ELIZANDRO: Bubble Burst

John Elizandro

Of the many causes of the current financial crisis, the most frequently cited is the subprime mortgage collapse.  In general, subprime mortgages are home loans banks probably shouldn’t have made to homebuyers who probably couldn’t afford them. The system worked as long as real-estate prices continued to rise. In the past, if homeowners needed to sell their homes, they were able to pay off the remainder of their mortgages with the profits from the sale of their homes. Of course, when the housing market tanked, many homeowners were left owing more money on their mortgage than their homes were worth. Under the weight of so much debt, many loan recipients were unable to make their payments and defaulted on their loans.

The debacle of the subprime mortgages is instructive.  As long as home values rose, the increasing amount of debt on homeowners was sustainable. But after the return on real estate investments dissipated, the entire house of cards collapsed.

With the economy slowing and job opportunities continuing to dry up, our generation may be ground zero for the next bubble to burst: college tuition.

Over the last 20 years, college tuition has increased on an average of twice the rate of inflation. The average amount of financial aid available to students, particularly scholarships and grants, has increased at a much slower rate. The inevitable result of this has been to drive college students to borrow more and more money to finance their education.

Today, the average debt of a college student is over $20,000 and rising. The flipside of this mountain of debt is the value of a college education. Today, a college degree is worth more than ever before, and over the course of their lifetimes, college graduates can expect to earn roughly twice what a non-college graduate will make.

Essentially, as long as the value of a college degree continues to rise, the increasing burden of debt on graduates is offset by the anticipated increase in earnings a college-educated worker can expect over the course of his career.

Currently, though, the economy continues to slow and the job market for college graduates is constricting. Not only are firms slashing positions, instituting hiring freezes and cutting back hours, but newly minted college grads will be trying to enter the workforce competing against the hundreds of thousands of employees in every field who have been laid off and who already possess valuable work experience.

In short, the prospects for a college graduate, at least in the near term, have dimmed significantly in light of an economy in recession. Can higher education tuition continue to increase at such phenomenal rates? If Americans fresh from graduation $20,000 or $30,000 in debt but jobless, begin to default on their debts, we could well see another “subprime mortgage”-like collapse, making it even harder for current students to finance their educations.

Marquee-name schools like Villanova will be somewhat insulated from the slowdown because of the high quality of education a Villanova graduate receives. This reputation among recruiters and headhunters will ensure that, even in a dwindling job market, graduates from Villanova and other top-tier schools are better-positioned to receive employment offers. Larger and less expensive public institutions should also survive the crisis because of the allure of their lower tuitions, but these state schools face other financial challenges as governments are forced to cut costs to compensate for lower tax revenue.

Most imperiled are the private, lower-ranked institutions that offer a less-highly regarded education and less name recognition for largely the same price as a school like Villanova or Georgetown. Prospective students at these second- and third-tiered colleges may opt to attend a much less costly public school if they decide the current economic malaise outweighs the benefits of enrolling at a private college.

As current students, we are fortunate for the resources and opportunities we have here at Villanova. But all of academia should be wary of the inevitable slowdown in higher education that will accompany the general economic recession.


John Elizandro is a freshman business major from Radnor, Pa. He can be reached at [email protected].