The Higher Education Bubble That Everyone Forgot About

Higher education was in the news during the Biden administration because the Supreme Court ruled that student loans could not be forgiven, and Biden subsequently sought end-arounds to forgive as many as possible anyway. People are focused on other things now, like AI and tariffs and such, so paying for college is no longer at the front of our consciousness, but the problem is still there. There are well over $1 trillion in loans outstanding.

There are easy fixes to this problem, like making student loans dischargeable in bankruptcy or having colleges and universities share in the downside when loans aren’t repaid, but this problem, like a lot of problems, is going to work itself out on its own, and it’s because of demographics.

I will say this as succinctly as possible: My generation, Generation X, the smallest generation, hatched an even smaller generation, Gen Z. The number of students going to college peaked around 5–7 years ago, has been going down ever since, and will continue to go down. Many colleges and universities simply won’t be able to survive. They’re businesses, like anything else, and the schools that have something to offer will continue to thrive, and others will simply wither and blow away. We’ll have far fewer institutions of higher education 10 years from now, and while that is regrettable in a sense, it is probably a good thing.

Everyone Thinks This Is Normal

As it stands right now, the government makes student loans, and the government is directly subsidizing schools. If Harvard’s tuition was $1,000,000 a year, then the government would lend $1,000,000 a year. It doesn’t matter what it costs; the government will lend against it. Harvard is kind of a straw man for these debates because Harvard obviously has an enormous endowment and could easily charge no tuition to any of its students without breaking a sweat, but it accepts the subsidies anyway.

Since the government will lend against any amount of tuition, there is no pressure on schools to cut costs and economize—they can hire as many useless administrators as they want. So, you have the second vice assistant provost’s office, which is next to the Starbucks climbing wall, and everyone thinks this is normal. Also, if you know anything about universities, they are sprawling, byzantine bureaucracies. There are forms for everything. The number of forms that are necessary to take the kids on a field trip rival that of the License Raj. Universities are bloated, corrupt, and inefficient on a good day. And like I said, everyone thinks this is normal.

Schools Will Have to Compete

I asked Perplexity about the problem:

The number of traditional college students is expected to decline over the next 10–20 years, mainly because there will simply be fewer young people finishing high school in many regions, especially in the US and other aging, developed countries. This “demographic cliff” will put sustained pressure on college enrollments, finances, and even the survival of some institutions.

What the “demographic cliff” means

Demographers use “demographic cliff” to describe the sharp drop in the population of 18‑ to 24‑year‑olds that began after the Great Recession and is projected to continue into the 2030s. Because this age group makes up the majority of undergraduates, fewer young people almost automatically translates into fewer traditional college students, unless college‑going rates rise a lot.​

Key US projections

Several projections line up on a sizable decline in the pool of traditional students in the US:​

• Analysts drawing on Census data and the work of economist Nathan Grawe estimate roughly a 15% drop in traditional college‑age students between about 2025 and 2029.​

  
  

• The Western Interstate Commission for Higher Education (WICHE) projects about a 12–13% decline in high school graduates nationally by the late 2030s to early 2040s, which implies hundreds of thousands fewer potential freshmen each year.

  
  

• Updated forecasts suggest that even after a brief stabilization in the early‑to‑mid‑2030s, the population of 18‑year‑olds could fall again and stay below current levels for the rest of the century.​

This doesn’t pertain to the business of higher education, but if you have kids who will be entering college, the good news is that acceptance rates are going to go up. It will be easier to get into Harvard. It will be easier to get into an Ivy League school. It will be easier to get into the service academies. And for the first time in a long time, schools will have to compete for students. There have been many fat years, and now there will be many lean years. 

The question is: Will schools be competing on amenities, or will they be competing on the quality of education, or will they be competing on price? My guess is all three. Yes, for the first time in history, schools will have to compete on price. I think we’ve reached the apex of college tuition, and we’re headed downward from here. Not materially, but even if the cost of college remains constant, it will decline in real terms as incomes rise. Same goes for textbooks and room and board and everything else.

This Will Come to an End

Lots of people don’t know this, but the nature of capitalism is that prices actually go down over time. It is in situations when the government intervenes in some fashion, either through price controls, regulations, or subsidies, that prices actually go up. 

You’ve probably noticed that your fancy TV costs about the same as it did 20 years ago—no government intervention. But the price of higher education continues to go up—we subsidize it. Not too hard to figure out. Let’s say in some libertarian fantasyland where Rand Paul is president, or someone like him, we do away with public student lending altogether—what do you think will happen to tuition costs? What do you think will happen to employment at universities?

The free market, being what it is, would probably produce a low-cost higher education option where you can get a degree for a few thousand dollars a year, without the Starbucks climbing wall and the other accoutrements. There certainly is demand for it. What higher education needs is a Walmart, and it doesn’t have a Walmart, unless you count some of the bigger, cheaper state universities, but even those are expensive now. The free market would provide it. It provided it before the implicit subsidy. Efforts to make college more affordable have resulted in it being even less affordable. Remember Milton Friedman: If you put the government in charge of the desert, in a few years you would have a shortage of sand.

Some people are mad at the universities for their left-leaning politics and their radicalization of students. Economic karma being what it is, they will get what is coming, good and hard. I’ve left a lot out of this discussion, like the job market for PhDs these days, which is very tight. The graduate school bubble is even bigger than the undergraduate bubble. A newly minted PhD is faced with the reality that only people from the top 5 schools in their field end up getting jobs in higher education. The ironic thing about the higher education bubble is that the professors never got rich off it. Colleges and universities never increased faculty salaries—they just hired administrators instead.

But all of this is going to come to an end, slowly but surely. And it might be permanent. Given declining birth rates generally, 50 years from now, we could have half of the colleges that we have today. Nobody is thinking this far ahead, and nobody is preparing for it. If I were a university president, this would be top of mind—how to financially prepare a university for the day that enrollment is cut in half, building up financial reserves, and not building the indoor practice field. 

It’s like that old fable of the grasshopper and the ant. They won’t even know what hit them.

Jared Dillian, MFA