The bubble is about to burst 

It’s a story of an industry that may sound familiar.

The buyers think what they’re buying will appreciate in value, making them rich in the future. The product grows more and more elaborate, and more and more expensive, but the expense is offset by cheap credit provided by sellers eager to encourage buyers to buy.

Buyers see that everyone else is taking on mounds of debt, making them more comfortable when they do so themselves. Everything continues smoothly until, at some point, it doesn’t.

Yes, this sounds like the housing bubble, but I’m afraid it’s also sounding a lot like a still-inflating higher-education bubble. And despite (or because of) the fact that my day job involves higher education, I think it’s better for us to face up to what’s going on before the bubble bursts.

College has become a lot more expensive. According to a recent Money magazine report, “After adjusting for financial aid, the amount families pay for college has skyrocketed 439 percent since 1982.”

Consumers would balk, except for two things.

First, cheap and readily available credit has let people borrow to finance education. They’re willing to do so because of (1) consumer ignorance, as students (and, often, their parents) don’t fully grasp just how harsh the impact of loan payments will be after graduation; and (2) a belief that, whatever the cost, a college education is a necessary ticket to future prosperity.

Bubbles burst when there are no longer enough excessively optimistic and ignorant folks to fuel them. And there are signs that this is beginning to happen.

Loan demand, according to a recent report in The Washington Post, is going soft, and students are expressing a willingness to go to a cheaper school rather than run up debt. Things haven’t collapsed yet, but they’re looking shakier — kind of like the housing market in 2007.

So what happens if the bubble bursts? Will it be a tragedy, with millions of Americans losing their path to higher-paying jobs? Maybe not. College is often described as a path to prosperity, but is it? A college education can help people make more money in three ways.

First, it may actually make them more economically productive by teaching them skills valued in the workplace.

Second, it may provide a credential that employers want, not because it represents actual skills, but because it’s a weeding tool.

And third, a college degree — at least an elite one — may hook up its holder with a useful social network that can provide jobs and opportunities in the future.

While an individual might rationally pursue all three of these, only the first one — actual, added skills — produces a net benefit for society.

Yet, today’s college education system seems to be in the business of selling parts two and three to a much greater degree than part one, along with selling the even-harder-to-quantify “college experience.”

Post-bubble, perhaps students — and employers, not to mention parents and lenders — will focus instead on education that fosters economic value. And that’s likely to press colleges to focus more on providing useful majors.

My question is whether traditional academic institutions will be able to keep up with the times, or whether — as Anya Kamenetz suggests in her new book, “DIY U” — the real pioneering will be in online education and the work of “edupunks” who are interested in finding new ways of teaching and learning.

I’m betting on the latter. Industries seldom reform themselves, and real competition usually comes from the outside. Keep your eyes open — and if you’re planning on applying to college, watch out for those student loans.

Examiner contributor Glenn Harlan Reynolds hosts “InstaVision” on PJTV.com and blogs at www.instapundit.com. He’s a professor of law at the University of Tennessee.

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