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Public Affairs Forum


The Higher Education Bubble

Public Affairs Forum

March 13, 2013

An interview with Glenn Reynolds, Beauchamp Brogan Distinguished Professor of Law, University of Tennessee

Paula Tkac: Thank you for joining us for another Public Affairs Forum. I'm here today with Glenn Reynolds, professor of law at the University of Tennessee. Welcome.

Glenn Reynolds: Thanks for having me.

Tkac: Pleasure. So first, why don't you give us a brief description of what the higher education bubble is, in your view.

Photo of Glenn ReynoldsReynolds: College tuitions have been rising at a rate that vastly exceeds the rise in family income, or the general rise in consumer price index, or pretty much any general economic measure you want to choose. As they've done that, people have made up the difference with debt. Now they've done that because they feel that the college degrees will pay back enough in increased earnings to make taking on the debt worthwhile. The problem is the debt keeps getting bigger because the tuition keeps going up at a really colossal rate. And as a result, everything's out of whack now. And many people are graduating; they're unable to get jobs that let them pay off the debt. This mismatch between what it costs and what the return on investment is likely to be is the bubble.

Tkac: So we talk about bubbles, inevitably, we end up talking about bubbles bursting. And I think it's the case that the system of legal education is kind of leading the way on a bubble bursting.

Reynolds: Right now there are jobs for about half the people who graduate from law school in America. And right now there are lots of students graduating. I mean, there are a lot of law schools where the average student debt on graduation is $150,000 or thereabouts. And that's just law school debt in addition to whatever undergraduate debt they had. And the problem is a lot of those people can't get jobs.

Now what's happened is, people have caught on, and so now law school enrollments are dropping, and they've dropped very substantially. They've dropped in the neighborhood of 25 percent for the last two years, and were down from a peak of about 600,000 people applying to law school to this year just over 300,000. So it's almost half.

When the enrollment drops, you're left with a choice. You can either shrink your class size or you can relax the standards for students you admit. In the Wall Street Journal today they reported Northwestern is shrinking its class size. And a lot of people thought that those top-tier schools were immune—the top 10 or 15. But they're not, because even their students are having trouble getting jobs.

Tkac: If I look at the wage premiums, the difference in wages between people who go to college and people who only have a high school degree, the raw numbers still look pretty stable over the last 10 years, still about 80 percent. And then, the public perception and certainly the rhetoric around policy is such that going to college is a necessity. I found one quote from the Georgetown University Center on Education and the Workforce and it says, "Postsecondary education...is no longer the preferred pathway to the middle-class jobs—it is, increasingly, the only pathway." So in terms of market discipline helping to burst this bubble, are people going to overcome that with respect to college?

Reynolds: Yeah, but college will be slower than graduate education because people see it as less optional. And I have to say the main reason they see it as less optional is as a prestige good, as a marker. Going to college marks you as a member of the middle class. You can be a member of the middle class if you don't go to college, but it's iffy. You really can't be a member of the upper middle class if you don't go to college, no matter how much money you'll make. Now I notice my daughter's age group. They see a lot of older brothers, older cousins, older brothers of friends who are out of college and living in their parents' basement and have student loan debt. And I think the prestige value of college is going to go down when it becomes associated with that sort of thing.

Tkac: So once the market discipline starts to show up, whether it's in law schools or colleges in general, you're going to see colleges adapt to that. Just like you've said, law schools have reduced their class sizes and they're attempting to try to cut costs in the ways that they can. So what are their options in term of adjusting to this to somehow keep themselves alive?

Reynolds: Well, ultimately it's not just a price problem; it's a value problem. And the reason why there is a problem is that when you get out of college or you get out of law school, you don't get a job that makes enough money to pay off this debt reliably. But what you can do is cut the cost [of college]. And you know college costs a lot more than it cost 20 or 30 years ago. But the value isn't any better.

Tkac: As a tuition-paying parent, that doesn't make me real happy. I'm confident my daughter is gaining lots of skills.

Reynolds: Twenty years ago, 30 years ago, 40 years ago, when college was cheap, you could tell somebody, "You know what? Pay your way through college by waiting tables or by a modest allowance from Daddy. Party for four years or study something you like really intensely even if it's got no real economic value, and it really doesn't matter." But when you're going to graduate and you're going to owe $100,000, $150,000, $250,000, it really matters. Now you have to view it like an investment. And people get mad at me for saying this. You know, I'm some kind of philistine, you know, they say, "College should all be about learning, it should be about improving your mind, it should be about the college experience." But if it's about all those things, it's not an investment, it's a consumption good.

Tkac: If I ask you to predict for me what you think the landscape of higher education is going to look like in, say, 2030....

Reynolds: One thing that online education does is teaches people skills. And you can criticize that and say, for example, you can go to Udacity and learn calculus or computer programming for free and actually get a pretty good education in that. And you can get a certificate and that's, I think, going to morph into getting something that looks a lot more like a diploma. And you will have a skill. And I think that's very useful. And people will respond, "Well you've got a skill but you haven't had an education." And that's a legitimate critique. But, on the other hand, you also don't have grinding poverty and debt. And if you think it's that important for people to get educations that are sort of broadening, you need to find a way to get somebody a rigorous humanities education that doesn't leave them a broke Starbucks barista forever.

Tkac: Now are we seeing college students make different choices, given this ROI [return on investment] proposition with which they're now dealt?

Reynolds: Yeah.

Tkac: Are they basically, they aren't not going to college, so that discipline's not there. But when they go there, they are going to attempt to use that college experience to get as much value as they can out of it.

Reynolds: First, I do think you see college students becoming more cost conscious than they were a few years ago. They're focusing on majors that seem more likely to earn them money, and I think that's good and bad. I think it's fine for people to study engineering, but I think people are enthusiastic about it partly because they see it as being rigorous where the humanities have lost some of their rigor. And right now it's good to be an engineer, but you can't predict that four years from now there are going to be a lot of jobs for engineers.

Tkac: Do you think we're going to see small liberal arts colleges, you know, their numbers decline?

Reynolds: I actually think that there'll be a shakeout with small liberal arts colleges. But I think good ones will have a real advantage because they do a lot of real teaching. If I'm going to send my kid to a school where they are going to take lecture classes with 300 people and a TA [teaching assistant] who barely speaks English, to me online education looks like a pretty good alternative to that.

Whereas if I'm going to send them to a small liberal arts college where the professors all know their name and they sit out in the lawn in groups of 12 talking about Chaucer, maybe that seems like it's worth the money to me. I think branding is going to be really important. And I think that the people at the places like Harvard and MIT and Cal know this because they moved so rapidly into the online courses.

Tkac: This has been a very interesting conversation. Thanks again, Glenn, for joining us.

Reynolds: Thanks for having me.