Visualizing the U.S. Higher Education Bubble

Sep. 08, 2010 11:17 AM ET19 Comments

Is there really a bubble in US higher education?

Today, one way or another, we're going to find out! First, let's define just what a bubble is:

An economic bubble exists whenever the price of an asset that may be freely exchanged in a well-established market first soars then plummets over a sustained period of time at rates that are decoupled from the rate of growth of the income that might be realized from either owning or holding the asset.

Here, we'll consider the asset to be one year of college education at a four-year institution, whose price is given by the cost of tuition and any required fees for attendance.

The income that might otherwise be realized from either owning or holding the asset then actually turns out to be income itself! After all, the mostly likely alternative for an individual who might otherwise be in college is for them to be working instead. For our purposes, we'll use US median household income to represent this income that might otherwise be earned in our analysis.

We'll next determine if the changes in the average college tuition and required fees over time are decoupled from changes in median household income.

The chart below reveals what we find when we visually depict the level of average college tuition against median household income over the time from 1976 through 2008.

Nominal Average Annual Tuition and Required Fees vs Median Household Income in the United States, 1976 through 2008

(Click to enlarge)

We find that there is indeed a building bubble in US higher education, which we see is clearly represented by three separate periods in which the growth of tuition decoupled from the growth of US median income.

These periods of tuition inflation largely coincide with periods of recession or slow job growth in the United States, from 1990 to 1993, 2000 to 2004 and from 2007 to the present. That these distinct

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Ironman is the alias of the blogger at Political Calculations, a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics. We should acknowledge that Ironman is either formerly or currently, and quite possibly, simultaneously employed as some kind of engineer, researcher, analyst, rocket scientist, editor and perhaps as a teacher of some kind or another. The scary thing is that's not even close to being a full list of Ironman's professions and we should potentially acknowledge that Ironman may or may not be one person. We'll leave it to our readers to sort out which Ironman might behind any of the posts that do appear here or comments that appear elsewhere on the web!

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