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Peter Thiel's College Bubble Theory Gains Few Believers

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NEW YORK -- The average college graduate leaves school with $24,000 in debt and one in 10 are unable to find work of any kind. By year's end, student loan debt is predicted to surpass the trillion dollar mark.

Since the Second World War, Americans have grown accustomed to taking on debt to finance their future. It was part of the mobility associated with the American Dream -- a college education, a job, a house.

Much like the housing bubble, when home buyers took on outsized mortgages they were either lured into or which they knew they could ill afford, all in the service of realizing the American Dream of homeownership, students today are struggling with piles of educational debt assumed in service of a similar goal -- the American Dream of a college education.

According to the College Board, 70 years ago there were 1.5 million students enrolled at American universities. By 2006, that figure had swelled to more than 20 million. Meanwhile, the cost of tuition has grown steadily higher. Over the past 25 years, college tuition and fees have risen three times as fast as individual family income. And over the past decade, tuition has increased at a rate of 5.6 percent per year beyond the rate of general inflation.

Recently, with tuition costs rising and debt levels increasing, the skepticism has reached a boiling point.

Amid this backdrop, a Silicon Valley-based venture capitalist named Peter Thiel has inserted himself in a debate about whether a college bubble exists.

Thiel, a co-founder of PayPal and an early investor in Facebook, created the Thiel Foundation, which last fall issued a radical declaration: It would give 20 people under the age of 20 $100,000 to drop out of school and become not just tech entrepreneurs, but world-changing visionaries.

Hundreds applied to be among the first 20 fellows; the winners will be announced during the second half of May.

Not unlike other foundations funded by one deep-pocketed source, Thiel uses it as a platform from which to espouse his particular worldview.

Namely, Thiel believes that a lack of innovation will result in long-term economic stagnation. He also argues that the housing bubble, which inflated the real estate market and sent prices soaring and finally crashing back to Earth, now threatens to dismantle higher education.

“A true bubble is when something is overvalued and intensely believed,” explained Thiel during a recent interview with TechCrunch. “Education may be the only thing people still believe in in the United States. To question education is really dangerous. It is the absolute taboo. It’s like telling the world there’s no Santa Claus.”

Thiel’s slant has infuriated some, and emboldened others. But is he right? 

Many scholars don’t buy the bubble theory as it concerns higher education.

“It’s not really a bubble and the main reason it’s not a bubble is because college isn’t a tradable commodity. You can’t flip a higher education,” said Fabio Rojas, a professor of sociology at Indiana University who studies higher education. “Also, unlike a house, once you have college debt, you can’t get rid of it by walking away or selling the underlying asset. You have to work it off.”

Mark Kantrowitz, who publishes Fastweb.com and FinAid.org, also sees but a superficial parallel between the housing and education bubble.

“A lot of people are saying there’s a big higher education bubble and that it’s going to burst,” said Kantrowitz. “And they’re just plain wrong.”

Kantrowitz worries not of one bubble bursting but of several smaller bubbles rupturing -- particularly in the increased amount of debt that students are willing to undertake in order to finance a dream school they can’t really afford.

“If you’re up to your eyebrows in debt and you borrow more than twice your starting salary, you’re at a very high risk of defaulting on your loans,” Kantrowitz said. Specifically, he advises that a graduate going into a field that pays a starting salary of $40,000 shouldn’t be taking out more than $40,000 in loans.

Despite unemployment rates that are twice the levels they were a few years ago, college graduates still fare better than high school graduates. Still, while many conclude that college is the best investment you can make, there are no guarantees on your return.

Frederick Hess, an education policy analyst at the American Enterprise Institute, cautions that a larger force may be at work. “We’re coming out of this incredibly privileged half-century. For better or worse, students can no longer spend a lot of money for four years of college and just assume that they’ll be entitled to start a comfortable, well-paying job. Those days may well be over.”

Pushing more and more graduates into a weak labor market isn’t the answer, either.

“If everyone went to college there’d be no rewards of going to college,” said Shamus Khan, a professor of sociology at Columbia University. “The universal push to college isn’t the answer if there aren’t enough jobs.”

But everyone dropping out of college also won't fix it. Khan sees Thiel’s argument as inherently elitist. For instance, for every tech entrepreneur who quit college and made millions of dollars, Khan can point to tens of millions who didn’t. “It’s a little fresh for those very, very wealthy people to say that college isn’t necessary when they’ve been part of the huge evisceration of the middle class.”

Anthony Carnevale, a professor and director of Georgetown University’s Center on Education and the Workforce, has heard this tune before. Specifically, he finds the college bubble theory particularly persuasive during periods of economic decline.

"It’s a bubble to the extent that during a recession when it rains hard enough and long enough that everyone’s going to get a little wet,” said Carnevale. He believes the length and depth of the current recession makes the notion that a college degree is essentially worthless all the more persuasive. “But higher education is still the best umbrella under which to wait out a storm, no matter how long the current storm lasts.”

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