Recently I read Jeremy Grantham’s Q3 letter (highly recommended read, link below) and it got me to thinking about something that, as a Level 3 candidate considering business school sometime within the next 3 years, is a very large concern of mine: Is an MBA a good investment? Whether or not you agree with Grantham’s assertion that the Fed’s excessively low interest rate policy over the last 15 years under Greenspan/Bernanke has been an active and knowing effort to manipulate asset prices in the face of recession, you no doubt can recognize that the unabated uptrend of education costs is very much like recent asset bubbles we have seen in the stock market and housing. Obviously education is not an asset in the same sense as a stock or a house because it has no liquid value. However, much like “good will” on a company’s balance sheet, education has an intrinsic value because it can enhance an individuals earning power (just discount the potential future cash flows). Therefore, any input costs to obtaining the intangible asset of education must also have a definable and calculable intrinsic value. The rise in education costs bear a striking resemblance to the housing bubble in that they seemingly never decline. Education costs have outpaced overall CPI cost of living by a factor of over 4 since 1985 (coincidentally around the time Greenspan took over at the Fed). Indeed this trend continues even today, as today’s issue of the WSJ reports in an article titled “Tuition, Pell Grants Rise in Tandem” that the cost of in-state 4 year institutions rose by 7.9% this year while private colleges increased by 4.5%. CPI is forecast to come in at, what, 1% this year? All in all a 6.9% and 3.5% real increase in undergrad tuition costs respectively. All of this in an environment where roughly 17% of kids age 20-24 are unemployed, according the BLS… and I would adjust those numbers way up considering it is the BLS. I’m not sure how closely increases in MBA tuition track with undergrad, but I do know that in terms of unemployment rates recent MBA grads are way worse— 10 to 15% for top-tier MBA programs and 30% or greater for mid-tier programs. If you adjust potential future earnings for graduates of either 4-year institutions or MBA programs by the probability of being unemployed and potentially unable to meet interest payments on student loans, the intrinsic value of an education has gone down over the last three years. This is especially true in the case of an MBA, where you have a fairly significant opportunity cost of foregoing a potentially sizable annual salary with your existing employer. Why then do tuition costs continue to rise at rates that massively outperform inflation? Supply vs. demand, you say? I realize supply of education is roughly fixed by definition (hard to build schools or to increase existing capacity) if you ignore worthless for-profit education from U of Phoenix and such. I also realize that demand may be increasing due to the public perception that if you can just get that extra piece of paper that you’ll be a much more attractive applicant for a job you don’t hate(I’m going to assume most MBA candidates are not satisfied with their job or career path ex-MBA). However, when you consider the fact that unsustainably low financing cost and government subsidizing have been blamed for the creation of a bubble in the housing, stock, and credit markets; why would the same not be true for education? The WSJ article I mentioned earlier also touches upon the fact that while tuition costs have increased, so has federal grant money (to the tune of 44% of all grants, up from 34% the prior year). On top of this I know for-profit universities stocks have been getting destroyed recently on news that many of the loans made to finance enrollment are exhibiting the same lapses in quality enforcement as subprime mortgages. The bottom line is that easy credit artificially stimulates asset prices among any asset that requires financing or can be bought on margin. As tuition has risen it has become increasingly financed with easy credit (thanks Alan & Ben!) and government subsidies (thanks Congress!). Education is as much a part of the American Dream as owning a house. If that’s the case, have the Fed and the government gone too far in allowing the cost (and the implied value) to lose touch with reality? Are tuition costs (and implied value) bound to experience a decline and if so, is an MBA at the current cost really a good investment? CFA costs way less, your employer will normally pay for it, and in many cases is viewed as a much better measure of industry specific knowledge… problem is I’m already far enough down the CFA road that I have to be considering my next investment in my own “good will”. Thoughts? Grantham’s letter: http://www.gmo.com/websitecontent/JGLetter_NightofLivingFed_3Q10.pdf
with three posts, i’m assuming you haven’t used the search function as of yet. the consensus on AF is generally stated as: top 20 MBAs should yield positive NPVs top 20-50 MBA should yield even to negative NPVs and UofP MBAs are essentially writeoffs and yes, government financing, a la Pell Grants and student loans from big banks are worse for the US economy than subprime lending in the LR. my opinion but I think its a simple conclusion. do we really need any liberal arts majors, considering the vast majority end up doing something completely unrelated to their studies? i’m sure you could also argue that the length of a respected undergraduate education (sciences, maths, business) is too much considering you learn so little of your actual topic (less engineering and computer science which is generally quite specialized).
to some degree education is an arms race IMO. the best jobs will be filled by the best people, but it’s a relative game. so if you think your chances of getting into a top position are enhanced by getting more education than the next guy, you go for it. problem is that everyone thinks that way, hence the arms race. Maybe people underestimate the competition they face, so they pour money into an education that doesn’t make them better than others on a relative basis. at the same time if you don’t get the education you risk falling behind. i don’t see how this cycle unwinds. just like steroids in baseball…
bubble pop? stra: -24% dv: -11%
You should read my shorting for-profit education thread.
I don’t know what the current statistics are, but as of 2004, only about 25% of the US population has a bachelors degree. Amongst those who grew up assuming they would go to college, this number generally comes as a shock that it is surprisingly low. Even if there has been a massive increase in the last 6 years, it’s still not going to push up the percentages to more than perhaps 30%, and even that is a stretch. Now take a look at the job prospects for those with and without college degrees. What’s happening is that the BA doesn’t give you as much benefit as before, but the lack of a BA will still screw you, unless you are an entrepreneur with a brilliant idea like MS-DOS. So, there is definitely demand for higher education. Most likely the form of delivery is going to have to change, and for-profit colleges are likely to be part of the solution. The residential 4-year college, as much as it is part of the popular imagination, is probably not going to be as important as it was. For profit education, though in its current incarnation it is not working, is likely to integrate itself into a model of continuous learning (similar to Kaplan/Schwesser or Becker/Stalla and the CFA).
bchadwick Wrote: ------------------------------------------------------- > So, there is definitely demand for higher > education. Most likely the form of delivery is > going to have to change, and for-profit colleges > are likely to be part of the solution. The > residential 4-year college, as much as it is part > of the popular imagination, is probably not going > to be as important as it was. For profit > education, though in its current incarnation it is > not working, is likely to integrate itself into a > model of continuous learning (similar to > Kaplan/Schwesser or Becker/Stalla and the CFA). disagree. some kid taking his BA online will not provide him with the same experience of living away from home, meeting new people, experiencing new things, making mistakes, etc etc. college/university is more about learning how to be an adult and think like an adult than what you actually learn. college/university is more about hazy, drunken philosophical and/or economic discussions that go past last call than what’s in your syllabus.
This won’t die, it will simply revert to the old system of being going-away camp for the wealthy who can afford a few years of partying and orgies on mom and dad’s dime in the name of higher education. The remainder will go to trade schools. So the real policy challenge is to make our trade schools more competitive and train for positions higher up in the value chain.
MattLikesAnalysis Wrote: ------------------------------------------------------- > bchadwick Wrote: > -------------------------------------------------- > ----- > > So, there is definitely demand for higher > > education. Most likely the form of delivery is > > going to have to change, and for-profit > colleges > > are likely to be part of the solution. The > > residential 4-year college, as much as it is > part > > of the popular imagination, is probably not > going > > to be as important as it was. For profit > > education, though in its current incarnation it > is > > not working, is likely to integrate itself into > a > > model of continuous learning (similar to > > Kaplan/Schwesser or Becker/Stalla and the CFA). > > disagree. some kid taking his BA online will not > provide him with the same experience of living > away from home, meeting new people, experiencing > new things, making mistakes, etc etc. > college/university is more about learning how to > be an adult and think like an adult than what you > actually learn. college/university is more about > hazy, drunken philosophical and/or economic > discussions that go past last call than what’s in > your syllabus. I think bchad isn’t saying necessarily that things will move online. But simply that non-4 year technical schools will rise. I kind of agree. A system that allows students to study a 2-3 year focused technical degree full or part time will surely prove much more efficient (and somewhat similar to the Indian model of secondary education if I’m not mistaken). That being said, to Matt’s point, I recently partied at a house party with kids from my hometown who went directly to warehouse / factory work after high school and don’t have college education. It was a mess, total amateur hour. Twenty four year olds throwing up and handling it poorly, kids needing babysat, drama all over the place, it was like they were all 18 year olds at a crappy house party. Not to mention the party was very lame despite the level of drunkenness. Took me like an hour before I finally put my finger on it and realized they’d never received an advanced degree in partying by moving away and going to university. From a mentality perspective, they lack broad awareness of society and thought processes outside of their home town. So yes, the 4 year university system does hold a place, although to Bchad’s point, it may diminish.
bchadwick Wrote: ------------------------------------------------------- > This won’t die, it will simply revert to the old > system of being going-away camp for the wealthy > who can afford a few years of partying and orgies > on mom and dad’s dime in the name of higher > education. The remainder will go to trade > schools. So the real policy challenge is to make > our trade schools more competitive and train for > positions higher up in the value chain. I disagree, IMHO the college system will become more of playground for “nerds” with only the brightest being accepted from around the world. So it will be all studying and no games. Oh of course there will be the very wealthy spoilt kids who will be at the bottom of every class. Very simililar to what happens in China and India.
It won’t change much from the way it is now. At the margin, fewer people will be willing or able to take on the massive student loans and will therefore be in increase in those starting at community college.