There Oughta Be A Law

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CA College Pricing Proposals Reveal Fundamental Higher Education Policy Problem

  • Axiom of Public Subsidies – The purpose of a public subsidy is to reduce the price of a good or service for the buyer.
  • Axiom of Public Subsidies for Colleges  — Colleges receiving public subsidies should not be allowed to charge different prices for a product with the same cost structure.
  • Lemma to Previous Axiom — Colleges receiving public subsidies should apply commensurate price reductions for alternative programs or learning modalities that are cheaper to deliver.

As the perfect storm for the accredited college business model intensifies, colleges are increasingly looking to pricing solutions to fix their financial woes. At ground zero in California, Santa Monica College pepper-sprayed students protesting differential tuition for classes with the same cost structure and the Cal State system indicated that it’s considering a comparable structure  for “bottleneck” classes.

Though Cal State and Santa Monica are being criticized for differential pricing, this is the flip side of the well-worn coin where colleges charge the same price for courses with different cost structures. This week, the Hechinger Report, a nonprofit news organization that focuses on education journalism, released a report about the profitability of rapidly growing college certificate programs. A forthcoming report from the Campus Computing Project and the Western Interstate Commission for Higher Education (WICHE) shows that 93% of colleges charge the same or more for online courses though online courses have none of the overhead of face to face programs.

To defend differential pricing for products with equivalent cost structures, a college president or state system might argue that reduced taxpayer support requires rationing of education. To serve those that are turned away, education can purchased at the unsubsidized price. On the other side of the coin, a college president or state system can defend constant pricing with a differential cost structure by arguing that this profit-center subsidizes the other parts of a college.

The problem with both of these arguments is that it allows non-profit, tax-payer subsidized entities to create de-facto for-profit units. I have no problem with, in fact I applaud, the creation of for-profit entities. However, I do have a problem with for-profit entities that enjoy unfair competitive advantages created by a non-profit label. The unfair competitive advantages that accrue to colleges’ non-profit profit-centers are pricing subsidies in the form of tax avoidance, state subsidies, direct student subsidies that only apply to accredited colleges, tax-favored savings plans and more.

Perhaps more important are the credentialing barriers that non-profit colleges can and do erect to protect their de facto for-profit units. These barriers limit the potential number of course providers. By limiting the number of providers, there is no market for courses. If there is no market for courses, there is no market price. If there is no market price, then a state system with significant pricing power can set whatever price it chooses.  For instance, if the Cal State system offers a course at a price that’s three times higher than the subsidized price, who knows if that’s the right price? There is no “market” for courses because Cal State can decide what it will and won’t accept as credit. Like some others, the Cal State system already awards credit by class of student rather than by academic standard. For instance, it will award credit for ACE recommended courses for the military, but not for civilians. As colleges continue to create multi-tiered pricing for products with the same cost structure and constant pricing for products with multiple cost structures, the justification for continued direct taxpayer subsidies erodes.

The myriad taxpayer benefits showered on accredited colleges are, at heart, policy mechanisms to reduce the price of higher education to students. These policy mechanisms worked reasonably well until the possible cost structures and possible revenue streams for colleges exploded over the last two decades. Now, instead of applying uniform price subsidies, the myriad sources of taxpayer support are being used to obscure the marginal cost of delivery. This results in ever-rising prices and student debt despite significant advances in technology-driven cost reduction potential. Assuming that continued taxpayer support of higher education is desired, a policy mechanism that provides a uniform subsidy in the face of much greater provider and consumer choice will be required to bring sanity back to higher education pricing.

Part-Time Online Students Persist At Greater Rates

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New study adds academic reasons for unbundling the degree

As my second blog post in two days, this way exceeds my quota. However, a study released today compels me to prattle on. It says that online students are more likely to succeed if they take a few courses to start, rather than a full course load. This is contrary to higher education’s received wisdom that students are more likely to persist when enrolled full-time.

At first blush, this may not seem so important. However, what it really says is there’s nothing magical about a bundled online offering, at least for the general education and pre-requisite classes that students must take. If there’s nothing magical, then these courses can and should be unbundled from the institutional offering. When they are unbundled, the price point for these courses should plummet. Once the price points plummet, students are not only persisting at greater rates but paying far less to do it. So, a strategy for a college interested in enrolling online students that are likely to persist would be to require students to take a certain number of online courses prior to enrollment.

Sound familiar? This is exactly what StraighterLine offers to its students and partner colleges. For students, a low-cost, low-risk way to complete early college courses before taking on the much bigger financial and personal responsibility of a full-time program. For colleges, StraighterLine is a place from which students that are more likely to succeed will enroll. Sounds like a win-win.

Except, that it isn’t. Since accreditors will only accredit degrees and not individual courses, these early college courses can’t be unbundled. Further, because these online general education courses are priced way, way above their cost of delivery, they are massive profit centers for the rest of the college. So, the accreditation system has created a structure where colleges have disincentives to let students transfer these first courses into their degree programs, even if it will result in greater completion rates, reduced overall cost and less financial risk.

This study is so important because it adds academic credibility to the already powerful economic case for federal and state policy initiatives to allow unbundled student pathways to a degree.

“Don’t Throw Me in the Briar Patch!”

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Higher Education’s Likely Reaction to Obama’s College Reform Proposal

Methinks Though Doth Protest Too Much

Methinks Thou Doth Protest Too Much

First, the good news. For the first time the Department of Education is showing signs that it might be a regulatory agency rather than a booster for accredited non-profit and public colleges. Now, the bad news. The regulatory tool that it has chosen pushes more money from student wallets into a broken system.

As I understand it (and I’m no financial aid expert), Obama proposes to grow the Perkins loan program from $1 billion to $8 billion. The Perkins loan program is administered by colleges themselves. So, colleges that adhere to certain parameters will have more money to lend. These loans would go to reducing the immediate student/parent contribution, enrolling more students, or both. Because this is student debt, and debt gets paid back (in theory), it will be free to the taxpayer (but not to the student).

Though the details of participation requirements have yet to be released, the problem with the proposal is that it focuses on slowing the growth of tuition rather than reducing the overall cost. Further, it relies on the expansion of already overwhelming debt. Lastly, if fails to include the many nascent alternative credentialing models at a time when they are starting to spring up everywhere. Let’s start with the goal.

  • Why Slow Tuition Growth When You Can Reduce It? – College tuition has grown 4x the rate of inflation and 2x the rate of health care over the past three decades. Given that grade inflation is rampant and that degree completion rates are essentially stagnant, it’s hard to argue that much has been gained by this tuition growth. Further, despite the ongoing debate about whether online learning is better, worse or equal to face to face learning, just about every college offers some credit-bearing online courses. Therefore, online learning has become an economic substitute for face to face learning. Since online learning has none of the substantial fixed costs of online learning, the massive tuition growth is concurrent with the dramatic reduction in the cost of delivery of a face-to-face substitute. A properly functioning market would create dramatic declines in the real price of higher education.
  • Why Expand Student Debt? – Colleges like to call student debt “good” debt under the assumption that such debt has a positive lifetime ROI. Indeed, the ROI to a college degree has been positive over the last 50 years. However, as the financial services industry says, “past performance is no guarantee of future returns.” The positive ROI to a degree has coincided with sustained economic growth, smaller cohorts of college students, and lower college prices. Translated to statistics-ese, the positive ROI could very easily be a result of correlation rather than causation due to overall economic growth, selection bias due to a more select group of individuals enrolling in college and simply a smaller investment upon which a return must be made resulting from lower tuition. If any of these are true, then student debt incurred now could actually become the “worst” debt because, unlike consumer debt, student debt is not dischargeable at bankruptcy. Uncle Sam knows where you live and will show up at your door, forever! Such debt is bad enough for those that get degrees, but nearly 50% of students do not complete degrees. Almost half of those that start college will have no degree and non-dischargeable debt. With such potential negative consequences, expanding the ability for students to go into even greater debt seems counter-intuitive.
  • Why not include other sectors and options? – All of Obama’s proposals specifically exclude the for-profit college sector and the for-profit unaccredited sector. Over the past two years, the for-profit college sector has been the whipping boy for the Obama administration and its non-profit and public wards. Though the argument against proprietary colleges was cast as an argument between profit-seeking for-profits and mission-driven non-profits, the real schism is between the accredited sector’s credentialing monopoly and other alternatives. As I think most would agree, there are “good” for-profits and “bad” for-profits. There are “good” non-profits and “bad” non-profits (7% graduation rate at City Colleges of Chicago?). The for-profit colleges were attacked for having high prices and using a disproportionate share of Title IV funds. What if for-profits with comparable courses charge less than publicly subsidized non-profits? In the last three weeks, StraighterLine has announced a partnership with ETS and the Collegiate Learning Assessment (CLA), MIT announced MITx, and the Stanford professor that taught over 100,000 students announced a venture capital backed company to do the same thing. Here’s an overview by the Chronicle of Higher Education’s editor, Jeff Selingo. Almost all cost and price innovation is happening outside of the accredited college sector, so why limit the reforms and loans to the non-profit, accredited sector?

If I was Obama, after asking the CIA who really killed JFK, I would focus on basic regulatory changes that wouldn’t cost a dime or put students into debt and that would dramatically reduce the price of college. Frequent readers (reader? Mom?) of my blog will not be surprised to see:

  • Course level accreditation – If I offer the world’s best Physics course at a price cheaper than anyone else, I cannot get financial aid to pay for it. Further, I have to convince my college to accept it for credit. This college has a strong incentive to deny credit for someone else’s Physics course so that I will take its Physics course at its price. As unaccredited, comparable and lower-priced offerings proliferate, existing financial aid policy is, in effect, requiring the neediest students (those that can’t pay out-of-pocket) to go into greater debt to buy more expensive offerings – an unintended consequence to be sure.
  • Required Articulation — Course level accreditation must be accompanied by required articulation for at least the 50-70 courses that comprise general education and introductory level courses. These represent over 1/3 of all enrollments in higher education. If colleges complain that their particular experience is too integrated to allow course substitutes, then anyone that prices by the credit or course must articulate with any accredited provider of courses. Any college that has the market power to price by the term or semester can decide whether to articulate or not.

With these simple changes, students will have the power to shop for the courses and experience – either on an a la carte or bundled basis — that best meets their needs. Course providers will compete and prices for online courses will plummet. Though face to face course pricing may remain the same, other parts of the college experience will get much cheaper. Why not focus reforms on making a better market rather than expanding funding for a broken one?

The answer, of course, is that changing the rules is far less palatable to colleges than increasing the amount that can be spent on colleges. Non-profit and public colleges, like all other profit-maximizing businesses, have zero incentive to reduce prices or to encourage competition. Forcing course level accreditation and articulation will reduce prices and force some colleges out of business. This would be a welcome results for students and taxpayers, but not so much for colleges. Obama was quoted as saying that these policy ideas were the result of a brainstorming session he had with college leaders a few weeks ago. Given that all the participants in the meeting were college presidents, is it any wonder that “reform” is focused on expanding ways to pay for college rather than changing the game? For accredited colleges, an expansion of student debt as a solution to out-of-control tuition seems like a one-way trip to the briar patch.

Higher Education Doesn’t Have a Cost Problem.

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It Has a Price Problem

As the public’s concern with the unrelenting and inexplicable growth in college tuition mounts, policymakers are asking higher education to show something – anything — that demonstrates a commitment to tuition reduction. In theory, there are two ways to attack high tuition. One is to reduce the cost of delivery. Theoretically, reduced costs should translate to lower prices. The other is force prices down either by policy fiat or by creating more efficient price-setting mechanisms (a.k.a. markets). Of these two, colleges almost always support cost reduction initiatives and are reluctant to support pricing initiatives. Why? Because cost reduction initiatives almost always affect a very small part of the overall cost structure and, even when successful, the savings are used to subsidize other, unrelated activities. Pricing initiatives, on the other hand, threaten to change the rules of the market and create real losers (and winners).

When asked for suggestions to reduce college costs, the innovations extolled by colleges are Course Redesign – a proven way to reduce the cost of delivery of high enrollment classes while improving student outcomes — the promotion of free content through open courseware initiatives and greater use of online learning.  The problem is that, even if every college in the country adopted Course Redesign principles (which, frankly, it’s a crime if they haven’t done so already), used open courseware, and offered a full list of online courses, the price of college would be untouched. What’s more, I’ll lay dollars to donuts that higher education tuition would continue to rise unabated. Here’s why:

I’m going to pick-on a state. It could be any state, but let’s take Massachusetts. The average tuition and fees for a three credit course in the Massachusetts 2 year and open access 4 year systems are roughly $540 and $872 respectively (these are derived by dividing the tuition and fees for a full-time student by 10 courses). The portion of 2 and 4 year system’s budget that is subsidized by the state is roughly 32% and 21% respectively (derived from data here). This means that the average all-in revenue for a course at a 2 year college is $792 and $1108 at a 4 year college. Depending on the college and course, the direct instructional costs (not overhead and fixed costs) of an introductory level course is somewhere around $100 per student (for back of the envelope calculations, assume that an adjunct makes $3,000 per course with 30 students. There are few other direct instructional costs). Courses redesigned using Course Redesign principles have demonstrated an average 37% reduction in the cost of delivery. From a $100 course, this represents a $37 savings. Though this cost reduction adds up to real dollars, it represents only a 5% potential price reduction for that course at a community college and a 3% potential price reduction at a four year college for that particular course. The most likely candidates for Course Redesign are the 40 or so general education courses. These represent about one-third of all enrollments in higher ed. So, even if Course Redesign principles were applied to all applicable courses, the total price reduction would be 1.6% at a community college and 1% at a four year college.

Similarly, the percentage of the price structure of digital content is effectively zero because 1) professors build courses with their own materials for free 2) the cost of the digital materials in course development when amortized over all the students taking the course is trivial or 3) students pay for textbooks which let professors get digital materials from major publishers for free.

What’s more, any cost savings derived from Course Redesign or the use of open courseware are often promised to the departments who adopted the innovation to get their buy-in. Even if there were cost reductions, they would be quickly absorbed into the other areas of a college that are supported by cross-subsidies from these courses. This can be easily seen in most colleges’ pricing policies for online courses. Because online courses have none of the overhead of face-to-face courses, they are dramatically cheaper to deliver. However, most colleges price online courses the same or higher as face to face courses because they are worried about losing students to the less expensive courses, and, therefore, losing revenue. Clearly, college-driven cost reductions have zero effect on the price offered to students.

What about price-based strategies? Some are likely to work and some won’t. Those that won’t include:

  • Performance Funding – Performance funding initiatives tie taxpayer support to higher completion rates. While such a strategy does not reduce tuition, it hopes to get more from what is currently being paid. Performance funding is elegant in theory, but without objective, course-level outcome assessments, it is likely to lead to further diminish the credibility of a college degree. Grade inflation is already rampant in America’s colleges. What will happen when institutional budgets are even more closely tied to subjectively determined degrees?
  • Shaming – Shaming is the practice of publicly listing the colleges with the highest tuition and tuition growth. For the most part, this is only relevant to those colleges that are the most selective. This represents about 15% of the total enrollment. Further, because these colleges are selective, the students that apply aren’t particularly price sensitive. Such a policy is not likely to have a material impact on college behavior.
  • Pricing Transparency of full-time enrollment – Colleges were recently required to put “net price calculators” on their websites.  These calculators are supposed to allow students to input financial information to determine what their net price would be. The theory is that, by creating greater pricing transparency, students will make choices based on net price and force colleges to reduce the overall price of tuition. While elegant in theory, most colleges are not able or are unwilling to give a complete view of the true cost because many financial decisions won’t actually be made until enrollment. Further, the net price calculator doesn’t allow for the possibility of completing some parts of a college in one place (like at a community college or StraighterLine) and completing the rest of college at the school.

Pricing strategies that are likely to be effective include:

  • Articulation Strategies – If one believes that today’s technologies and learning possibilities should be driving substantial productivity improvements in higher education, then it is helpful to look at other markets that have seen such productivity improvements. Content, computers, news media, advertising and more are characterized by the ability to “disaggregate” and “inter-operate.” The “product” – say a 10 song CD – could be broken into smaller parts of a value chain – say a one-song download. These pieces can then be put back together via accepted standards – say a play list. Online learning has dramatically accelerated the ability to disaggregate the degree. However, articulation – the interoperability standards of a college – remains unstandardized. With objective articulation standards for all providers – not just accredited colleges – students can choose the price and learning modality that best meets their needs. Such choice creates course level markets and would dramatically reduce the price of delivery.
  • Vouchers – The higher education market is characterized by for-profits, non-profits and publicly subsidized non-profits, some of whom have tuition established by state governments. Such an obviously un-level playing field creates a dysfunctional market. With access to a college education limited only by the penetration of high-speed internet access, the rationale for direct-subsidies to specific schools is far less compelling.

The effective pricing strategies are the ones that let a more outcome-based, course-level market set prices based on student choice. A more efficient market could lead to a set of pricing innovations that could dramatically reduce the price of college. Not surprisingly, with some exceptions, colleges usually resist market based pricing strategies like articulation agreements with cheaper alternatives or vouchers. Where such articulation agreements exist, like 2+2 programs between public 4 years and public community colleges, the agreements are usually limited to members of the public college system with non-threatening standardized pricing.

One common objection to forced articulation is that some colleges rightly believe that their college experience is more than the sum of its parts. Forced articulation would undermine this experience. While this is undoubtedly true in some cases, it’s definitely not true in others. Further, it might be true for part of the college experience, but not for the whole. One solution is to require any college that charges students by the credit or course to accept outside coursework. Colleges that price by the semester, year or program would not be required to do so.

If colleges set objective articulation policies for all course providers, enable providers to price in such a way that students pay only for what they use (like a subscription), and create markets such that course level pricing is closer to the marginal cost of delivery, I believe that the price of college could be reduced by 25 – 40%. While such price reductions are terrific for students and taxpayers, it will result in college failures, market consolidation, and successful new entrants. In any other industry, this would be cause for celebration. What will it be in higher education?

Universities, Cross-Subsidies and the Non-Profit Conundrum

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Universities, Cross-Subsidies and the Non-Profit Conundrum

Here’s an excellent article by Dan Devise in the Washington Post about the decline of “Public Ivies,” growth in tuition and the correlation (not causation!) with dramatically reduced state support. Some in the article, like Robert Reich, former Secretary of Labor in the Clinton Administration, claim that the very future of public higher education is at stake. I couldn’t agree more, but probably not for the same reasons. Before I get too much further, let’s start from some baseline assumptions:

  • Given the demands on state and federal budgets created by a sluggish economy, health care, pensions, debt service and the always-more-popular K-12 system, direct tax-payer support for colleges and students will not be increasing, and will likely be decreasing, well into the future.
  • There are no inter-institutional academic standards that can serve as even the most minimal benchmarks for institutional comparison.
  • Colleges have little incentive to control prices (not the same as controlling costs) because that would diminish their own revenue and make an already acute institutional funding crisis that much worse.

What can be done?

First and foremost, policymakers must address higher education’s cross-subsidy problem. A college is a rubber-band ball of cross-subsidies. To name just a few, general education courses subsidize upper level courses, online courses subsidize face-to-face courses, commuter students subsidize residential students, football subsidizes tennis, executive programs subsidize masters programs, tuition subsidizes research, etc… In reality, it isn’t this clear-cut. In practice, there are a host of “profit-centers” that subsidize a host “loss-centers” all under the umbrella of non-profit tax status. However, most colleges have little idea which components are profitable and which ones aren’t. This cross-subsidy dependent economic model has worked reasonably well for about 500 years, but the price and disruptive pressures of online learning, new expectations placed on the current model by the human capital requirements of the information age, and the unwillingness to define “college” creates unfixable fractures in today’s post- secondary economic model.

In the 1500’s, universities were created because subject-matter experts were scarce and real-time communication options were limited, so it made sense to attract a critical mass of learned individuals to a single place with the facilities to teach and learn. A critical mass of professors attracted a critical mass of students, who attracted more professors, and so on. This critical mass required lecture halls, dormitories, cafeterias, and, eventually, football stadiums and climbing walls. With such large fixed costs, adding a few more professors to teach a few more courses was relatively cheap. In addition to teaching, these professors were the only ones qualified to assess student performance and they burnished their credentials by conducting research (which attracted more students). Lastly, students were far less mobile, so there was little need for formal articulation policies. Tuition was set according to a student’s fractional responsibility of the college’s overall budget (minus government support) rather than split between the amount that it actually cost to deliver a course and the overhead of the college. However, since students didn’t have variety of course suppliers from which to choose, a college could be confident that a new student would contribute a constant amount to the overhead of the college. There was no need to attribute what “learning” was conducted at one school, what “learning” was conducted at another school or what percentage of the tuition was attributable to overhead.

However, times have changed. Today, either students are mobile or classes are. Further, learning modalities have very different cost structures. A student learning in a residential environment with football teams and climbing walls should have to pay for the overhead that he or she is enjoying that goes above and beyond classroom instruction. Conversely, a student taking a class online shouldn’t have to pay any of that. Yet a college typically charges as if the face to face course and the online course – which have the same academic outcomes — cost the same. This combination of varying cost structures for courses and course-level choice and portability creates an economic crisis for higher education. No longer can the general overhead of a college be supported by bundling it with the direct instructional costs of courses. So far, the model has stayed intact because of limited course-level price competition maintained by an outdated accreditation structure. However, such barriers to competition can’t be sustained much longer.

While this cross-subsidy problem is evident in online and face-to-face course pricing, it is exactly the same dynamic that has led to the disgrace that is major college sports. I love college basketball (go Terps!), but it’s hard to believe that it is truly part of a learning experience. The larger question is what, if any, parts of a university deserve a non-profit designation. Even without direct taxpayer support, a non-profit designation is a significant cost to taxpayers. Clearly, there are large parts of a university that are very profitable. To maximize their profits, non-profit colleges are already well into ethically dubious areas like big-time college sports, bounty payments to recruiters of foreign students, enrollment priorities given to out-of-state students, outsourced distance education programs, overseas campuses, and more. If higher education as an industry, rather than for individual institutions, wants to regain its public mission mantle, it needs to clearly demonstrate what is deserving of public support and what isn’t. Those areas that are profit centers should be part of the private sector. If those areas that aren’t profit centers are deserving of public support, they should be able to ask for such support on their own merits. Put differently, colleges have strong incentives to expand their for-profit components under the umbrella of their non-profit tax status; and they are doing so. The biggest question for policymakers is what should “non-profit” mean?

MITx and “Magic College Dust”

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MITx and “Magic College Dust”

The announcement of MITx – a credential bearing component to MIT’s Open Courseware Project – presents the clearest depiction to date of the existential “Magic College Dust” crisis looming over every institution of higher education. Though the MIT and MITx degrees will likely share the same content and assessments, MIT has made a clear distinction between its selective, residential and very expensive degree and the non-selective, online, and inexpensive MITx credential. The end result will be the quantification of just how much more value — or Magic College Dust — the MIT degree has over the MITx degree.

In one shape or another, every college will need to decide whether each of its programs has Magic College Dust (MCD, maybe?) Why? Because in the immortal phrase of the ‘80’s Wendy’s commercial “parts is parts,” and, with my own addendum, parts is cheap. Parts is so cheap because content and software can be practically free, assessments are cheaper and more precise than what colleges currently practice and instruction can be delivered by people located anywhere in the world. The direct instructional cost of a course can represent as little as 5-10% of the revenue that most colleges receive for that course. Already business models like StraighterLine, MITx and University of the People are testaments to the benefits that can accrue to students when online course prices aren’t saddled with the overhead of a traditional college. Their spread is limited only by artificial and outdated regulatory barriers.

At this point, every college is probably murmuring about how its unique student experience justifies the 10x – 30x premiums paid for its courses. This is the “trust me, I’m a professor” model of assigning educational value and, by extension, pricing. However, unlike in the past, the market will decide whether a college, or any of its constituent programs and courses, does indeed offer sufficient Magic College Dust to justify its price. To attract students in a market with thousands of competing providers, colleges are increasingly forced to award credit for comparable courses from other institutions and providers (especially unaccredited ones). By forcing “interoperability,” pricing power shifts from colleges protected by accreditation to students searching for the best value.

MIT’s brand, selectivity and residential learning experience are likely to sustain the premium pricing that it already enjoys. However, I suspect that most colleges won’t be so lucky. Most colleges will have a couple of programs or courses that have sufficient Magic College Dust, but many that won’t. The difference in the near future is that students, not the college, will be determining what has educational value and what doesn’t. If I were a college President, I would be thinking about what elements of my college are so special and unique that they can’t be done better and/or cheaper by someone else. In fact, more generally, any program or course that is a profit center, as opposed to a recipient of cross-subsidies, is likely to be threatened. The parts of a college that are likely to retain their Magic College Dust will be in the delivery of support services and local connections. That savvy President should then set upon the path of bolstering those elements and shedding the rest. For existing colleges that want to navigate an existential Magic College Dust crisis, the likely strategy will be to do fewer things better, rather than everything the same as everyone else.

Find: Cable Television — Replace: Higher Education

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What do higher education and cable television have in common? Both would far prefer that you buy “bundles” of channels or courses rather than buying a la carte, and both are more than willing to use their lobbying muscle to keep it that way. While traditional higher education would be aghast at being compared to the seemingly more mercantile cable television providers, try reading this James Suroweiki’s 2010 New Yorker article with “higher education” replacing “cable television”:

Still unconvinced? Here’s an article about higher education’s response to a proposed requirement by the Department of Defense that schools that participate in its reimbursement plan accept credits from a wider variety of sources. Colleges claim that the DoD’s requirement violates “traditional practices” giving institutions control over their articulation and transfer requirements. While this is undeniably true, this is exactly the point. If the DoD requires institutions to maintain a clear, objective standard about what will and won’t transfer, then real competition will result. This, in turn, will save the DoD money. While such opposition would be perfectly fine if colleges were strictly private sector enterprises, these institutions subsist on direct subsidies, non-profit status and government funded students. As public institutions, they should have an obligation to accept courses from any provider of equivalent courses so as not to waste student and taxpayer money. If colleges can preserve control over articulation – their API’s if you will – they can keep competition out. However, given the rapid rise of tuition, reduced sources of student support and questions about the ROI and efficacy of higher education, I would bet that very few colleges would actually opt out of the reimbursement program if the Department of Defense stuck to its guns – so to speak.

Inside Baseball

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In my experience, higher education policy is usually the red-headed step-child of presidential politics. Presidents much prefer to talk about K-12 education than higher education. After a few bromides about having the most admired post-secondary system in the world, colleges are left to their own devices and students continue to accumulate “good” debt. No longer.

In the past two weeks Secretary of Education Arne Duncan has signaled his irritation with the college cost spiral and President Obama has convened a group of college leaders to discuss the issue. I attribute this newfound interest in college prices directly to the attention the Occupy movement has brought to student debt. Like other Occupy targets, higher education is a seemingly regulated market with little difference between the regulated and the regulators. Accrediting agencies are funded by the colleges they accredit and reviews are conducted by administrators from other accredited colleges. Also, like in other regulated industries, there is a revolving door between the regulatory agencies and the colleges themselves.

While presidential attention to the college cost issue is, at first blush, welcome, it worries me that the institutions that have been part of the problem are being asked to come up with all the solutions. Unfortunately, colleges have little incentive to reduce prices (not the same as reducing costs). Price reductions would result in less revenue. Less revenue results in less college growth and, possibly, fewer colleges. Normally, some kind of market mechanism would enforce price competition. However, such a mechanism is massively distorted in higher education.

In other industries, productivity benefits accrue as a result of technological and business model innovation. Hallmarks of innovation are “disaggregation” and “inter-operability.” Disaggregation means that pieces of a whole can be done better and more cheaply by others. “Interoperability” means there are common standards to which multiple providers can produce parts of a larger whole. The accreditation process – the gateway to federal financial aid and the good housekeeping seal of approval for higher education — is structurally resistant to both disaggregation and interoperability.

Only full degree programs are allowed to be accredited, not individual courses. Therefore, a provider of the world’s best course in X or a provider of a course exactly equivalent to a college’s at a lower price cannot receive accreditation. Without having accreditation, students for these courses must pay out of pocket, a significant disincentive to enrollment. Without a business model, disaggregation and innovation is thwarted.

Similarly, interoperability is a pre-requisite for successful disaggregation. You can’t break things apart if they can’t be put back together again. For colleges, interoperability is the same as articulation – a college’s API’s if you will. Accreditation gives a college complete authority to determine what they will and won’t accept for transfer credit. With such power, a college can choose to not award credit for courses that compete with its own, even if the course is functionally the same. In the software world, this is the same as having a proprietary operating system. While maintaining a proprietary system is certainly the right of any software company, the maintenance of such a proprietary system is more troublesome when conducted by institutions funded with taxpayer funds. So, even if someone can create a business model for an individual course, that person has to persuade colleges to let it be part of their proprietary operating systems. Again, a significant barrier to a purchasing customer and, therefore, a disincentive to innovate.

If the President is serious about reining in college costs, he must be willing to reform the higher education regulatory structure such that it creates the preconditions for innovation. Such reforms are unlikely to be supported by most existing colleges. Andy Grove, the former CEO of Intel, famously said that “only the paranoid survive.” While I applaud presidential interest in higher education pricing, the closed circle of perspectives sought by the White House and the Department of Education makes me more than a little paranoid that the regulated and the regulators will again come up with policy changes that reward insiders and neglect innovation.