A bubble exists when the price for something continually outpaces the real value of it. Absent government intervention, products are subject to supply and demand. When irrational demand occurs for various reasons, bubbles are created. Eventually, they burst as the demand drops to normal levels but the supply remains high. The "value" plummets. This happens all the time and usually doesn't result in any problems at all because the scale is small.
A great current example is "silly bands". If you have kids you know about these. They are rubber bands in neat colors and shapes. They became extremely popular last year and just about every kid had to have one. The demand was very high, and whoever invented them became rich. Good for them, the American dream realized in a capitalistic society. However, what is the real value of a rubber band? Not much, maybe a few pennies. So selling these things for $1 each and kids trading them like money only works while demand is very high and supply is low. Today, you can buy these things everywhere. You can get a package of 25 at Walmart for $1. Every kid who wants one has one-hundred. Demand has dropped as the "fad" faded, but supply is still high. If you had bought $60,000 of silly bands last year, hoping to sell them for profit this year, you lost. This didn't cost the economy any headaches though, because not too many people where heavily invested in silly bands. Some kids may have wasted their allowance but not much else.
The housing bubble was another beast altogether. The problem occurred, in my opinion, because the laws of supply and demand were thwarted by government. This allowed the bubble to get huge. Really, really, really huge! Federal programs and federal lenders encouraged new loans at all costs. It was thought that the benefits of owning a home were so great that everyone should have one. New laws, new loan types, new regulations all came out to generate more mortgages. Investors all over the world bought them because the price kept going up and up and up. Looking at the data now, one can easily see the bubble. The chart below shows US median income in red. See the nice linear upward trend as we, on average, increase our standard of living and as inflation did it's thing? Now look at the blue line. This is the US median selling price for a home. It is going up at a steeper rate (homes getting bigger, fancier, materials costing more). But over the past decade it goes crazy, reaching an almost vertical slope as the price for a house skyrockets. This is the bubble.
We all remember this, some of us tried to buy houses at this time. I remember my cousin trying to buy a house. Looking at little, one bedroom, starter homes that were selling for over a quarter of a million dollars. Wow. This was completely unsustainable. Obviously, the price can not continue to outpace the income of people. This can only be done with more and more debt. We were lied to and told that our homes were "good debt" because the value goes up (it had every year for decades). But, finally, the insanity stopped as people, by the millions, could not pay for the loans they took out and demand dropped. Also, supply reached a peak as many thousands of homes were built and bought by investors and no-one was actually living in them. "Suddenly" we realized we have WAY too many homes, and WAY too much debt that no one could pay. Unfortunately, instead of a few kids loosing their allowance, we all lost. And governments lost. And business lost. And wall street lost. And banks lost. Anyone invested in housing lost. Hello recession of 2009.
So anyway, that was a lot of buildup. I thought we were talking about College?
The laws of supply and demand for higher education are currently being thwarted by the government. The true "cost" of college is being hidden. Governments are promoting more and more lending and cheaper and cheaper money to get everyone they can to attend college. We are told this is "good debt" because we need to go to college to better ourselves. The following chart again shows the US median income ("family" instead of "household", is a bit higher? but same general trend) in yellow. The blue line is the cost of a 4-year college.
Look familiar?!
The governments solutions to this have been exactly the opposite of what they should be. Similar to the housing bubble, they continue to promote college at all costs, coming up with new programs and new loans to get an ever increasing number of people to go to college at ever increasing debt levels. College costs can not continue to go up at this rate without a corresponding rise in income. Debt levels will continue to go up and up until we "break" the bubble. The worse case scenario may be the government takes over the higher education system altogether. The costs will then be "invisible" and are guaranteed to increase while service decreases with no competition.
I am not saying we shouldn't go to college. Just saying we need to carefully evaluate if we are going to get a good return on our investment. You have to be sure that your income after graduation is sufficient to justify the amount of debt. I.E. don't borrow $100K to become a school teacher. And check the placement rate for graduates with your desired degree. Do you only have a 50/50 shot at actually getting a job after graduation? Look for ways to reduce costs by starting at community or satellite colleges for the first couple of years, co-opting, paying as you go with a part-time job, online courses, etc. Also, don't go to college just because you think you should without a clear plan for graduation. It is too expensive just to hang out and take classes without even knowing what you want to get a degree in. Of course this is all pretty difficult when you are 18 years old. I learned this the hard way by getting a Chemical Engineering degree from Rose-Hulman instead of Purdue. I could have gone 4 years at Purdue for what I spent in a semester at Rose. I am paying for that mistake now, literally.
Is higher education the next bubble to burst? I don't know. College can be a very rewarding and beneficial investment in yourself and your future, just be careful not to go into $60,000 of student loan debt and be holding nothing but a bag full of silly bands in 4 years!
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