Which economic bubble will be next to burst?

By: Dave Roos

The Higher Education Bubble

Over the past 25 years, the average price of a four-year college education has risen 440 percent -- more than four times the rate of inflation [source: Cronin]. At the same time, more and more Americans have lined up to pay these skyrocketing tuitions. From 1987 to 1997, undergraduate college enrollment increased 14 percent. From 1997 to 2007, the increase was 26 percent [source: NCES].

But where is all of that tuition money coming from? The short answer is financial aid. The federal government offers both low-interest Stafford loans and Pell Grants, which do not have to be repaid. But even those loans and grants aren't enough to cover the four-year cost of tuition, books, room and board at four-year colleges: nearly $47,000 for public schools and $100,000 for private colleges and universities [source: Kristof]. Pell grants, for example, max out at $5,035 a year [source: Cronin].


For many students, the only option left is a private student loan. These loans are largely unregulated and carry much higher interest rates than Federal loans. In fact, commentator Kathy Kristof of Forbes magazine actually compares the tactics of private college lenders to those employed by the subprime lending market. Kristof accuses private lenders -- and college admissions offices -- of tricking naïve students into signing up for loans that they don't fully understand. Some of these loans have "teaser" interest rates that "adjust" after graduation to levels as high as 18 percent [source: Kristof]. Compare that to the highest Stafford loan rate of 6.8 percent [source: Stafford].

What this means is that millions of college students are entering an extremely tight job market saddled with tens of thousands of dollars in high-interest debt. That's not the way to start any career.

Even graduate and professional degree earners find themselves saddled with debt that they can't possibly repay. According to the Law School Admission Council, the average law school debt is $100,000 [source: LSAC]. Multiply that by a double-digit interest rate and that debt becomes very big, very fast.

There is evidence that the college enrollment bubble is already bursting. Two-thirds of private U.S. colleges expect lower enrollment in 2009 than 2008. They've been forced to freeze employee salaries and cut some benefits [sources: Hass and Fain].

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