Editor’s note: This post originally appeared in Real Clear Markets on June 8, 2015.
American higher education is on the verge of an enormous and rapid transformation — a “disruptive innovation.” The scale and scope of the change is likely to be similar to that experienced in computers and telecommunications (thanks to the likes of Steve Jobs), and the news industry. The result will be an American college system that is very different from today’s.
Perhaps understandably, it has been the growing impact of education technology that has attracted most attention, due to the emergence in recent years of such phenomena as massive open online courses (MOOCs) – with thousands of students enrolled in each course. It’s true that the spread of low-cost, even free, online introductory classes from new providers, such as Coursera and edX, will make it increasingly difficult for traditional universities to use tuition from heavily subscribed “101” classes to cross-subsidize expensive upper-level courses. This will be especially the case as innovators offer low-cost courses through accredited institutions that can count towards degrees and be eligible for federal student aid.
But the other existential threat to the higher education world is the performance evaluation information now becoming available to the potential student customer. That’s a growing factor in the higher-education market.
When there is an asymmetry of information favoring the supplier in a complex industry, such as health care or higher education, which gives suppliers a crucial advantage since it is so difficult for the consumer to identify good value for money. So it means suppliers can maintain profitable and cross-subsidized products because the customer is in the dark. That has been true for decades in health care, where hospitals are notorious for their reluctance to release information that would allow customers to compare costs and value. That information asymmetry has led to increasing government action to force hospitals to disclose usable quality information.
Universities have also generally made it difficult or impossible for students and their parents to discover the true return on their tuition investment. That permits inefficient and low-quality institution to continue in business, and means many students accumulate heavy debt only to discover their degree does not translate into good job prospects or future earning potential.
But information asymmetry is beginning to erode in the world of higher education. That means the market will do better in weeding out institutions that cannot show measurable value and make it easier for new forms of competition to enter the picture.
A quiet information revolution is taking several forms.
First, the now-familiar US News & World Report rankings have spawned a range of other ratings. Some, such as Forbes and Kiplinger, focus on providing prospective students with detailed comparisons of actual expected costs and graduation rates. Meanwhile, reflecting different visions of “value,” the American Council of Trustees and Alumni (ACTA) looks at how colleges stack up in providing key areas of knowledge.
The sophistication of these rating systems is steadily improving, and this will help students become more knowledgeable buyers and sharpen competition between institutions. Very recently the Brookings Institution unveiled a measure of “value-added” within a ratings system. This uses a variety of data sources to measure college performance by comparing the actual mid-career salary of alumni and compares that with what a graduate from a similar type of school with similar characteristics could be expected to earn. The characteristics used include such factors as family income, race and high school preparedness. Interestingly, such a value-added measure produces quite different rankings of colleges and universities than the previous generation of ratings tools and is a more meaningful measure of return on investment.
Second, better information is becoming available on the likely financial return from taking particular majors. As many past graduates learned the hard way, the likely salary after graduation varies widely according to the student’s major. Georgetown University researchers have developed a detailed breakdown of the likely earnings potential of majors at US colleges and universities. These range from a median of just $36,000 for early childhood education to $120,000 for petroleum engineers. Combining data on majors with value-added data on institutions gives students a powerful information tool to choose between colleges.
Third, crowdsourcing has an important role as an information tool. Social media sources like Rate My Professors may be viewed with disdain by many academics, but this type of information allows students to further refine their ability to assess how particular courses will fit their particular learning characteristics. These customer-generated reviews, just like Amazon book ratings or movie reviews by one’s favorite critic, are an important additional source of information to empower consumers.
The basic business model of higher education has changed little for hundreds of years. Many university faculty and administrators assume it won’t change much in the future, even if budgets get a little tighter. They are wrong. Once customers obtain the information tools they need to measure value in a market, the gentle breeze of competition becomes a tsunami.