Profiting From the Higher Education Bubble

Tuition

We still talk about those who were smart enough to see the real estate bubble of the 2000s and find a way to bet against it. These people made insane amounts of money by having the courage to short a bull market everyone else thought would go on forever. However, we are almost definitely in the middle of an even bigger opportunity: the higher education bubble.

Much like the housing crisis, the higher education bubble is inflated largely due to a belief in the American Dream. Everyone thinks they need to go to college, get married, and have a nice house with a backyard for the dog. They all think this is possible even though with the current population and demographic distributions, it likely isn’t. Fifteen years ago, that didn’t stop mortgage brokers from finding ways to make it possible in the short-term, and that is what has happened with higher education.

Where the Problem Lies

The big issue with higher education is the cost and incentives involved. It is extremely easy to borrow funds to go to college, which increases the number of students who are able to go. As a result, administrations raise tuition fees, and this cycle has continued for some time. In that same time, the number of teachers being employed hasn’t necessarily gone up, but the number of administrators have. This creates a bloated system with perverse incentives. The lending system pays for the tuition, so the schools are happy, but then when it comes time for students to pay back their loans, it can take decades.

It doesn’t help that these are the only loans that are impossible for students to default on. With $1.5 trillion (and counting) in student loans outstanding, it seems like there are more than a few students struggling to pay back their debts. At least when home buyers were getting fleeced into purchasing real estate they couldn’t afford, they were adults! Imagine making such a life-altering decision at 18.

But the situation is what it is. There is tons of debt that cannot be sustained, no one can afford the current system, and all we need is a better solution. When this solution emerges, there is the potential for a mass transfer of students to this new system.

There are two ways to profit from something like this. You can either bet on the competitors or bet against the incumbent. I haven’t been able to find any way to structure a “short” on tuition prices or the financial solvency of colleges in the same way that derivative products allowed for a housing market short using Credit Default Swaps. The closest thing I could find was public companies that build student housing or other ancillary services, but there are very few of these.

Betting on Competitors

There are websites like SkillShare and Udemy which allow “teachers” to create courses and sell them at a low ticket price, but no one really views this as a threat to the current education system. Several colleges have turned their lectures into online courses and had some success, but these colleges will eventually be disintermediated from the system in some way. What this leaves is the big tech solution.

Google and Apple seem like the most likely bets for who could make a meaningful impact in creating and distributing education in a way that allows for a credentialed system without having any of the same problems. The courses would be cheaper to provide at scale (think Netflix). Also, it is unlikely banks would loan money out for these courses to the same degree, and that would prevent prices from climbing as much.

Apple has the cash required, and Google has the AI capabilities, so the best bet here would be to keep your eye on both and then look for other companies that depend upon the circumvention of college altogether. Any companies related to freelancing or the trades would have huge potential, especially if we head into a recession soon.

The idea of free education is something being thrown around a lot in the current Democratic nominations, and if that occurred, we would likely see a drop in the stock market. Or at least a plummeting in the prices of all the banks who loan to students and are unlikely to be repaid. But we’ll cross that bridge when we get there.