The Higher Education Bubble

How universities are struggling to serve their core functions

Universities are struggling in each of their core missions—in preparing students for the workforce (via education & filtering), in forming better citizens, and in pursuing knowledge above all. They’re also in financial trouble.

Let’s first consider the financial situation. Education costs have increased by 300% since 1980: Wildly bloated administrations. Egregiously overbuilt sports programs. It’s unclear quality has gone up at all—and students are left carrying the bags. In 2000, college debt in the U.S. totaled $300 billion; It’s now ~$1.7 trillion. In 2005, student debt became non-dischargeable in bankruptcy. If you don’t pay off your student loans by the time you’re 65, the government will garner your social security.

The societal cost of this debt is hard to quantify: how many people can’t take entrepreneurial risks because of debt? If you’re six figures in debt right out of college, you’ll likely be pushed into high-paying, uncreative professions instead of trying to create the next big startup. And that’s if you’re lucky! If you’re unlucky, your expertise in Chaucer nets you a job as a barista.

Colleges haven’t been merely facing a financial crisis, they’ve also been facing a credibility crisis.

Colleges haven’t been adequately preparing students for the job markets, and bootcamp companies like Lambda School and Silicon Valley Academy are unbundling technical training across multiple verticals. This is bad news for universities, since it’s widely known that technical degrees are worth much more than non-technical degrees. If the technical degrees get unbundled, well, there goes most of the university’s economic value.

Colleges aren’t merely struggling to prepare students for the job markets, they’re also getting worse at filtering talent for prospective employers. Eliminating standardized testing will dilute the power of the credential. To an employer, what does it even mean to get into college anymore? What does it mean to graduate? 

It’s unfortunate: relative to grades, SATs were an equalizer. People had access to different preparation resources, sure, but people still took the same test. Whereas for grades, there’s little signal there because every high school is different, which means the application process becomes much more politicized.  

Colleges aren’t only struggling to serve their economic role, they’re also failing at their core mission: pursue truth and knowledge above all. Jonathan Haidt started Heterodox Academy because he noticed creeping ideological uniformity in our universities, many of whom are prioritizing activism above truth. In the past, universities were havens away from religious activism, literal safe spaces where people could pursue knowledge in peace, free from religious & political considerations threatening their job security. Many professors report that this is no longer the case. That’s not to say activism isn’t important or edifying, it’s to say that colleges should explicitly rank order their priorities: Truth or Activism?

With rising costs and stagnating performance, you’d think there’d be emergent university competitors. Tech companies like Google and Facebook are sometimes referred to as monopolies, but their respective reigns usually end every few decades. In education however, the top universities have remained the same for *centuries* without new entrants posing much of a threat. 

Why is this? Universities are effectively government enforced monopolies, benefitting from tax exemption at the company and endowment level, federal funding for research, and federal subsidies for student loans. Becoming an accredited university is a painstaking process, and if your college doesn’t get accredited it can’t get the federal subsidies and tax exemptions, and thus can’t really compete.

This explains the lack of innovation: Why disrupt yourselves when no one else can disrupt you? 

And then there is also the threat of unhappy professors. Colleges are doing more and more teaching with adjuncts who get paid nothing and have no job security. What happens when professors have real alternatives, or are able to go D2C and decide to leave, the same way journalists have left places like The New York Times to go independent on Substack?

Colleges were facing these financial and credibility challenges before COVID-19. The pandemic has merely exacerbated these issues: Nobody can go to class, the dorms are emptied, and the borders are closed. The financial challenge here is that while many domestic students were on scholarships, international students were paying full-tuition and footing the bill. If some percentage of international students stop paying full-tuition, that creates a large hole in universities’ operating budget. University endowments are already overallocated to illiquid investments, so their only hope is a bailout. 

If college students are forced to stay at home for significantly longer, it'll be harder to obfuscate how overpriced many colleges are. Why are students paying so much for online education and network development they could have likely found better versions of for cheaper or even free?

Indeed, in a COVID world, the entire value proposition is at risk. Colleges haven't had to sell the actual skill value proposition before, because it's been bundled in with the rest of the experience (IRL friendships, networking, dating, coming-of-age, etc). And yet they're still charging the same full 4 year program w/ full tuition. Would you rather go into massive debt for four years of online streaming or pay zero debt for nine months of online streaming for the same outcome? Of course, COVID will end eventually, but a real reckoning might happen in the meantime. 

Over the last decade, many companies have tried to unbundle the university. MOOCS unbundled the education component, accelerators and fellowships unbundled the network component for certain careers, and companies like Github and Behance unbundled the credential for specific expertise areas.

But the college bundle has always more than the sum of its individual parts. In COVID era, colleges are forced to unbundle, so now college is competing with other unbundled alternatives. COVID may be temporary, but in the interim some other players may be able to come in and rebundle a strong alternative. 

To be sure, higher education isn’t dead. There are 4,000 colleges and universities. While the long-tail of non-differentiated universities will be in trouble over the next decade—expect many closures—the large public universities will be safe, and the elite universities will be fine. The smartest kids in the world will continue to flock to the most prestigious universities, and it makes sense for many of them to do so. Universities have network effects that are hard to beat, in spite of itself. 

But still. Even the elite universities’ best days are behind them. Alternatives will emerge, and while universities will maintain their cultural relevance, they'll lose their cultural dominance. They're like a tech incumbent harvesting what remains of its monopoly, but no longer innovating.

Indeed: Peter Thiel has been calling a bubble in higher education for over a decade. A bubble both in the sense that it’s wildly overpriced and that there are irrational psychosocial dynamics involved. I’ll summarize Peter’s perspective here:

Zooming out: What's the goal of higher ed? Is it an investment—job training? Is it a consumption decision—a 4 year party? Perhaps it’s more of an insurance policy, where it's not worth as much as people are paying for it, but people are scared of falling through the cracks in our society. And as the cracks get bigger, we pay more and more for insurance against it. 

The reality is that college is a crazy zero sum tournament in which what really matters is getting into the best schools, such that to many people a diploma from a third tier university is actually a negative signal.

College isn’t insurance—It’s a nightclub. If colleges were normal businesses, with the entire world clamoring to get in, they’d increase enrollment. If they’re offering a great product, more people should benefit from it. But not universities. Because it's not about learning, it's about status. Indeed: Colleges don’t gain their power from how many people benefit from it, they get their power from how many people can't benefit from it. We have a massive velvet rope with a long line of people trying to get in, and the more exclusive you make it, the more valuable it is...like a nightclub.

Colleges acting like nightclubs is ironic because learning itself is inherently positive-sum. If you learn something, you teach it to me, and then I know it — now we both know it. If we teach others, they know it and can teach others. It's unbounded. Universities aim to be positive sum in their rhetoric, but are zero sum in practice.

Education has become increasingly a status driven credential, where you simply get it in order to get other things. Everything is about extending optionality. And thus higher ed becomes a way to avoid thinking about the future. And that’s why we haven't thought about the future of what college should look like: We haven't been able to imagine better alternatives, which is why colleges can get away with endlessly raising the prices without significant pushback.

Peter has said that the universities face a crisis somewhat similar to that of the Catholic Church 500 years ago. The comparisons are stark: Runaway tuition costs are today’s runaway indulgences. The priestly class had tenure like professor class. Reverence is dogmatic, as in, without inquiry. Your salvation consists of getting a college diploma, if you don't, you'll go to hell (“Go to Yale or go to jail”). And there’s no salvation possible outside of the system, no reformation from within.

The message we need to send to students and educators today is the same as it was back then: Regardless of what you choose to do, you have to work out your salvation on your own. 

The first step is releasing some of the social pressure on people to go to universities. It simply no longer works for the vast majority of middle class students who are attending 2nd/3rd rate universities & amassing enormous amounts of debt. 

The next step is to build alternatives.

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Thanks for reading! If you have any feedback on these ideas, or requests for me to write about other topics, feel free to reply with thoughts.

Book of the week: Building the Intentional University, by Stephen Kosslyn. Also not a book, but SSC had a great graduation speech that’s appropriate for today’s newsletter. 

Podcast of the week: The Closing of The American Mind, which summarizes the classic book of the same name. The Unbundling of Higher Ed shows how sector-specific fellowships are unbundling college (We put out a feeler for a writing fellowship, fill this out for more info coming very soon).

Cosign of the week: Justin Murphy, a self-described “libertarian communist” who left academia to make a living going D2C. If it works out, it could inspire many others to do the same. He inspired this tweet and I had him on my podcast to discuss the unbundling of professorship.

Track of the week: New J. Cole

Until next week,

Erik