For years, economists used to be in denial about the existence (or even the possibility) of bubbles. But then the dot-com market collapsed in 2000, the same happened to the housing market in 2008, and all of a sudden everyone has become too aware of this concept, used to describe an asset that is irrationally and artificially overvalued and cannot be sustained.
In such a climate, many believe that the next bubble to burst will be the higher education one. According to the supporters of this theory, there is a speculative boom phenomenon in the field of higher education, particularly in the United States, and this hypothesis is not as implausible as it may seem at first, as Joseph Marr Cronin and Howard E. Horton have shown by pointing out some early warnings:
Over the past 25 years, average college tuition and fees have risen by 440 percent — more than four times the rate of inflation.
Meanwhile, the middle class, which has paid for higher education in the past mainly by taking out loans, may now be precluded from doing so as the private student-loan market has all but dried up. In addition, endowment cushions that allowed colleges to engage in steep tuition discounting are gone. Declines in housing valuations are making it difficult for families to rely on home-equity loans for college financing. Even when the equity is there, parents are reluctant to further leverage themselves into a future where job security is uncertain.
This combination of rising tuition costs, with decreasing rate of return to a college degree and high unemployment rate, increases the threat of default in the student loan market which leads many to compare this scenario to the housing bubble and the sub-prime crisis. However, while this analogy may be tempting, it is probably defective and misleading. Higher education is an intangible asset that cannot be resold and therefore the collapse in the value of existing degrees is unlikely to occur. Moreover, there is a permanent and measurable difference in earnings for college graduates, who are also less likely to be unemployed, and even though the student debt load has dramatically increased, student loan default rates have declined since the 1990s. Furthermore, unlike subsidized loans for housing, there is a real externality that justifies continued federal presence in the student loan market, which ensures that credit to students will continue to exist.
On the other side of this story, we find Peter Thiel, mostly known for his spectacular reputation of identifying bubbles. For him, education is a classic one (“probably the only candidate left for a bubble in the developed world”), as it fills the two pre requisites for something to be considered as such: it is extremely overpriced (tuition costs are too high, debt loads are too onerous, and there is mounting evidence that the rewards are over-rated) and there is an intense belief in it. Moreover, he believes that, as the Great Recession of 2008 came to show, it is already at a point where it is very close to unraveling.
If Peter Thiel is right, and this bubble actually exists, is there anything universities can do to keep it from bursting? Fortunately, yes. According to Cronin and Horton, universities can look for more efficiency and other sources of tuition, for instance, by adopting the year-round university method, which can potentially increase the offer of education without increasing tuition costs, and/or by using technology to achieve productivity gains.
These authors also point out that some other forces already at work might help save higher education in the US, mainly the respect that the rest of the world has gained for American higher education. According to them, the families of international students usually pay in full and the number of international students could rise from 600,000 to a million a year if visa reviews are expedited.
However, after the recent Boston bombing attack, the Obama Administration has decided to tighten student visa rules. The Department of Homeland Security has ordered border agents to check the visa status of every student and the approval of new visas is likely to get tougher. If this leads overseas enrollments in American colleges to start falling abruptly, can this be the needle that will burst the higher education bubble? I’m not sure, but just in case I think I’ll postpone my PhD for a while.
Ana Lemos Gomes
 Joseph Marr Cronin is the former Massachusetts secretary of educational affairs and Howard E. Horton is the president of New England College of Business and Finance.
 Peter Thiel is the co-founder of PayPal and the venture capitalist who gave Facebook the investment it needed to really launch. He has a long history of identifying bubbles: in March 2000, against everybody’s advice, he invested in PayPal when the market valued it at only $500m, on the ground that the dotcom bubble was about to burst; he refused to buy property until recently, figuring that the dotcom bubble had simply shifted to housing and the hedge fund he presides, Clarium Capital, made extravagant gains by betting against the housing market in 2007. Most recently, he created the Thiel Fellowship, which selects 20 college students under the age of 20 and pays them $100,000 each to drop out of college and embark on entrepreneurial careers (i.e., start their own company).