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Editor's Note

A Very Bumpy Ride

University Business, Jul 2008

AS I WRITE THIS, OIL IS AT $135 A BARREL; gas pump prices have topped $4 almost everywhere. Some airlines are charging a $15 fee for the first checked bag-on top of a $25 fee for checking a second bag-to help offset fuel costs. The price to feed a family of four averages about $908 a month, according to the USDA, up $80 in just two years. The housing market continues its collapse, with foreclosure rates up 48 percent from this time last year.

In his June 7 column, <em>Washington Post</em> business columnist Steven Pearlstein tried to put it all in perspective.

"Fundamentally, they are all part of the same story-the story of the global economy purging itself of large and unsustainable imbalances that for a time allowed many Americans to think they were richer than they really were," Pearlstein wrote.

Mixed in the middle of that mess, of course, is college tuition.

A new report called "A Tuition Bubble?" by the Center for College Affordability and Productivity ( warns that college tuitions are following a dangerously similar pattern to the housing crisis. College tuition has risen at a record-breaking rate since 2001. As with the housing crisis, economists say tuition costs are driven in part by artificially low interest rates and a lack of lending standards.

The problem is that bubbles tend to burst. And they can be very messy when they do.

"Part of the problem is that public policy attempts to subsidize attendance for too many students on the assumption that this will increase access to higher education," writes Andrew Gillen, the report's author. "These subsidies, intended to make college more affordable, are ineffective because schools maximize prestige rather than profit, and because the lack of any measure of their output rules out normal price competition. These characteristics imply that subsidies will not lower the financial burden of higher education for students, as colleges and universities raise prices to exploit the increased ability to pay that the subsidies bring about."

Gillen maintains that these government subsidies, intended to increase access, have instead "encouraged" schools to raise prices more than they otherwise could, creating a vicious cycle. "By encouraging prices to rise more than they otherwise would, policymakers are fostering a tuition bubble," he writes.

The problem is that bubbles tend to burst. And they can be very messy when they do.

What will happen when the tuition bubble bursts? Independent schools that are largely tuition driven might be forced to close their doors. Even more financially stable institutions will have to dramatically rethink their approach to attracting topnotch students, if fewer students are able to pay higher tuition costs. And, with students graduating with ever-greater debt (the class of 2006 averaged $21,100, according to the Project on Student Debt), many prospective students might think twice about ever going to college at all.

Economists had warned about the impending housing crisis for a number of years, yet little was done to forestall it. With many signs pointing to tuition prices following a similar path, we can't ignore the warnings again. Lawmakers and the higher ed community need to work together quickly to correct what is clearly an unsustainable trend. If, as Pearlstein says, the global economy is purging itself of large and unsustainable imbalances, higher education may be in for a very bumpy ride.

Write to Tim Goral at