No, not the fact that beginning psychology students see abnormal behavior in everybody
, this term instead refers to an acknowledged and tricky issue of selection bias
in psychological experimentation.
Many psychological experiments are conducted on college campuses by professors or grad students, and frequently use undergraduate students as subjects, who are recruited by offering extra credit in psychology courses. As introductory psychology courses are usually very popular (My college's Psych 101 is reputedly the largest lecture in the country, with 1600 students), and as introductory courses, are more likely to contain students ill-suited for the field (and thus in need of extra credit), the plurality, if not the flat-out majority of these subjects are students in these classes, thus the name.
First, as undergraduates trend towards the 18-to-23 age group, they are unlikely to have had children, worked in a "career" job, acted as the head of household, or dealt with very complex money issues. As such, their perceptions of family, money, responsibility, or risk are colored by this lack of experience and are likely to be different from those (usually older) people who have. Continuing in this vein, it is generally acknowledged that young adults, and especially college students, tend to be more liberal than average, which will tend to color their responses and behaviors in experiments pertaining to value judgements, society as a whole, political issues, and the like.
Further, students attending a 4-year college are likely to have an intelligence at or above the average of their general age group, and they are more likely to come from a middle or upper class background. At the prestigious, selective, and expensive universities where many high-profile experiments are conducted, this effect is only amplified.
Even further, as a "humanities" department, psychology courses attract students who tend to be more "right-brained" than the average member of the student body, and may be more likely to be characterized by creative and emotional approaches to issues and activities, and less likely to behave in a strictly analytical manner.
These are all just examples, but the problem as a whole comes down to one issue: your average undergraduate is not a very good representative of humanity as a whole. Of course, psychologists are aware of this - results are weighted and corrected for bias and nature of the study group, and whenever possible, they seek as diverse a subject pool as they can get. Still, it's worth remembering, the next time a report on the inner works of the mind comes down from the ivory tower, that there's a good chance these revelations come to you courtesy of the same guys who vomited on your shoes at Sig Ep. Food for thought.