Is College Education Overpriced?

Peter Thiel- co-founder of Paypal- garnered plenty of headlines within the past few weeks with some comments on higher education. He believes that the cost of college is a bad investment proposition for many. His comments were featured in an interview with Sarah Lacy on techcrunch.com. He brings up a couple of issues that have been circulating in my head for a while. Those two issues:

1. MIT does an admirable thing by offering almost all of their courses online for free through MITOpenCourseWare. This is an unbelievable resource for those who have the motivation and intellectual capacity to pursue this. So you can receive an MIT education for free or you can spend around $250k to obtain a degree from MIT.

One of the points Thiel brings up is if schools like Harvard, MIT and Stanford are such difference makers for people, why don't we franchise them? Why do these schools insist on elitism?

One of the beliefs that I have had about college in general is that the actual education component is worth very little. Any individual can receive a fantastic education by reading and watching videos on their academic discipline of choice. The true value of college is the relationships you form. The network is where the value is.

I spent around $40k for a business degree at Baylor University in the late 80s/early 90s. The cost of a Baylor education has probably quadrupled since then. For me, the $40k was money well spent. The network of relationships has been worth a large multiple of that figure. But would it have been worth the money if I wasn't a business major? I have my doubts. Would it have been worth $160k as a liberal arts major? Hard to imagine that it would have been.

2. How much of the rapid rise in college tuition prices in the last 20 years has been due to easy access to loans? There are plenty of students who graduate from college with over $100k in loans to repay. Costs tend to escalate when you are spending other people's money. Most people don't think about the consequences. Mark Perry had a blog post highlighting similar problems with healthcare costs. Fifty years ago, health care costs were distributed around 45% out of pocket and 55% to insurance; employers; or government agencies. Today those numbers are 10% out of pocket and 90% other people's money. And we wonder why costs have escalated out of control.

The average student debt was around $8,000 in 1990. That had tripled to over $24,000 in 2009. That figure is higher for students graduating from a private university. And has escalated to over $100k average for students graduating from medical school. Without the leverage in the system (easy access to loans), prices of education would fall. Just as they have for houses in the last 3 years as the availability of credit has tightened.

Put me in the camp of believing that college costs are artificially inflated. This could be potentially good news for those who have younger kids. The prevailing opinion today is that college costs will continue to escalate. Just as that same opinion existed about housing four years ago. If sanity returns to the financing of education debt, you'll probably see costs fall just like the real estate market in recent years.

Ashley Hodge