marylsommers: Students, discuss: are degrees the new sub-prime bubble?

As in the housing boom, cheap money is chasing overpriced education assets. The challenge is to avoid poor-value university courses

Like an addict back on the smack, the country is hooked on hope once more, but this time the bubble is in higher education rather than housing. The latest figures for university applications ? out on Tuesday ? are likely to be at record levels, with applications set to top last year's high of 688,310. Demand is rising among students aged 19-21, suggesting that many rejected in previous years are applying again.

The provocative idea that rising fees are feeding an overvaluation of the investment ? a bubble waiting to pop ? has been floated in the US by Peter Thiel, the venture capitalist whose backing for Facebook made the social network happen. His description of education as a "classic bubble" makes uncomfortable reading as universities here rush to charge �9,000. A bubble, Thiel says, must be overpriced and there must be an intense belief in it.

That belief has enabled both the University of East London and Cambridge to charge the same fee next year, despite the fact that a recent university guide ranked the former fifth from bottom for graduate job prospects while Cambridge was third from the top. That could be the makings of a new sub-prime crisis ? cheap money being pumped into paying for an overpriced asset. And in this case it's government money that is paying tuition fees upfront. The challenge for one of the record numbers applying for a university place is how to avoid ending up with a degree that offers poor value for money.

Start with this question ? is it worth getting a degree at all? In some cases, university can actually depress your earnings. Research by Ian Walker at Lancaster University finds that a male graduate with a poor arts degree can expect to earn less over his lifetime than a man going straight into employment after A-levels. That's not the case for a good arts degree, of course, still less one that leads to a profession. Walker finds that a law, economics or management graduate can expect to earn �30,000 a year more on average than a school-leaver.

Employers may not value a degree purely for the skills it confers, but rather as a signal of ability or ? more worryingly ? class. Take the measures of graduate prospects for the two universities above, and then think about their intakes. Nearly half of students at UEL are from a working class background, while Cambridge has one of the most privileged social profiles in the country. Employers know this, and their hiring practices may just reflect how good the university is at selecting the most polished students ? the kind who would have had little trouble getting a job without a degree ? rather than how good it is at teaching them.

We all know of jobs that didn't require a degree a generation ago and are now graduate entry ? journalism is one. The government says that teachers should now have at least a 2:2. Employers are outsourcing judgment from the candidate to the piece of paper. And because there's increasing suspicion that the piece of paper has become easier to acquire ? and more young people are seeking qualifications purely for this reason ? they keep asking for higher qualifications to screen candidates.

Even for teenagers who don't choose university ? and there's a small upward trend in smart school-leavers skipping degrees ? the hot option is apprenticeships such as BT's massively oversubscribed scheme. It's hard to get away from the need for a certificate.

Thiel has a pedigree of scepticism about university. Though he completed his own degree, in philosophy at Stanford, he has offered would-be entrepreneurs $100,000 scholarships to drop out and pursue their ideas. In his latest swipe at higher education, he argues that there's a herd instinct in the rush to go to college, but the vast debts incurred are bad for society because they discourage risk-taking and entrepreneurship.

It's true that Bill Gates, Steve Jobs and Mark Zuckerberg dropped out of higher education early, forging stellar careers on the strength of popular ideas. A US diplomatic cable published last year reported that Richard Branson thinks of his fellow British businessmen as "overeducated". Branson, who left school at 15, regards his experiences as more than compensating for university. But the dropouts who changed the world are the exceptions. For most, quitting university is a messy and hazardous business.

There's a choice to be made here. Like house buyers, prospective students need to decide what they're going to university for. In the housing boom, the question "Is this a place I want to live in?" got subsumed in the idea that housing was an investment ? "Will this place be a foothold on the ladder?" If you're picking an institution, the question is whether your main goal is pursuit of knowledge or getting away the family home and spending three years partying. Hedonism is a perfectly respectable goal, and a crucial rite of passage for thousands of young people. But it might not involve the institution or degree you'd choose if you want to send a message about your employability.

That's not simply a matter of a traditional subject at an old university. Some vocational degrees, in subjects like computer gaming, are prized by recruiters. After all, by the time you've trained an Oxford PPE graduate in fashion retail they might be too old to be cutting edge.

What can the government do? Well, it could abolish the cap on fees; without a 9k ceiling you'd get less of the bunching that's distorting the market. But that might only allow the bubble to inflate to new heights (and a battered Liberal Democrat party could not countenance agreeing to it in this parliament).

If the government is serious about bringing prices down, that will require a more radical shake-up of universities. The main barrier to change is "number control", the quota of undergraduate places each university is allowed to offer every autumn. It allows the government to plan, but stifles growth at good universities, while poorly performing universities aren't punished because they still get their ration.

A new model called "core and margin" would allow universities a smaller core allocation, but they would have to bid for extra marginal places if they wanted to take on more students that year. The government would look at the repayment record of a university's graduates before accepting bids. So universities where fewer graduates get good jobs would have to trim prices. Stung by the headlines over fees, the government is likely to limit the margin to no more than 10% of places.

But if we're going to put pressure on universities charging high prices for poor-quality courses, that reform doesn't go far enough. With a progressive loan system in place, with scholarship schemes, and above all with a determined effort to encourage the poor to apply, there's no reason why that 10% could not become 100%.

Having come this far down the market road, it might now be that competition red in tooth and claw is the only means of bursting the university bubble.

Jeevan Vasagar

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