Industrial Insight

The education bubble … | December 17, 2010

http://www.forbes.com/2010/12/16/education-college-bubble-opinions-contributors-jerry-bowyer_2.html

The Great Relearning

The Coming College Education Bubble

Jerry Bowyer, 12.16.10, 03:15 PM EST

Students are foregoing six years of full-time income for their six years of full-time education. Let’s say an average of $10 per hour (something like $8/hour right out of high school, trending toward $12/hour after six years’ work), which comes out to $20,000 dollars per year, which is $120,000 over six years. Add that opportunity cost to our hard cost and we get $270,000 to $170,000. Let’s just make it an even $200,000 and keep the numbers round and the nitpickers mollified. That’s the P.

Let’s generously and roundly assign the initial E from college a value of $2,000.

Voilá, our P/E is 100. Is that a good deal? Not really. Even if one argues that the difference, the College E, grows over time, so what? So do stock earnings. If you think that the E grows quickly over time, then you can think of a degree as a growth stock and compare a 100 P/E to that. It still doesn’t look very attractive.

And let’s keep something very important in mind: A college education contains a risk factor that no stock or bond does: zero liquidity. For good or for ill, you’re stuck with it.

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I'm the executive vice president for a steel casting trade association, the Steel Founders' Society of America. I've got a crazy wife, five crazy children, three crazy people that married into the family, and two crazy fun little grandsons.

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