and the founder of this fellowship is PayPal founder Peter Thiel. Thiel says that our economy is all set to reel under another bubble burst soon – the higher education bubble.

He says that students carry too much debt load as costs of tuition are very high. The fact that rewards are overrated does not help at all. To add salt to the wound, politicians are striving hard to expand higher education supply just as they did with affordable housing supply and there is no way we can all escape the impending disaster.

Thiel is not alone in this theory. There is talk of a bubble burst by many skeptics and critics. But don’t you think these are just hyperventilated hypothesis based on insufficient evidence? They definitely look like sensational ideas that could sell a magazine through good publicity.

According to a Bubble definition by Charles Kindleberger, a bubble is a continuous rise in price of assets. Here new buyers are attracted by the initial rise that fuels further price rise. This method is used by speculators who are looking to make profit from asset trading. Financial crisis inevitably results from such a situation where there is a sharp decline due to reversal of expectations.

Coming to context, do you think investors are so gullible that they will purchase college training as they would an upscale townhouse? A life time of potential higher earnings in fact are accrued as the monetary value of education. Bubble analogy is indeed being oversold by sensationalists.
Analyzing the trend further, bubble is when an upward price spiral arises from rising demand.

However, higher cost per student is not the result of fuelling demand for college level training. For examples, most of the colleges need not necessarily add 5% to the cost as they take in 5% more students.

Cost per student will in fact be greatly reduced in colleges that have excess faculty members and facilities if they doubled student size. You may wonder why small colleges remain small throughout. Well this is essentially because they feel that their campuses will be depersonalized and the quality of education will suffer if they take in more students.

Supply of seats in higher education is elastic as we have seen. This refutes the idea that price is pushed up by rising demand in universities and colleges based on the assumption that number of seats are static. Maybe in universities such as Princeton and Stanford, you may find that the number of seats is indeed static but the bubble story is not about the tiny fraction of elite institutions. If it is, then it certainly is not relevant in terms of policy.

So, what exactly is driving the college tuition up if it is not the rising demands? One of the reasons could be the rising cost of employing qualified and quality faculty. Productivity of the said educated workforce has not increased in proportion with the rising cost.

There is no clear method by which universities can double size of classes without reducing on quality. They are therefore forced to adopt new approaches such as distance learning, which has not really helped to a great extent till now. Filtration of newer technology has again increased costs of higher education.

So, I think it is time to stop sensationalizing the issue with Bubble talk and take concrete measures to address the situation in a realistic manner.