How many bankruptcies to come in higher education?

by on December 26, 2012 at 7:26 am in Economics, Education, Uncategorized | Permalink

Bryan Caplan doubts that on-line education will lead to many bankruptcies in higher education.  To provide a contrasting point of view, I see the landscape as follows:

1. The absolute wages of college graduates have been falling for over a decade, even though the relative premium over “no college degree” is robust.  Still, absolute wages do determine the long-term viability of any revenue model.  And note that a pretty big chunk of the relative college wage premium is captured through post-secondary education only.

2. The “debt bubble” behind a lot of recent higher education expansion won’t be repeated anytime soon.

3. A large number of institutions in the top one hundred will move to a hybrid on-line model for a third or so of their classes and they will do so gradually, without seriously disrupting norms of conformity or eliminating campus life.  In fact this will become the new conformity and furthermore through time-shifting it may increase the quantity and joy of drunken parties and campus orgies.  Eventually these on-line classes will be sold for credit to outside students.  Some top schools will sell credits in this manner, even if the more exclusive Harvard and Princeton do not.  Many lesser schools will lose a third or so of their current tuition revenue stream.  Note that the prices for these on-line credits, even if hybrid, will likely be much lower, plus lesser schools lose revenue to the schools better at designing on-line content.

4. Some state governors will try to put out a supposedly semi-passable degree from their state schools for 10k a year, with some on-line components of course.  That will put price and revenue pressure on many other schools.

So let’s say you are Trinity International University, in Deerfield, Illinois, 1,265 students, nominal tuition about 26k.  I had never heard of that place before doing a quick search through U.S. News rankings.  Still, it is rated in the second tier.  Will it survive?  Maybe their Evangelical orientation will push them through.  Maybe it will sink to 500 students.

How about Lynn University, in Florida, also second tier, nominal tuition listed as 32k?  1,619 students, but how many by say 2032?

I don’t think bankruptcy, literally interpreted, is the likely legal outcome (for one thing, these schools probably don’t have enough debt for bankruptcy law to be relevant).  Still, I think it is quite possible that one hundred or more schools in the U.S. News rankings will find their enrollments or at least their tuition revenue streams cut in half or more within twenty years.  They will be shells of their former selves, though on-line education might not even be their major economic challenge.  It will be one of three or four major whammies facing them.  Higher education as a general practice of course still will thrive, as will community colleges.

One key question is whether on-line education will encourage consolidation or not.  Under one vision, on-line offerings shore up the smaller schools, because you can go to them for the atmosphere while taking German III purely on-line.  (Even then, they survive but the revenue stream takes a huge whack.)  Under another vision, on-line — for most students — works best in hybrid form, mixed with various face-to-face forms, and the larger schools will have a much easier time getting this off the ground in a workable manner.

Two additional comments on Bryan’s post.  First, he thinks that for on-line education “…the dollars of venture capital raised are laughable.”  Yet keep in mind that the major players are or can be backed by the endowments of the top universities.  In any case, why raise extra money before you are able to spend it?  If these on-line efforts get any traction at all, the funding and lines of credit will be there.

Second, advocates of the relevance of the signaling model should be relatively optimistic about on-line education.  Because it is hard to pay attention in the on-line schoolhouse, it provides an especially potent signal!  And you always face the temptation to upgrade your signal by subbing in some Top School on-line credits for some of your Podunk University credits.  (Sooner or later Podunk will have to accept such credits.)  Social pressures for conformity will encourage rather than stop that trend.  On the other hand, if you subscribe to a learning model for higher education, there are some very legitimate questions as to how well the on-line product can teach you what you need to know, at least for people with some fairly wide variety of learning styles.

Conformity pressures and signaling may militate against the “stay at home all day” forms of on-line education, but not against on-line education more generally, in fact quite the contrary.  In my view Bryan is underestimating the economic problems to be faced by a wide range of colleges and universities, and putting up a not very plausible model of non-conformist on-line ed as the major threat.

Addendum: Matt Yglesias comments.

Bill December 26, 2012 at 7:53 am

For there to be competition, the products offered by online and onsite colleges have to be substitutable in the sense that they are “recognized”. And, that requires the degree granting institution to accept the credits of another institution, and for credentialling agencies of the degree granting institution to approve as well. Since the credentialling agencies themselves are controlled by degree granting instituions, don’t expect that to be easy or fast, given the incentives of the stakeholders.

But, assuming colleges ultimately accept credits from other institutions online courses, the question then will be: if I am a student at Podunk U taking an online class at Stanford, and perform exceptionally well, who captures the gain: to be sure the student, but also Podunk U, which is now recognized as having some students who perform at the level of Stanford students attending Stanford classes. So, it is not necessarily clear that Podunk loses.

Now, let’s say that Podunk students know they will do poorly taking Stanford classes, or you know that top performing Podunk students who took Stanford classes performed poorly on the Stanford classes. That also reflects on Podunk and its student body. So, does Podunk have an incentive to give credit to its students who take classes online from Stanford? What if the brightest students at Podunk take the Stanford calc course, leaving the dumbest attending the in class courses at Podunk…talk about the class being a drag to teach, if there are no bright students in it; and think about the loss of students teaching each other if there are only dumb students in the room.

Now, think of Stanford for a second: if you are a Stanford student, and get whipped by a online student in Dehli, now your competition is broader, and your threat of a poor evaluation of the professor has less impact if all the smart students (from Dehli and elsewhere) say this guy is a great teacher. So much for the loss of Stanford student power ala the power to write a critical faculty and course review.

As to the economics of the exchange between Stanford and Podunk (how much can Stanford charge), that’s a function of how many other providers there are offering the same product and whether the Stanford calc class is any better than the CalTech or MIT class.

Rahul December 26, 2012 at 8:04 am

on-line education might not even be their major economic challenge. It will be one of three or four major whammies facing them.

What are the others?

msgkings December 26, 2012 at 1:34 pm

Perhaps
- Demographics (fewer college age people to capture)
- Pricing finally too expensive for most with TGS, and little economies of scale for the smaller schools to exploit
- Difficult for schools like that to be relevant in an increasing demand for STEM type grads world

Paul N December 26, 2012 at 8:08 am

Sounds like a topic for a short book.

Orange14 December 26, 2012 at 8:24 am

I don’t think the on-line stuff is the central issue here at all but rather it is the increasing cost of college and the indebtedness that students are incurring. Much of the debt comes from those who enroll at high tuition colleges where loans may be the only way they can attend. Increasingly, costs are also going up at state universities as well as austerity has led to cutbacks in support. It is unconscionable to me for universities with large endowments to regularly hike their tuition payments every year. Our youngest graduated five years ago from a top 30 ranked private research university and we saw 6% increases each year in fees such that her final year the cost was just over $40K. Now she started with a modest honor scholarship (10% of tuition) but that didn’t go up a single penny. I regularly tracked the endowment donation/earnings in the school’s annual report and that was going up by 10-15% a year (the school also had a significant portfolio of patents in STEM fields that were generating significant amounts of money as well). Clearly the smaller ‘podunk’ colleges don’t have such endowments or patent revenues and need to rely on tuition payments to stay alive. They are also the schools that have been the most aggressive about putting students into loan situations that will severely compromise the student’s financial ability to cope once out of college. It really is too sad and this is what the focus should be on, not the on-line stuff.

derek December 26, 2012 at 11:31 am

You have it backwards. Did the 6% lose them any students? If your daughter and all her class had said, this is too expensive I’m going somewhere else, would they have had a long list of others who would have been willing to pay?

Prices are set by those bidding for the services. The question of why education is so expensive has a simple answer; there have been lots of people willing to pay even more, along with a helpful government that has set up ways for people to pay far more than they can afford.

Online education will be as successful as there are numbers of people who want an education but cannot or will not pay the inflated prices. I wonder if there will be a time where those who take these routes come out with less debt, hence are less costly to employ, will drive out the over priced due to their indebtedness. I’m not talking about educational establishments, but people looking for jobs afterwards.

chuck martel December 26, 2012 at 4:36 pm

Every year the University of Minnesota admits a little over 5000 freshman from over 30,000 applications. As long as that ratio continues the cost of going to that school isn’t going to go down.

dearieme December 26, 2012 at 8:27 am

One of the Cambridge Colleges failed in the nineteenth century when the bursar fled with the endowment.

We have yet to see how big Higher Education’s “bezzle” is (to use J K Galbraith’s term).

Ken December 26, 2012 at 12:51 pm

One of the Cambridge Colleges failed in the nineteenth century when the bursar fled with the endowment.

That was more-or-less my thought when I read “venture capital” and “endowments” in consecutive sentences of Tyler’s post. Many of these institutions also have under-performing pension funds, and many are sitting on prime real estate. A hostile takeover could yield a very nice ROI.

Injunjoe December 26, 2012 at 8:39 am

Actually, the online route could help schools like Trinity and Lynn. Smaller schools like them do not offer a wide variety of majors and the course offerings seem rather sparse when compared to larger schools. Online classes that transfer would enable them to possibly attract more students by offering degrees/majors not currently offered and a wider variety of classes in the majors that they currently do.
Also, its interesting you chose Lynn. They actually have a degree plan that lets you graduate in three years instead of four. They might already be anticipating the squeeze on private, for-profit schools that are not nationally known, as you described.

Matt December 26, 2012 at 8:52 am
john personna December 26, 2012 at 8:57 am

I think our ratio of production should shift a bit toward AA from BA. I don’t really see the point of lighter four year degrees. Better to use the low cost community college model, and have them be on the receiving end of credits from MITx etc.

babar December 26, 2012 at 9:36 am

maybe small colleges without large grifting admin layers will be fine?

Mark Bryan December 26, 2012 at 9:39 am

Distance learning has existed for years (for example in the UK there is the Open University http://www.open.ac.uk/) without making serious inroads into conventional universities. Except perhaps for cost, I don’t see why online education should be any different.

Orange14 December 26, 2012 at 10:04 am

Also Israel has an extensive distance learning set up as well (my sister is a professor of biblical archeology there); see: http://www-e.openu.ac.il/

Mark Thorson December 26, 2012 at 1:36 pm

I have a large collection of early books on television, and there was quite a bit of discussion from the 1930′s into the 1960′s on how television would impact education. Some people really did think it would be possible for everybody to get a college education by broadcasting the lectures of the best professors at the best universities. There were a number of projects and experiments to try to get the ball rolling.

It’s not exactly clear to me why the revolution never happened. Resistance from the teaching profession was certainly part of it. The technology was another part — most of this work occurred during the days of live TV, so it would have taken much more effort to get the lecturer, broadcast facilities, and students synchronized. Also, the demand didn’t exist to support using the commercial television broadcasting networks for education.

I also collect books on teaching machines and the application of computers to education. Teaching machines date back to the 1920′s and computer-aided instruction dates back to the 1950′s. Self-paced drills and automated testing were also seen as potential breakthroughs in education, but except for automated test scoring they had little to no impact.

I suspect in both cases, these technologies only attacked isolated parts of the educational problem. When you’ve only got one piece, it competes with an existing piece that has the advantage of already being integrated into a functioning whole. If your new piece is too different, it won’t fit and nobody will use it.

On-line education may get around this barrier by offering a complete standalone replacement for traditional education. If you don’t have people trying to fit your technology into their existing educational model, you don’t have people telling you no. You’re free to try new models, one or more of which may succeed. That might make the difference this time around.

Hadur December 26, 2012 at 10:23 am

The problem with our higher education system isn’t just economic: there are also serious social problems. People continue to line up to take out $100k loans to get useless degrees, either because they are irrationally optimistic or because our society fetishizes degrees for the sake of degrees.

The same social forces that drive people to take out loans to study Literature instead of learning air conditioner repair at a community college are the same forces that will make online education underperform.

zbicyclist December 26, 2012 at 10:32 am

The mystery to me is why large state institutions (like, say, U of Illinois) aren’t rushing into this. The state has been scaling back funding. The state has no realistic prospect of increasing funding. You still have a good reputation, and both a legal and moral obligation to favor the students in your state. You are part of a group of similar institutions (other Big Ten universities) with generally similar problems — you have all the scale you are likely to need.

Of course, they are also large bureaucracies, so maybe that is sufficient to answer my question.

steve December 26, 2012 at 10:35 am

There seems to be an underlying assumption that kids can learn just as well from online courses. I am not sure that has really been proven. I suspect that the kids who are best able to take advantage of online courses are the same kids able to get into a top 100 school. Given that these schools have many more applications than positions, I am not sure how much incentive they have to change, except as a way to capture more income. For schools outside of that top 100 or so, they will likely set requirements fairly high for what percentage of credits need to be obtained at their institution.

Dont we really need to see a drop in demand before we can expect to see a drop in prices?

Steve

Hadur December 26, 2012 at 10:38 am

A drop in effective demand could be accomplished by making student loands dischargeable in bankruptcy.

ed December 26, 2012 at 11:40 am

“kids who are best able to take advantage of online courses are the same kids able to get into a top 100 school.”

Very good point! I agree this is important and under-appreciated.

mkt December 27, 2012 at 4:22 am

“There seems to be an underlying assumption that kids can learn just as well from online courses. I am not sure that has really been proven. I suspect that the kids who are best able to take advantage of online courses are the same kids able to get into a top 100 school.”

There are a number of reasons why the notion that online education is going to take over higher education is incorrect, but these are the most important ones. The notion that online education is as effective as bricks-and-mortar education is not only unproven, it is incorrect (IMO obviously). It works for motivated students if the material is easy enough. It is already failling miserably for unmotivated students — the MOOCs that have gathered the headlines have had less than a 10% completion rate. And for difficult material, there are a few geniuses who can teach themselves but for the rest of us, even with high motivation, no way. I was a strong econ undergrad student, but there is no way that I would’ve learned the first-year graduate curriculum if I’d had to do it online. For that matter, although I probably could’ve learned undergraduate level econ in an online course, I doubt that I would’ve learned it as well.

Online technology will of course continue to grow in importance. Even traditional classes and traditional schools will increase their use of online resources. But just as the invention of literacy and the printing press, making books widely available, didn’t cause bricks-and-mortar schools to go out of business, online education won’t cause bricks-and-mortar schools to go out of business. Instead they will incorporate the technology into their pedagogy, just as they incorporated books.

Ted Craig December 26, 2012 at 10:48 am

There was a higher education bubble that popped prior to the Civil War. That might provide some guidance.

Skip Intro December 27, 2012 at 10:29 am

Can you expand on this? I’ve never heard of such a thing.

albatross December 26, 2012 at 11:16 am

It seems to me there is a big advantage a smallish college has over an individual or high school, when looking at online and open courses. If I decide to start going through an open course in, say, development economics or virology or abstract algebra, I have to do it alone–if something doesn’t make sense, I don’t have someone with the kind of expertise needed to answer my questions or explain things in person, I don’t have someone to show me how to get the lab stuff to come our right, etc. But a smallish liberal arts college will have that–they may not have enough econ students to justify a development economics course every year, but they probably have an economics department, which means they have some professors who can at least keep up with the courses and help kids who get stuck or have questions. Similarly, a small college can use the lectures and classwork to put together a decent final exam, and can run a final exam with the normal sort of precautions against cheating for their college. The result is that Westminster College or Southeastern Missouri State can offer a much wider range of classes than before, and can still get more meaningful grades and more solid learning than people taking any all-online course.

Mike December 26, 2012 at 4:11 pm

Good point. Also, the smaller schools can establish relationships with each other that make it painless to get credit for course at the other schools that aren’t offered at your home school (I remember Swarthmore, Haverford, and Bryn Mawr doing something like this back in the day, and touting it as one of the attractions — the benefits of a smaller school with a larger selection of courses and fellow students available if you wanted it).

This also lets schools specialize — so if one of the best literature programs in the country is at a school that is otherwise not strong in certain areas, I can still go there and get the rest of my education somewhere else. Or I can go somewhere else and still get my literature education from that school. Either way is a revenue stream for that school that they might not have gotten otherwise.

Brian Donohue December 26, 2012 at 11:40 am

I think Yglesias has the best take here.

Peter December 26, 2012 at 11:59 am

Here’s my proposal:
Divide all colleges and universities into three tiers. Tier One includes state flagship and land grant universities, and private institutions ranked in the top 25% by a to-be-designated ratings board. Student loan eligibility for students at Tier One institutions remains unchanged. It is to be expected that these colleges and universities themselves will remain largely unchanged.

Tier Two is comprised of state directional and at-city colleges and private ones ranked in the second 25% by the aforementioned ratings board. Students at Tier Two institutions would be able to get student loans only if they are studying marketable fields. A final-authority panel would be responsible for determining what is and is not a marketable course of study, always cognizant of the fact that marketability changes over time and is subject to regional variations. Over time, the expectation is that most Tier Two institutions will recast themselves as technical training academies. rather than something-for-everyone colleges.

Tier Three consists of private colleges and universities ranked in the bottom half. Students at these institutions get no student loans at all. Presumably, most of these colleges will go completely out of business.

GiT December 26, 2012 at 3:12 pm

…until only one college is left.

GiT December 26, 2012 at 3:13 pm

Zeno’s education plan.

Marc Roston December 26, 2012 at 12:05 pm

I agree BK universities are unlikely. I think we see aggregators or online courses as a new model of accreditation, working in conjunction with some bricks and mortar instruction and new models for housing young adults.

BTW, Peter needs to have a look at the corruption of the French wine business, and see if he still likes his tiered system!

Peter December 26, 2012 at 12:55 pm

BTW, Peter needs to have a look at the corruption of the French wine business, and see if he still likes his tiered system!

Whether or not the tiered system would be fair in its application is beside the point. The idea is that it would result in a significant reduction in the number of people getting college degrees, thereby reducing student loan debt burdens and making those people who do have degrees all the more marketable.

Of course the counter-argument is that people have to go to college because employers are demanding college degrees for all sorts of jobs. While that is true, it is true solely because so many people are going to college – meaning that those who don’t go are likely to be nincompoops. If college weren’t so popular, the absence of a degree wouldn’t be nearly so significant and it would not be such a bar to employment.

Tom West December 26, 2012 at 11:59 pm

If college weren’t so popular, the absence of a degree wouldn’t be nearly so significant and it would not be such a bar to employment.

All well and good to say, but the reality is that unless there’s a *huge* decrease in the number college graduates (like 50%), businesses will be happy to continue to use the degree as a simple metric for conscientiousness, leaving non-college-goers out in the cold.

JimD December 26, 2012 at 1:35 pm

What drives me crazy about these discussions is that the people who think online is going to revolutionize everything have little experience with universities that are actually doing it now.

I teach at a large regional public university and we have substantial online offerings. Having taught some of them, my impression is that they aren’t as good as the standard courses. Generally students don’t like them and the course work is watered down. However, they are cheap to run, which is why we do them.

My department will soon have 25% of our enrollment online. The university’s cost per full-time-equivalent student is around $13,000, so not so different from Tyler’s $10,000 (that’s cost, not tuition, so universities don’t have to be expensive, and most aren’t). The future is now.

But if you really want to see the future, look at Western Governors University. It’s all online and they have completely eliminated professors from the curriculum. They pretty much have established what it costs to run a real online university (and not just a vanity course).

And the standards are what you would expect. My guess is that as more universities shift to online classes, and costs and standards continue to fall, it will be increasingly important to get a Master’s degree to distinguish yourself.

Andrew' December 27, 2012 at 1:42 am

This isn’t what revolution looks like?

My assumption is an ivy league with a billion here or there in their hedge fund will survive.

Fred Bush December 26, 2012 at 1:36 pm

Won’t foreign students take up a fair amount of the slack?

John Mansfield December 26, 2012 at 1:53 pm

What’s changed between now and thirty years ago that it takes online classes to provide higher education at a price students can pay?

Tangurena December 26, 2012 at 2:14 pm

Some schools do go bankrupt.

Want to buy one?
http://www.ameribid.com/upcoming-auctions/auction-detail/?id=192730

Steve Sailer December 26, 2012 at 5:10 pm

In Evelyn Waugh novels, the people who run England always mention they were up at Oxford or Cambridge, while the poor losers who will never get anywhere in England’s class system always talk about how they are taking correspondence courses.

How different will this turn out to be?

Jason December 26, 2012 at 10:52 pm

I’ve heard the argument that yearly tuition increases are necessary based on supply and demand; it’s about greed and nothing more. Prices will rise because people, begrudgingly or not, will pay and the government will continue to supply loans that graduates will never be able to pay back.

anon December 26, 2012 at 11:46 pm

businesses (and nonprofits) come and go all the time. why should bankruptcies or sharp revenue drops be the metric of success for online ed? some of the economic challenges facing current unviersities are fairly unrelated like the ‘arms race’ over rankings, the hollowing out of the middle class, attempts to expand the student base. I don’t see how online ed helps the marginal college student in the US. the worst thing is to start college and leave with no degree and lots of debt…how does online ed help that student? many students need more structure (call it conformity if you like), not less…too much flexibility can be a mess for the undisciplined, unfocused. cost is one hurdle for the marginal student but it is far from the only one. I remain doubtful online ed will matter along metrics that matter, at least for secondary students…plenty of infotainment and work-related training is possible.

Andrew' December 27, 2012 at 1:39 am

“Campus ‘life’” was great shakes for you guys? For two years I lived in a closet.

Positions in higher education December 27, 2012 at 1:41 am

Now days everyone wants to come in higher education as after you have done from higher education you get good job and position in higher education.

Douglas Levene December 27, 2012 at 2:18 am

Could we be facing a future where 10,000,000 students from all over the world attend Harvard? Harvard would not have to charge very much tuition to make that model work. Maybe we’ll have a world in which less than 10 schools dominate the worldwide market for higher education, each with tens of millions of students. Everyone could have Feynmann for physics or Reischauer for East Asian History or Milton Friedman for Economics. Why settle for less than the very best? Maybe this would be the right model for introductory classes, which are usually taught in large lectures, with something else for more advanced classes, where working closely with a professor is possible.

Andrew' December 27, 2012 at 2:34 am

I’ve always made fun of the ‘elites’ by reporting that I’ve never been cross-checked standing between them and some underprivileged mind (Milton Friedman notwithstanding!) If someone else makes it virtually costless then we’ll see if that makes a difference.

albatross December 27, 2012 at 11:37 am

Yeah, replacing the 300 kids in an auditorium lecture with online lectures seems like almost pure win–how many lectures did you miss as an undergrad due to hangover, sleep deprivation from finishing other projects or working late, relationship drama, etc? That problem, at least, goes away with online lectures you can watch at your convenience.

susheel sharma December 27, 2012 at 4:29 am

Its a likeable infomation for EDUCATION

Floccina December 31, 2012 at 5:32 pm

How does the fact that few pay the full price impact this?

susheelcbitss January 14, 2013 at 10:00 am

great job i like thanks admin

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