Sam Altman and College: Why the Bubble Refuses to Pop

The following Sam Altman tweets about college went hugely viral over the weekend:

It’s not collapsing though. People keep saying this, and it’s not true. I think people keep repeating this line despite it flying in the face of the obvious counterevidence, because they want it to be true. A system in which a very expensive piece of paper is a ticket to entry to the middle class, does seem inherently unfair or broken, but this is the world we live in.

I would argue that college–not civil rights, women entering the workforce, or contraceptives–was the greatest force of social change or had the most impact societally over the past 100 years.

The rise of the salaried ‘middle class professional’ is a major contributing factor to the division and culture wars we see today. As recently as the 50s-60s, there was much less of a social or wealth distinction between the educated vs. the uneducated. Starting in the 70s or so when college became vehicle for upward social and financial mobility, is when the split began. The GI Bill saw college become accessible to almost everyone, not just the wealthy. By the 80s, high-income professionals began pull way ahead of the rest of the country, especially compared to the unskilled masses. The individual expectation of going to college and the increased affordability of college meant more people with degrees, and hence more economic and social division. This division manifested itself in voting patterns, differences of social values, falling fertility rates and delayed family formation among the college educated, where people live, and so on.

Even today, the gap between college grads and everyone else keeps widening in terms of income and wealth.

As unfair it may be, the evidence still suggests college is a good deal:

1. College loan debt has lower interest rates, more forbearance options and payment plans compared to consumer debt, like credit card or car loan debt. Credit card debt has very high interest rates. There needs to be more outrage about that, not student loan debt, which comparably has better terms.

Despite the media doom and gloom, student loans are surprisingly cheap, and way cheaper than other forms of debt. For example, a $60,000 loan paid over 10 years with a 4.5% interest rate, which is typical, is only $600/month, which is minuscule compared to even non-STEM salaries.

2.Even adjusted for student loan debt and inflation, college grads today are earning more than than ever compared to non-grads, and compared to past college grads . The college wage premium is wider than ever and shows no signs of narrowing, even with Covid. This premium even applies to non-STEM fields and low-ranking colleges. The rise of online learning and remote learning has not put a dent in the premium.

This is not too surprising: college courses, especially in STEM, are more rigorous than online videos/courses; and second, college attendance confers other attributes beyond learning, like conscientiousness and maybe even conformity. Indeed, 60-70% of the adult population does not have a college degree. There is a huge potential pool of cheap, untapped labor right there. So why aren’t more companies biting? So there is some reason that cannot be explained by employers just willingly or voluntarily paying more money to hire college grads despite not getting any benefit.

3. The college wage premium is 2-fold: higher wages and then higher returns from investing said wages in rapidly appreciating assets like stocks and real estate. The post-2009 bull market is the biggest and longest ever, even adjusted for inflation, for both stocks and real estate. The fed is hellbent on making stocks go up as much as possible, by keeping rates rock bottom and raising them very, very gradually even as inflation rips higher. Most calculations of the college wage premium only look at wages and not returns from investing said wages in the stock market and or real estate.

4. Small biz has high start-up costs and a high failure rate. Sure, if you have rich parents or can get VC backing, maybe give entrepreneurship a shot, but for everyone else, a professional, high-paying job, like at a FANG company, offers a much more reliable, consistent way of making money. Or investing that $ in the stock market. And even many tech founders have college degrees. Dropouts like Bill Gates and Steve Jobs are more the exception than the norm. There many people who have made 7 or even 8 figures with the college-to-STEM-job route. The FIRE movement is full of such individuals who have amassed large nest eggs in their 20s and 30s by doing this. For these people at least, college was certainty a good deal.

5. High school grads may have a 4-year head start compared to college grads, but this is negated by a higher unemployment rate.

6. What about cost of living in Silicon Valley? That too is not such a big deal (for people in STEM at least). A simple calculation shows that a job that pays $200k still has plenty of discretionary income to invest with, after subtracting expenses. Rent is the biggest expense, but still very small relative to monthly wages for a tech job. Buying a home offers way better returns anyway, and is doable with six figure salary. You can buy a home with 5-15% down.

For example, the typical rent for a 2 bedroom apartment or house in the Bay Area is around $3,000/month, which does seem like a lot, but consider that a $200k/year job , after state and federal taxes, still leaves $126,000 left over. So subtracting $3,000/month for rent and $2,000/month for student loans, car, and other expenses, still leaves $54,000 remaining. I am also ignoring any bonusses, promotions, or stock options. Also, I am assuming a single person household; costs will obviously go up if children are involved.

Income taxes in the US are also surprisingly low, lower than most people expect when surveyed or revealed. Because of all the media hype and unending political rhetoric about raising taxes on the rich and ‘class warfare’, people may be inclined to overestimate how much taxes high income people pay. Or understandable naivete about how the progressive income tax system works (I too was guilty of this by massively overpaying a tax bill). It’s always funny when you read discussions online about taxes, and people just say “you have to subtract by 30-50%”. I’m like…um…unless you are making millions, that is a huge overestimation. Even for people who earn $200k/year, it’s much closer to 20% than 30-50%. I’m talking about the US here, not countries in Europe, where taxes are higher.

Politicians like AOC and Sanders do a lot of talking, but in the end are downright ineffectual when it comes to actually making the rich pay more.

Cancelling student debt is good if it’s tied to fixing the problem going forward, which means not offering it, or having the colleges be the guarantor, or ISAs, or something.

The problem is that 50% of students not finish college. They get all of the debt of having attended but none of the benefits of graduating. More effort needs to be made screening ppl who are unlikely to finish, as opposed to debt forgiveness. If anyone deserves to have debt forgiveness it’s dropouts, who were compelled to go to college but for whatever reason were not suited for it. Student loan forgiveness will not solve this problem. Even if dropouts have their debts forgiven, they should ideally be doing something else.

Overall, in explaining the refusal of the college bubble to burst in spite of endless predictions or anticipation since the early 2010s of such, we have to accept the fact that college is just another consumer good/service, albeit a very expensive one. So provided that employers and students mutually derive some sort of benefit (higher wages for graduates, better employees from the perspective of employers), nothing can or will change.

If enough employers were to come to sudden and collective realization that they are overpaying for college-educated employees, the premium would shrink, and hence college attendance, tuition, and debt would fall. Given that a few pennies in terms of earnings per share can make the difference between a stock surging on earnings or crashing, is a very good incentive to keep costs low.

So the problem would fix itself, instead of having to constantly hope or wish for the problem to go away. No one talks about a ‘Beanie Baby bubble’ anymore because the marketplace, at around 2000 or so, decided that $10,000 for a plush elephant made no sense, so the problem went away without any need for Congress to step in and regulate Beanie Babies or try to make Beanie Babies more affordable.

2 comments

  1. That is because of nonwhites seeking for some kind of statue, particularly those who come from Asia.

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