Education Bubble Close to Bursting, says Early Facebook Inve

by Vault Education Editors | January 25, 2011

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Why all this doomsaying of late when talking about higher education? It probably comes from our increasing awareness that the American education sector is a bubble that's ready to burst. Hedge fund head Peter Thiel, who was an early investor in Facebook, and is a self-proclaimed staunch libertarian, has spoken on this before, and does so again in an interview with the National Review.

Education is a bubble in a classic sense. To call something a bubble, it must be overpriced and there must be an intense belief in it. Housing was a classic bubble, as were tech stocks in the ’90s, because they were both very overvalued, but there was an incredibly widespread belief that almost could not be questioned — you had to own a house in 2005, and you had to be in an equity-market index fund in 1999.

Thiel makes a number of excellent diagnostic and prescriptive remarks in the extended interview. He also understands well the problem of educational credentials as inadequate but necessary (barring changes in hiring policy) indicators of ability. Here is a summary recap of his comments on the education bubble.

The education bubble is worse than the housing bubble in some ways. Housing loans are typically non-recourse, so you can just leave the house; education loans are recourse and usually survive bankruptcy. If you take out big loans and college fails to provide value, then you've probably made a big mistake.

There was a lack of a counter-narrative. With the housing fiasco, at least the upper-middle class elites dissented to what the middle class were doing, Thiel says. Education has rarely been questioned, so the market will be more distorted than with housing.

College is sold as an investment, but it's often just consumption. "It was something about combining the investment decision and the consumption decision that made the housing thing so tricky to get a handle on—and I think that's also true of the college bubble."

Are colleges teaching or just scouting talent? Thiel suspects universities to be better at indentifying high-performers than actually educating them.

College has become a signaling mechanism. Universities, which were possibly too cheap in the 70s and 80s, became "these somewhat parasitic entities" that found a way to capture "most or all of the value" by providing that signaling mechanism.

We need to measure the returns with more specificity. The focus away from infrastructure toward higher gains on human capital was not accompanied by an equally strong focus on measuring the returns, which tend to be evaded.

Bring meritocracy back to government hiring. Pay grade is determined by your degree in the government sector, creating a competition for diplomas not merit. Thiel thinks that removing educational credentials as a government hiring criterion would be a good start and set a precedent that the private sector could follow.  

Lessen government subsidies of college loans. The government should not be guaranteeing student loans. Doing so has made what's going on with Sallie Mae analogous to what happened with Fannie Mae.

The burden of debt hinders human progress. Risk-taking is an important part of progress and having large amounts of debt limits people's risk-taking.

So, what does Thiel think people should consider before going to college or graduate school? One valuable mental exercise, he says, would be to evaluate the purpose of going to college, think on the teleology of education, something he didn't quite do before attending Stanford and Stanford Law.   

"When I look back on my own education"…"I don't have any big regrets about doing it. The costs have gone up way more, so it's trickier now. But if I had to do something over, I would try to think about it a lot more than I did at the time. Paradoxically, education has become a way to avoid thinking about your future. Instead of thinking about your future, you go to school and defer thinking about your life."

[via Andrew Sullivan]

[National Review]

Filed Under: Education

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