Is Education the Next Market Bubble?

by Mark Wong on August 11, 2010 · 2 comments

in Career, GMAT, Personal Finance

I recently came across the above chart from Clusterstock’s Chart of the Day.  It shows the education “market” versus the rest of the market, during a period where we went through the worst financial crisis since the Great Depression.  The question proposed by this chart is same one that was asked about real estate many years ago:

Will the education market be the next bubble to burst?

Why it Won’t Be

Compared to the other markets in our economy, education sits on sacred ground.  Education will always be overvalued because of our culture.  While not all parents value education as much as they could, very few will ever say that education is a bad thing, even if the economics of it stop making sense.  We’ve all seen the bitter examples of someone spending hundreds of thousands of dollars to get a degree, ending up unemployed and in a huge amount of debt afterwards.  Despite this obvious risk, parents will still encourage their kids to get an education because the alternative, “don’t bother getting an education,” is likely much worse.

The recession might actually help the education field in the long run.  For any person out there who’s spent time looking for job, you’re fully aware that the job market is not efficient.  In a “cold call” environment, where you’re forced to distinguish your resume against the resumes of thousands of others, people need every single advantage they can get.  A degree, though it may not be practical or even relevant to your intended job, provides this edge.

With so many jobs lost, base salaries cut, and promotions deferred, everyone is looking for that additional edge to bring them to the next level in their career.  Getting a degree is the simplest way to do that and usually has the best return on investment.

Why it Might Be

It was only a few years ago that people said the real estate market was not bound to natural market principles.  Look what happened.  And in spite of the worst economic downturn since the Great Depression, tuition prices have continued to soar.

Doesn’t this market correction mean anything?  When you buy a house for a million dollars, wait two years, and can only sell it for half a million, it means you paid too much for your house and it was overvalued at the time of purchase.  When you pay $100,000 for an education, wait two years to get your degree, and can’t find a job, doesn’t it mean your degree was overvalued as well?  They’ll never admit it out of pride, but many times a degree can turn out to be a terrible investment.

This is not to say that spending generously on your education is necessarily a bad idea.  I’m just pointing out that there are so many examples where the “plan” linking education to career and professional growth does not succeed.  There are countless metrics showing how much more people with a degree earn than those without; that part is clear.  However, the correlation between the amount you spend and the amount you earn afterwards is definitely not as strong.  With these known inefficiencies,  you would think that prices would come down a bit.

The other major component that could bring down the education market is the implementation of online courses.  I’m not talking about the University of Phoenix.  While they are definitely the most popular online degree program, they obviously have accreditation issues.  No, I’m talking about large, accredited, and Ivy League schools who are starting to deliver their courses online.  While it’s definitely not the same experience, most schools don’t designate on your degree whether or not you took the “online” version.  And the benefit to the universities is that online courses are much cheaper to deliver.  You can enroll more students and not have to pay the costs of physical classrooms and facilities.  Assuming that the universities start to compete against each other, they would eventually have to lower their prices.

My Take

At the end of the day, most of us want to be considered “educated” within our population and there is nothing wrong with that.  Just note that getting a degree to improve your education is an investment and, like any other investment, carries a tangible risk.  Additionally, remember that an “education” and a “degree” are two different things.  There are numerous ways to develop a robust education without making a down payment to a university.

I personally don’t think the education market will ever crash and that it is one of those unique markets not bound to economic principles.  What do you think?

Image Source: Clusterstock.com

You can sign up for Clusterstock’s Chart of the Day email and get a cool graphic every business day.  I haven’t been spammed yet, so I’m pretty sure they’re legit.

{ 2 comments… read them below or add one }

ashleyNo Gravatar August 12, 2010 at 9:53 pm

interesting!

Online schoolsNo Gravatar August 12, 2010 at 11:27 pm

I agree with most of your comments, but I read something else very interesting on the BusinessAdminCollege online schools website. According to a US Department of Education Report, the Meta-Analysis and Review of Online Learning Studies, found that, “on average, students in online learning conditions performed better than those receiving face to face instruction.” So, while education is a good thing, we now have to worry about how we’re getting the education. It is much cheaper to get a degree online than attend an on-campus institution. I’m an advocate for more education- but the risk has to be reasonable. I don’t want more than 30 grand in debt for a bachelors degree! that’s just silly! With online schools, people can get a bachelor’s degree for half that!

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