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The Coming Higher Education Bust: “Some Will Survive”

by John Rubino on March 1, 2013 · 20 comments

To understand how close many US universities are to catastrophic failure, let’s start with the story of Robert (not his real name, but all the rest is true).

He’s 19, a freshman at a state university, a smart kid with eclectic interests but no sense of what he wants to be when he grows up. His favorite class, which he had to battle to get into, is an upper-level creative writing seminar taught by a successful author in which six students, all serious about the subject, submit original work and critique it each week. He’s also taking “computer science as a career” taught by a disgruntled professor who shows lots of videos while never missing a chance to tell the class how little he cares about the subject, and weight lifting, which operates on the honor system; Robert promises to lift weights and the school promises to give him an A.

What’s notable about this menu is that the two fluff courses cost the same as the much more serious and harder-to-duplicate creative writing seminar. Robert’s parents, appalled by the difference between his tuition bills and theirs of two decades ago, are aware of the varying amounts of quality and value they’re getting for the big checks they’re writing. And they’re responding like consumers. They’re looking into local community colleges that offer intro courses in core requirements like psych and sociology for much less, with the resulting credits being transferable to most four-year colleges. They’re researching online schools that also offer cheap, transferable credits for low-level coursework taken from home. And they’ve signed Robert up for an online “health coaching” program that will make him a certified health coach (at worst a nice, unusual resume filler) while generating nearly a full year of credits that several colleges in the region will accept. The idea is for Robert to gobble up a bunch of cheap credits and then transfer to a four-year bricks-and-mortar university for his last couple of years, thus acquiring a degree from a name-brand school for far less than four years of full-price tuition.

Variations on Robert’s theme are happening everywhere, as a combination of technology and sticker shock leads increasingly well-informed parents and students to distinguish between the truly-valuable offerings of mainstream universities and commodity courses and activities that can be had elsewhere for a fraction of the price. The result: a tsunami of creative destruction is bearing down on US higher education.

Wired magazine recently interviewed author and consultant Clayton Christensen, who puts some theoretical meat on the bones of this assertion. In the first part of the interview he explains the concept of disruptive innovation, through which big, complacent organizations are crushed by smaller competitors making low-end, cheap products that gobble up markets from below. Think cheap Japanese cars destroying the US auto industry, steel mini-mills bankrupting Big Steel, and so on. Now it’s Big Education’s turn:

Clayton Christensen Wants to Transform Capitalism

Howe: If you had to list some industries right now that are either in a state of disruptive crisis or will be soon, what would they be?

Christensen: Journalism, certainly, and publishing broadly. Anything supported by advertising. That all of this is being disrupted is now beyond question. And then I think higher education is just on the edge of the crevasse. Generally, universities are doing very well financially, so they don’t feel from the data that their world is going to collapse. But I think even five years from now these enterprises are going to be in real trouble.

Howe: Why is higher education vulnerable?

Christensen: The availability of online learning. It will take root in its simplest applications, then just get better and better. You know, Harvard Business School doesn’t teach accounting anymore, because there’s a guy out of BYU whose online accounting course is so good. He is extraordinary, and our accounting faculty, on average, is average.

Howe: What happens to all our institutions of advanced learning?

Christensen: Some will survive. Most will evolve hybrid models, in which universities license some courses from an online provider like Coursera but then provide more-specialized courses in person.

“Some will survive”…that’s a nice, understated way of saying that many won’t survive. And those that don’t will be the ones that have spent fortunes on non-academic fluff like state-of-the-art rec centers and NFL-caliber football stadiums, while assigning grad students to teach amphitheater 101 classes – all while raising tuition by 10% a year to levels that force students to graduate with tens of thousands of dollars of debt and highly uncertain job prospects. Those schools will be caught between the best, truly-valuable universities and junior colleges, online classes and “alternative” programs with transferable credits. The space in between won’t generate enough revenue to support their bloated costs.

Academia will become an even tougher place for generic PhDs, while turning into a candy store for creative entrepreneurs. So whether this is a good or bad thing depends on where you are in the academic food chain. The typical history major from a mid-range school will be unemployed and default on his loans. The undistinguished academic administrator will be fired and, like a mediocre newspaper editor, find zero new openings available. Entrepreneurs with solutions to the problems of cost, access, and quality will be the Mark Zuckerbergs and Steve Jobs of the next decade. Kids with parents able to shop aggressively and creatively will get good, cheap educations.

In other words, capitalism will work its usual magic and when the dust clears US higher ed will have been transformed from dysfunctionally-overpriced  to consumer-driven, varied and highly-advanced. With a lot of pain and casualties along the way. To which parents like Robert’s would say, “bring it on, the sooner the better.”

  • Debtslave_0012397

    Nowhere is the tuition bubble more apparent than law school. The bubble will burst there first.

    • retired

      That sounds terrible,a world without hordes of lawyers?What was it that Shakespeare wanted to do with them?(Henry VI ?)

  • Debtslave_0012397
  • Bob

    The Larry Parks Show had an interesting recent interview on this topic.

  • Matchew T Cornpone

    Everything just mentioned in this article I true at face-value but there is catch not mentioned in which community colleges, junior colleges and other forms of alternative sources of higher education are battling with the state universities: state universities are refusing credits in any courses that are considered apart of a “college” within a university even if it is lower level courses and even if the state board agrees that the credits are transferable (think financial accounting 101 or criminal justice). The battle between there institutions in my own state is tightening.. Kids are getting screwed and it is a travesty. Higher education as a whole will bust soon as the prices will become so high that people will stop going; there will be massive defaults as the economy continues to collapse; and when it does collapse many businesses will feel the affects as many students are consumers based off government loans and grants. If not by that mechanism then it will be by interest rate as the government will be unable to finance government loans and grants at such a rate. If people only understood how fictitious our economy is they would have panic attacks daily. Our economy is All based off federal deficits and inflation. Take the punch bowl away (QE) and watch the fireworks begin.

    • retired

      we

    • Dona Furiosa

      Matchew, your observations are excellent and complement the post very well. I teach in a community college. At one time, it was possible to confidently advise students that their English, Psych, Spanish or Chem 101 would transfer into four-year schools. But, as you say, four-year schools are accepting fewer and fewer of such credits.

      I think now of an institution in which I used to teach: Long Island University’s Brooklyn campus. They and St. John’s, both of which are private schools, have the only pharmacy programs in New York City. Students used to go to community colleges or City University schools, which were much less expensive, for two years. But now LIU (and, from what I understand, St.John’s) are taking few or no credits from students who want to transfer into their pharmacy programs.

    • http://twitter.com/pipefit Jason Emery

      Agree with Matthew. The actual deficit for fiscal year 2012, using GAAP accounting, was $6.9 trillion, according to John Willimas of shadowstats. Others have similar estimates. Imagine if a business tried to hide their fiscal position by not funding their retirement accounts, hiding stuff off balance sheet, not paying interest on past underfundings, etc.
      Brick and mortar universities are a massive part of our economy. Think of how many employees they have, and how much money they pour into their local economies. Also, with the housing bust and office and retail space glut, these universities are one of the few entities still building new towers. These are high paying jobs they create. One of the last vestiges of our dwindling middle class in this nation.

  • Dennis

    Another good article, condensed enough for a quick read and easily understood. Also, not a subject I’ve seen a lot of in MSM. More like a PBS story. Thanks John. Keep them coming.

  • Debter4life

    In addition to universities closing their doors, we will probably see many of them merging in attempts to eliminate competition. Naturally, they will become too big to fail.

    One example already: http://www.abajournal.com/news/article/plan_to_merge_rutgers_two_law_schools_would_end_competition_for_students_fa/

  • Mark

    One key change that is happening outside the USA is the growth of international competition via online universities. Asian students are ahead of the curve in utilising these, and at a fraction of the cost of studying in the USA.

    One option that will become more appealing is to gain a recognised degree online from a reputable university (eg New Zealand) whilst still living at home or working part time.

    Competition is not only from within national borders.

  • Makati1

    And when the whole financial system collapses, and it is going to, then what pieces will be left over? State and Local sponsored colleges are going to disappear. Some of the Ivy Leagues can survive on their financial cushions and donations from their wealthy graduates, but eventually even they will shrink down to a few and they will definitely be for the .01% with a million to blow on a 4 year education.

    On-line college? I doubt it. The sucker schools are killing on-line reputations and while the internet could/should be a way to educate everyone, it will eventually contract along with everything else. College degrees are going the way of the dodo. They have little value unless you are going to be a doctor, engineer, or scientist. Certainly the other ‘degrees’ mean little or nothing in today’s world.

    No, trade schools will come back as demand for plumbers, carpenters, electricians, etc. come back. Those are the trades that will last through the depression and contraction of the world economy. Doctors will always be needed, but engineers and scientists, not so much.

    • Jen

      I agree with this. I’ve read that apprenticing is coming back and there was a huge article on vocational education in my local power co-op magazine this month. The homeschooling graduate community has already been choosing these avenues over traditional 4 year schools in increasing numbers, and I think in a few years the public school kids will follow suit. I don’t think they will have any other choice, except perhaps the military.

      • PaperIsPoverty

        As a homeschooling parent, I agree– we’re increasingly choosing non-traditional routes instead of a 4-year college. It’s hard to justify paying tens of thousands of dollars a year for something that you’ve been doing yourself for the cost of books and materials. On a related note, homeschool graduates are far more likely to own their own businesses (not just my guess; based on data).

  • wickeddog

    How can the conclusion be so obviously wrong with all the facts available? The outcome will not be some magic better system, it will be the worst of both. The companies that offer the cheapest credits and the schools that make the most money on sports will do the best crushing the schools that offer good educations for value.

    • http://twitter.com/pipefit Jason Emery

      Also, the best party schools will outlast those not well known for imbibing. And with the job market in tatters, schools that are creative enough to offer ‘5 years for the price of 4′ might steal market share as well. What’s the hurry to leave, especially a good party school, lol?

  • debter324

    Law schools are resorting to new lows. They are creating law firms to boost their employment stats. http://www.nytimes.com/2013/03/08/education/law-schools-look-to-medical-education-model.html

    For decades, every law school has been reporting 90-99% employment 9 months after graduation (it gets much worse 2-3 years out). The reporting method was recently changed and it revealed around 55% employment 9 months after graduation. http://online.wsj.com/article/SB10001424052702304458604577486623469958142.html

    I wouldn’t be surprised if even this latter stat is manipulated.

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  • http://www.facebook.com/donald.gillies Donald William Gillies

    I was for a short time, a college professor (of EE), and I once met a student at kwiki mart who was one of our graduates, fully 40% of our graduates were unable to practice in their field, and it was terribly depressing.

    The US College educational system is becoming as uncompetitive as GM in the 1970’s. My father was in this business, in the golden years of the space race, at UIUC, and at that time, there was 1 administrator for every 10 faculty members on campus. Today, there are 10 administrators for every 10 faculty members, and the number of administrators continues to skyrocket.

    We are putting our kids into indentured servitude – a big reason why many young families are unable to buy homes, is because they still owe their livelihoods to their lords – their university presidents!!! They are still paying off those enormous loans! This must end, and very soon, because it’s making US technology businesses uncompetitive, too. They are responding by bringing in cheap foreign labor, which just lowers salaries for everyone and makes the domestic kids all the more screwed in paying back their loans …


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