I bought a house in late 2001. People thought I was crazy to pay what I did, but still, in less than five years, I could’ve sold that house for double what I paid. But just two years later, if I wanted to sell it, I would have taken a loss.

A friend of mine bought his house about the same time as me, and then few years later, he moved back East for a job. I asked if he was going to keep his house as an investment property, he said, “Are you kidding, heck no! There’s no way house prices can stay this high. They’re letting anybody buy a house, and giving loans to people who are never going to be able to pay them back. I’m going to cash out now before that happens.” I think that bubble burst within a year after he sold his house.  I think he bought a new house using just the profit on his old house.

The housing market bubble, fed by the greed of subprime lenders, was enabled because people who couldn’t afford to buy houses were buying houses. People were all too willing to believe the market when it was saying their house was worth way way more than is rational*.

A similar thing might happening in higher education at the moment. Unscrupulous lenders are helping students pay tuition with loans that they might not be able to pay back. Some students are all too willing to believe that their college education is worth way way more than is rational.

The way the debt market is structured, and the way people spend money for college, it’s not as if all of our universities are going to just crash in value the way that houses did in the mid 2000s. (Though there is a whole school of wackadoodle anti-tax zealots who think that the government is spend too much on higher education. and I guess K-12 education, and roads, and clean air. I’m not with those guys.)

As college prices climb higher and higher, there are more and more reasonable people who think, “I’ve always wanted to attend X or Y, but I’m not going to spend a quarter million dollars on it.” Then again, the people who might think this aren’t the full payers. But the people on scholarship might be thinking, “I’ve always wanted to attend X or Y, but it’s not worth borrowing $60,000 for it.”

What are some indicators that some small private institutions are at risk in the US?

• Spending rates in institutions with small endowments (less than 50 million) have climbed, and the rate of return endowments is low and probably will stay low for a while.
• The expected revenue of college graduates is not climbing in some fields, and may not result in a return on investment, even though tuitions have increased extraordinarily.
• More than 70% of college students graduate in debt from tuition, averaging $35,000. A quarter of these students have also gotten their parents into debt to pay for college, with an average additional debt burden of $30,000.
• Other folks are saying that the rate of closure of small private schools is going to climb.

When you think of small private colleges, you might think of places like Swarthmore, Pomona, Grinnell, or the place where I went – Occidental. Oxy’s endowment isn’t in the same league as the first three, but their endowment is way more substantial than a lot of other small private schools that are having trouble keeping pace with the growing expectations of their consumers. It’s those small private schools you don’t think of right off the bat that are in peril.

Families that are paying through the nose for college (that is a painful-sounding metaphor, regardless of the currency) are going to want a place that has amenities, beauty, bells, and whistles. Going to college isn’t just an education, it’s an experience. You might live in a dump after you graduate, but in the meantime, you’ll be attending college in class. As the number of people who opt out of highly priced private institutions grows, the less prestigious institutions (which have a lower endowment, and are less selective, and are more dependent on tuition) will be at risk. Oberlin will be fine. But the small private school that you might not have heard of before? They need to have beautiful dorms, gourmet dining halls, high-tech classrooms, ample parking, and yadda yadda. They need to look like Swarthmore but they don’t have an endowment that even comes close.

In recent times I was visiting a university that is regarded to be one of the top institutions of higher education in Europe and had an occasion to learn about the undergraduate student experience. By the standards of undergraduate education in the United States, the physical structures on the campus were mighty dumpy. From all accounts, the dorms were serviceable at best, the food was passable, the buildings in need of some paint, and most buildings were equipped with furniture that looked secondhand. But that stuff didn’t seem to matter, because it was a high quality institution.

In my experience, Americans shopping for college will scrutinize the surface, but not the soul, when assessing the quality of a university. It’s hard to imagine that, in the small private college evolutionary arms race, that more campuses are going to get trumped by the the Red Queen.

One of my previous universities relied heavily on tuition. Its operating budget was 93% tuition. And it turns out that the university’s annual operating budget is just about the size of its endowment.

Let’s just say something bad happened — to the university, to the college loan industry — or maybe there was a massive cultural shift in the perception of the financial value of a college education. That university would be in trouble in a jiffy. When your endowment is only as big as as your operating budget, then one very bad year would be one woefully tragic year.

If you talk to enrollment management professionals, they’ll tell you that year-to-year shifts in enrollment are subtle. Things may rise and fall over time, but the following year shouldn’t be extraordinarily different from the previous year. That’s good news for a college that’s doing well. But that’s also bad news for some universities, because if the fundamentals of a college’s budget aren’t sound, and they can’t grow the endowment or enrollment rates aren’t maintaining, then things cannot be turned around overnight.

If or when more small colleges go belly up, then what effect will this have on the marketplace? That’s a good question. But if things keep going the way they are, it won’t be long before the price of college well exceeds the price of a 3br 2ba house. Is the market truly going to bear that? That’s something in my mind as my kid is preparing to head off to college in, oh my gosh like only 5 years, please I need a hug.

So if you’re looking at taking a job at a non-prestigious small college or university, you might want to look carefully into their books. And if you’re at one, and the numbers aren’t adding up, maybe it’s time to consider whether it’s guaranteed that you will be able to retire from that job?

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*(Meanwhile, I can’t believe that property isn’t selling at steep discount in Miami, which will be partly underwater before a 30-year mortgage is paid off.)