SOC-Edu-0010-Stock iStockphoto/Sharon Dominick

"Will Higher Education be the Next Bubble to Burst?" So asks a recent op-ed in the Chronicle of Higher Education. The question is powerful. Data points:

• Over the past quarter-century, the average cost of higher education has risen at a rate four times faster than inflation--twice as fast as the cost of health care.
• Tuition, room, and board at private colleges can cost $50,000 per year or more.
• The market crash of 2008 inflicted terrible damage on college endowments. The Commonfund Institute reports that endowments dropped by an average of 23 percent in the five months ending Nov. 30, 2008.

Authors Joseph Cronin and Howard Horton (respectively a past Massachusetts secretary of Education and the president of the New England College of Business and Finance) comment:

The middle class, which has paid for higher education in the past mainly by taking out loans, may now be precluded from doing so as the private student-loan market has all but dried up. In addition, endowment cushions that allowed colleges to engage in steep tuition discounting are gone. Declines in housing valuations are making it difficult for families to rely on home-equity loans for college financing. Even when the equity is there, parents are reluctant to further leverage themselves into a future where job security is uncertain.

Consumers who have questioned whether it is worth spending $1,000 a square foot for a home are now asking whether it is worth spending $1,000 a week to send their kids to college.

Even this underestimates the severity of the situation, however. The 2006 Economic Report of the President presents a remarkable fact: Between 2000 and 2005, the average wages of college graduates declined after adjusting for inflation.

From an economic point of view, in other words, a college degree costs more and more and returns less and less. Kind of like a hot stock with a price-to-earnings ratio of 32, it's a prelude to a crash.

Why are the wages of the college-educated declining? A big part of the answer is that the pool of college graduates is rapidly expanding. It's not surprising that as college becomes more universal, the return on a college education falls.

As the number of job applicants with degrees rises, employers become more sophisticated in assessing the value of any particular degree. The degree itself matters less than the institution that granted it, the subject areas of concentration, and the grade point average earned. A 4.0 math degree from Cal Tech is a very different thing from a 2.8 communications degree from San Francisco State University.

Now the next question is: Will consumers become more sophisticated too? Tuition, room, and board at the University of North Carolina in Chapel Hill cost about half what they cost at nearby Duke. Is a Duke education really twice as valuable as one from UNC?

Yet economic benefits are not the sole measurement of value. Intellectually, spiritually, and morally, American higher education is in crisis, with the worst damage manifested at the most expensive institutions. At Duke, racial politics whooped up a faculty lynch mob against student lacrosse players who were falsely accused of rape. It's often at the costliest universities that students are able to graduate with a degree in English without ever having read Shakespeare, a degree in history despite ignorance of the Civil War, or one in art history without ever having encountered the Renaissance.

In their own ways, universities indulge in some of the worst faults of the corporate sector, overcharging their customers in order to allow managers and staff to engage in wasteful or destructive activities that could never be justified on their own.

With the boom lowering, universities have begun feverishly looking for solutions to their problems. Options include broad admissions of international students, many of whom attend U.S. universities less in hope of obtaining a U.S. degree than of gaining entry to the U.S. labor market.

Over the longer run, however, universities, like other troubled institutions, will have to rethink the fundamentals of their work. Why does it take four years to complete a BA degree? Maybe liberal arts studies make more sense later in life?

But this rethinking should not stop with the universities. The entire American education establishment needs reform.

Maybe tough high school exit exams would serve the needs of employers who currently insist on a BA not for its own sake but as proof that a student was not too lazy or aimless to get one. Indeed, it could be that when the job market attaches less value to a piece of parchment, universities will at last lay aside their often ugly political preoccupations and rediscover their true mission: the pursuit of knowledge as a good in itself.

David Frum is a resident fellow at AEI.