What's a Diploma Worth? Americans Have Always Loved College and Real Estate. So Why Do These Assets Need Government Support?

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EVERY SCHOOLBOY knows that education leads to worldly success and material reward. "If a man empties his purse into his head, no man can take it away from him," Benjamin Franklin's Poor Richard advised. "An investment in knowledge always pays the best interest." To the Irish poet William Butler Yeats, learning was "not the filling of a bucket, but the lighting of a fire." As Emil Faber, founder of the college in Animal House, put it, "Knowledge is good."

Yet there's growing evidence that faith in the value of book-learning may be as ill-conceived as faith in the value of another asset inflated by public funding: real estate.

The overall cohort default rate on student loans has increased by more than 50 percent since 2003. The media have focused on the portion of this growth coming from students at for-profit colleges: According to the Department of Education, more than 40 percent of loans granted from 2003 to 2006 to students at such institutions will go bad over time. But students at nonprofit four-year colleges are also projected to default at rates between 10 and 20 percent. And the trend will worsen: Among 20 to 24-year-olds, college graduates are doing slightly better than non-graduates in the job market, but they still suffer an unemployment rate of 8.4 percent.

But if the worth of the asset is questionable, the price has been going through the roof. In the last 25 years, college tuition and fees have increased by 440 percent, according to the National Center for Public Policy and Higher Education. That's more than four times the rate of inflation.

Early this year, students in the University of California system responded to tuition hikes with some half-hearted campaigns of campus unrest. The bankrupt Golden State--which has shielded generations of customers from the actual costs of maintaining a tenure-rich, administration-heavy public university system, but which can no longer keep up this impossible mandate--is an especially painful case. But Alabama, Wisconsin, Illinois, and more than 30 other states have experienced similar protests against price hikes at their state school systems.

Time was that a top school was considered impervious to these kinds of market forces. As recently as 2006, the College Board estimated that the wealthiest 10 percent of private four-year colleges and universities had an endowment cushion of $454,100 per student. But these nest eggs were raided in the great credit unwind. Harvard's endowment has lost $10 billion, about 30 percent of its value, most of that under the leadership of current White House economic advisor Larry Summers. Yale's endowment has lost $5.6 billion.

You can begin to see why experts at Forbes and The Chronicle of Higher Education have been warning for several years about a "higher education bubble." But do we have the crucial ingredient, excessive leverage?

We do. Student borrowing has more than doubled since the end of the 20th century, according to the College Board, with $85 billion in loans in 2008, up from $41 billion in 1998. And as the rising rate of defaults indicates, borrowers in aggregate are not making the kind of money--i. …