Given new life by investor Peter Thiel, it is an idea that has been around since at least 2009 and this article in theChronicle of Higher Education. On the back of aprovocative discussion about the revenues needed to fund higher education in Colorado, I’ve been increasingly noticing a number of data points that seem to fit this hypothesis surprisingly well.

The most spectacular bubbles in recent years were the Internet (circa 2000) and housing (circa 2008). The hypothesis notes that bubbles such as these have certain qualities, among them: 1) everyone believes that the underlying value is both irrefutable and will continue to grow; 2) prices are rising exponentially faster than other goods or services; and 3) these prices are being met due in large part to the easy availability of capital (generally debt). To take these in turn:

That college is seen as inherently valuable is a truism.  Here is how Peter Thiel puts it:

“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.”

Bubble observers have heard this before — housing prices “always” go up (and owning a house is “always” good). Internet commerce, freed from the economics of retail stores, will enable unprecedented growth.   Does a dogmatic belief in the intrinsic value of a college degree make us unable to accurately assess what it is really worth?

Among those who think it might is Paul Krugman.  Part of the fidelity to a college education is the belief that the value of education will become increasingly important — that more and more jobs will require the basic reasoning and analytical skills which any college graduate should possess.  This is a universally accepted truth. Yet, as Krugman says, “what everyone knows is wrong:”

The belief that education is becoming ever more important rests on the plausible-sounding notion that advances in technology increase job opportunities for those who work with information — loosely speaking, that computers help those who work with their minds, while hurting those who work with their hands.

However, as Krugman points out, technology has progressed to a point where it is not just replacing menial labor, but a broad swath of middle-class, white-collar jobs that require cognitive abilities.  In contrast, Krugman notes:

Most of the manual labor still being done in our economy seems to be of the kind that’s hard to automate. […] Meanwhile, quite a lot of white-collar work currently carried out by well-educated, relatively well-paid workers may soon be computerized. Roombas are cute, but robot janitors are a long way off; computerized legal research and computer-aided medical diagnosis are already here.

Even accepting that college is valuable, it is clear that the specific value is awfully hard to quantify, which makes an accurate assessment problematic. That college graduates make more money and have more productive careers than non-graduates is undoubtedly true.  But it is not entirely clear that it is their years at college which enables this success. What one would like to see is a study that matches the success of college graduates with people who were admitted to college but chose not to go (or whom left voluntarily)  – admittedly a data set that is probably so small and self-selecting as to be virtually useless.

In lieu of such a control group, other attempts to measure the value of higher education are raising a lot of questions.  At least one book, which performed an analysis of more than 2,300 undergraduates at twenty-four institutions, found that “45 percent of these students demonstrate no significant improvement in a range of skills—including critical thinking, complex reasoning, and writing—during their first two years of college” and 36 percent showed no progress in four years.  To rub salt in the wound, there also seems increasing evidence that the prestige of elite colleges — and their accompanying higher price tag — make little difference. One pundit went so far as to make a lucid comparison between American universities today, and American car companies at their zenith, presaging a long and sordid decline.

While value resists measurement, cost does not.  College has a price, and there is no doubt that it and the rise of technology stocks and housing prices — albeit on shorter cycles — have a common trajectory. According to the National Center for Public Policy and Higher Education, over the last generation, average college tuition and fees have risen by 440 percent — more than four times the rate of inflation and almost twice the rate of medical care. In fact, if there is a broadly consumed service that has risen more in price than college over the same time period, I’m not aware of it. The impact is particularly disproportionate on students from low-income families, who are more likely to be the first member of their family to attend college, and often have the most to gain.

Now the standard reply to the current price tag is that higher education is charging what the market will bear.  Of course, that was the argument in other bubbles too.  What is also similar is the influx of cheap capital, which echos the previous bubbles of housing (mortgage debt) and technology companies (equity investments).  In this case, the market depends increasingly on student loans.

How do students and families afford the rising price of higher education? As I’ve written previously, and which is even more chilling with new data, student debt is dangerously high, approaching $1 trillion dollars.  As a 2006 report from the American Association of State Colleges and Universities (AASCU) states:

Students are deeper in debt today than ever before. Two out of three college students graduate with debt and the average borrower who graduates from a public[my emphasis] college owes $17,250 from student loans. Ten years ago, the average student borrower attending a public college or university graduated owing $8,000 from student loans (adjusted for inflation). […] The number of college graduates with at least $40,000 in student loan debt has increased 10–fold in the past decade.

Student loan default rates are also rising, and at the same time there will likely be less assistance available (both scholarships and financial aid).  And in much the same way that the housing bubble was partially funded by government-supported mortgages (Fannie Mae), student debt is often supported by, um, government-supported loans (Sallie Mae). And, much like housing, the debt burden seems particularly inappropriate for  those who can afford it least. The sames AASCU report notes that 20% of the students who drop out of college without a degree have accumulated debt in excess of $20,000. And one important distinction remains: unlike other debt, one can’t declare bankruptcy and walk away from college loans. This is debt that is with you for life, with all sorts of unhealthy implications.

So the primary components of a speculative bubble in higher education — a blinding belief in inherent virtue, rising prices, and increasing debt — seem to all be in place. But the main characteristic about bubbles, of course, is that they eventually pop.  So, is higher education due for a shock decline similar to housing prices and internet stocks?

Personally, I don’t think so, mostly for a simple reason: there is a lack of viable alternatives.  Housing bubble? You can rent instead of own.  Technology  bubble? You can do lots of things with your money besides buy shares of internet companies.  But what else would one suggest that a smart, ambitious, 18-year-old do if they are not going to attend college?  For better or worse, it’s simply hard to see large groups of students who have the option of going to college – even at an exorbitant cost – deciding they would rather do anything else.

And there are other perverse strengths to the college model.  Not the least is that it intentionally promotes both scarcity and elitism.  Pretty much any other organization that, as Harvard University did last year, denied 92% of willing applicants the privilege of paying tuition and board in excess of $45,000 a year would probably find a way to make a little more space available (which Harvard could clearly do without a degradation in quality).  And, as Tiger Moms everywhere know all too well, this elitism trickles down. The inherent belief of the value of a Ivy League or similar education is so entrenched in our collective thinking – even without much hard evidence in support — that even if demand somehow fell by 50% at the most prestigious schools they would still have far more applicants than spaces. It is hard to see a decline in all of higher ed, all at once (which is, of course, exactly what people said about the housing market).

But there is no doubt that even if the bubble does not pop, there are some segments where it is either going (or has already started) to deflate, and fast. One place is the Tier III private colleges that are both expensive and not very good, as their high price and questionable value is already driving students to state universities and community colleges.

Another place that will see a deflating bubble is likely to be specialized schools, with the first of these seems to already have felt some impact.  The New York Times recently did a remarkable piece that posits pretty clearly that for recent graduates, the value of a law degree is often not worth the crippling debt that many students took on (no matter how determined a spin law schools place on their employment statistics). And it is no coincidence that law school applications in 2011 were down 11.5%, to the lowest level since 2001. Clearly, unlike heading off to college, there are a number of attractive opportunities a young person might pursue instead of three years of paper chasing and incurring substantial debt.

All in all – and I don’t think there is a definitive answer here — it is a fascinating hypothesis, and it will bear watching to see if the three winds of value, price and debt continue to blow, increasing the tension on the surface area of higher education.

Lastly, as someone who spends more time thinking about K-12 than higher education, let me also say that I remain a fierce advocate of the option — if not the necessity — of college for every child.  It is one thing if, after reasoned consideration, a student elects not to attend a four-hear college to which she has been accepted; it is another thing altogether for a student to lack the basic academic skills that would permit them to attend, and graduate, from a quality, four-year college. For is not the idea and allure of college that may be out of balance, but only its actual application.