The College Education Crisis

In most industries, competition drives quality and lowers prices.  Unfortunately, higher education suffers from a serious lack of genuine economic competition.  In fact, private colleges are essentially a government-subsidized oligopoly resembling electric utilities, while public universities are a lot like any other government bureaucracy.

To support this conclusion, consider that over the past two decades tuition has risen 3.5 times the average cost of living and that the quantity of skilled college graduates falls short of the demand in all too many fields.  So, at a time of rapidly rising productivity, why is the effective productivity of colleges and universities actually declining?

The reasons for rising costs include the need to invest in modernizing facilities, providing enhanced security, and providing specialized equipment for technical training.  However, the biggest single factor behind tuition inflation has been a lack of legitimate market competition.  And the largest barrier to competition is the Federal Stafford Loan program, launched in 1992.¹Unlike most other forms of financial aid, these government-backed student loans have no restrictions on parental income.  To colleges, this was simply a license to print money; and this new source of billions in additional aid dollars was an open invitation to increase tuition.

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Promoted as a low-cost program, Stafford Loans led to massive borrowing.  Colleges got lots of additional revenue and students were left with the debt.  The government had worked a “sleight of hand” in the education realm, shifting money from the future incomes of graduates to boost the incomes of college faculty and administrators today.  Consequently, many students found themselves in financial bondage and society was little, if any, better off.

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So, what did these universities spend this windfall on?  For the most part, administrators invested in what they perceived to be “quality enhancements.”  Unfortunately, most of them seem to have a serious misunderstanding of what constitutes the school’s product.  Universities see themselves as the product, judging their worth by the size and amenities of their campuses, the caliber of their faculties, and the range of services they offer.  However, while these things may attract students and alumni donations, the real product is the student.  The real measure of a school’s quality is the quality of the graduates the school produces.

That’s the rub.  For all the additional revenue colleges now generate, the outcomes in terms of student capabilities are not all that great.  In fact, a recent study based on a large sample of students attending 29 different American four-year colleges reported that an astounding 36 percent of students showed no gains in learning in their four years of college.

Another disturbing statistic is that currently, 40 percent of those who begin a four-year programdo not graduate.²

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Obviously, the fault does not lie entirely with the colleges.  The quality of incoming students has also been slipping; that’s an indictment of the escalating sums we’ve spent on secondary schools.  According to U.S. government statistics reported in The Economist,³ high school seniors’ proficiency scores for science, math, reading, and writing all dropped from 1992 to 2005.  Furthermore, just one-third of American students graduated from high school with the ability to read proficiently, and just one-fourth could write a basic paragraph.  Sadly, only about 15 percent of high school graduates possess the skills necessary to do well in college.  Despite increased spending over the past 20 years, this number has not changed much.

This problem is only expected to intensify because, as we reported this month in our analysis of the trend, The Challenge of “Media-Addicted” Consumers, Employees, and Citizens, young people are becoming too busy with digital media — including cell phones, text messages, the Internet, e-mail, and video game systems — to read old-fashioned printed books or newspapers, even on their iPads.

Ironically, the generation that is most comfortable with digital technology, which gives them unprecedented access to all of the world’s knowledge, actually knows less than the previous generations that lacked this advantage.  Instead of using the Internet to improve their understanding of the world, young people are using it to stay in touch with their friends.

Reacting to this slide in college-readiness, most universities have had to “dumb down” their curricula in order to maintain their levels of enrollment.  As a result, many students easily “sail through” to a degree taking the easiest classes available.  That is driving yet another alarming statistic:  The average full-time U.S. college student now spends just 3.3 hours per weekday on educational activities.  That is surpassed by 3.6 hours of leisure and sports.⁴

Not surprisingly, college students typically aren’t producing term papers filled with logic, rhetorical flourishes, or even proper grammar.  Instead, they’re communicating with a minimum of effort, a minimum of words, and a minimum of impact.

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So, in effect, it’s a double whammy:  College is costing more, while students are getting less.  As a result, they are graduating in debt, and they are unprepared to get a job to earn the income they need to pay off their debt.

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To address the issue of rising tuition, students are finding ways to cut costs.⁵ For example, 30 percent are saving money by taking on a larger course load in order to graduate sooner.  Another smart approach is taken by the 43 percent who have chosen to live at home and commute to campus.  This is certainly a great way to limit expenses, but it also limits one’s choice of schools.

Unfortunately, these measures aren’t real solutions to the growing crisis; they are merely ways to cope with the problem.

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A major step in reversing the escalation of tuition would be to get the government out of the game.  If every student paid his or her own tuition, market forces would quickly compel colleges to optimize their costs.  Under the current system, university administrators know the government will continue to provide more funds through student loans, which eliminates their motivation for controlling costs.  Under these new rules, however, some colleges would close, some would merge, and most would streamline their operations, while seeking new business models.  The result would be college educations redesigned to fit economic realities.

Yet, just bringing costs under control won’t solve the bigger problem of the graduates who are not well-educated.  For that, there needs to be a major shift to a solution whose time has come.  Fortunately, it’s a solution that will go a long way toward solving the cost problem as well.

What is that solution?  Replace today’s 19^th century system with a 21^st century system.  Despite protests to the contrary, the traditional college model that requires a campus with classrooms, teachers, dorms, and libraries is obsolete.  In fact, it is unsustainable and must be replaced with a low-cost alternative.

The alternative is “distance education,” also known as “online learning.”  As Harvard professor Clayton Christensen reminds us, such disruptive solutions almost always enter at the bottom of the market and steadily get better until they own all but a tiny segment at the top of the market.⁶

According to a study by Shelia Tucker of East Carolina University, “Distance education reaches a broader student audience, better addresses student needs, saves money, and, more importantly, uses the principles of modern learning pedagogy.”⁷ This type of learning is already becoming widespread with sites like eduFire.com, which provides a marketplace for both teachers and students to find one another and connect with the most effective learning tools — all of it online, so geography doesn’t matter.  Moreover, the educational experience can be infinitely customized, which completely upsets the traditional model that offers a one-size-fits-all curriculum.

The old stigma of online learning is quickly changing, especially among a younger generation that is fully accustomed to receiving information electronically.  Studies reveal that not only is online learning good enough compared to traditional settings, in some measures, it’s even better.  In Tucker’s study, for example, students who learned online scored higher on post-test scores and final exam scores.

Also, a 12-year study by the U.S. Department of Education found that people learn better online than in a traditional classroom.⁸ In part, this is because students learning online are not faced with an authority figure but with their own peers in a collaborative setting.  They’re already used to that environment from social networking sites.

From both an economic and educational point of view, it would be much smarter to pay the world’s greatest expert $1 million per year to create and update the world’s greatest course on a topic that tens of thousands of students could access electronically, versus paying 50 mediocre professors $100,000 each per year to teach 100 students that same course in a traditional setting.

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Research universities obviously need top Ph.D. researchers and graduate students, but those people are largely funded by research grants from the government and corporations.  Rank-and-file people who write low-impact research papers and teach lame classes need to go away, along with their overhead; and that’s exactly what will happen when the distance learning model becomes a reality.

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Where traditional institutions fail to fill the void, entrepreneurs will enter.  According to an article in VentureBeat,⁹ the high cost of a college education at traditional universities is already driving opportunities for online learning endeavors that promise to revolutionize the way we learn.

The technology is available, the need is great, and the time is now.  A few elite colleges can certainly afford to keep the old model, as long as rich benefactors pick up the tab, but the rest should be forced to transition into the 21^st century.

Given this trend, we offer the following three forecasts:

First, a major transition to online learning will occur over the next two decades. It will occur naturally, as both supply and demand grow together.  Students who are simply priced out of a traditional college education will increasingly flock to online offerings.  However, as the quality continues to improve, we foresee an interesting irony.  Many of those who will be first to choose online leaning will do so because their high school grades and ACT/SAT scores were too low to receive merit-based college scholarships.  But, many of them will get a better education and be more prepared for the workforce than the “brighter” students who took frivolous classes such as “The Impact of the Beatles” and spent three hours a day playing video games in their dorms.  In time, as the success and cost savings of online learning become more widely known, it will become the preferred choice for students across all academic levels.

Second, in the short term, a “hybrid solution” will provide the winning value proposition for traditional colleges. Some colleges already offer a combination of online and live programs.  Those schools will find it easy to trim faculty and facilities without endangering their unique character.  By focusing their remaining faculty on top-notch online and live courses, they will be able to produce better-prepared graduates at a lower cost.

Third, while college faculty members and administrators will ally themselves with bureaucrats and politicians to fight this wave of change, they will ultimately fail. As with every technology-driven market revolution, those with the biggest investment in the status quo will fight change.  However, the superior business model will triumph in the end.  America’s great research universities will continue to attract the best and brightest faculty and students from around the world.  Since their work is supported largely by public and private research grants and contracts, that will continue unabated.  A certain set of courses will continue to use the traditional model, but for the most part, faculty members will embed their unique insights in courses accessible to thousands of students in thousands of locations, rather than dozens of students in a single classroom