Around the world, tuition at universities is rising at a much faster rate than inflation and challenging students’ return on investment. Reduced government funding and higher operating costs are driving the need for change at universities. The mismatch in employer needs and employee skills is leaving over seven million jobs unfilled in the U.S.
These trends are opening the way for new approaches in higher education. Innovations in how post-secondary education are delivered, financed, and recognized are driven by a range of actors—from large public universities like Arizona State University to elite private institutions like MIT to the many relatively new education companies entering the sector like Make School, Coursera, and Trilogy Education.
But to understand why these new approaches are emerging, we need to first look at what is driving them. While there are many factors influencing the direction of post-secondary education around the world, three are particularly noteworthy for influencing recent innovation: reduced return on investment for students, reduced government spending, and significant skills mis-matches between graduates’ abilities and jobs available.
What’s driving innovation in higher education
One way students can evaluate whether to invest in higher education is through potential wage premiums—namely if what students would earn with their education is higher than what they would earn without it. An important element in understanding the return on investment of higher education is the cost of the degree.
The average wage premium in the EU and U.S. for those with a tertiary education is approximately 60 to 75 percent more than they could earn without the degree, while it is around 150 percent in some middle-income countries like Brazil and Chile. In the U.S., tuition prices have skyrocketed and the cost of an undergraduate degree is 13 times higher than it was 40 years ago. Tuition and fees have increased over 1,000 percent since the late 1970s and the increase in the cost of food and housing was less than a third of that.
Another aspect influencing recent innovations is the increase in tuition and fees, which stems from a mix of factors including reduced government funding and increased spending on amenities to attract students. In the U.S., for example, states cut funding deeply after the recession hit—spending 16 percent less per student in 2018 than in 2008. Universities are responding with cost cuts and seeking alternative revenue sources. For example, Purdue University has reduced its in-state student intake by approximately 4,000 over the last ten years—while increasing its out-of-state and international student intake by about 5,000—as these students pay higher tuition largely without the need of financial aid.
In addition to reduced funding, rising costs, and decreasing wage premiums in places like the U.S. and U.K., there is also the worry that what students learn at university will not necessarily give them the skills needed for the jobs available. This skills mis-match is particularly acute in fields like computer science where real-world practice easily outpaces academic curricula. By 2020, one million computer science-related jobs will go unfilled, and many computer science programs at universities are outdated. In the words of one Make School college student attending its innovative tech program after taking computer science classes from the elite public university where he received a B.A., “my university courses taught me all about the theory of computer science, but I couldn’t actually code.”
There are currently seven million job openings and over 6.3 million job seekers in the U.S., and the acceleration of the digital economy and the rise of automation is only exacerbating this worker shortage. Of the job openings mentioned, 1.2 million or 17 percent are in the healthcare sector, highlighting a continued shortage of nurses in the U.S. According to a recent study by McKinsey, this sector is the only one in which “the need for physical and manual skills will grow in the years leading to 2030.”
These major shifts in higher education are opening opportunities for new approaches and new actors to help support post-secondary learning and skill development. There are six trends that are particularly notable.
1. Online education has become an increasingly accepted option, especially when “stackable” into degrees.
Enrollment in online courses has more than quadrupled in the last 15 years in the U.S. While not as explosive in other countries, online options are gaining traction around the world. Given the increased cost of higher education, online programs are offering not just increased flexibility, but also a major reduction in cost. Coursera offers a fully online master’s degree from the University of Pennsylvania in computer and information technology for one-third the cost of the on-campus version. Several programs are also allowing students to “test” degrees by taking courses that can eventually be “stacked” into a degree, thus lowering their risk. MIT now offers a supply chain management degree with a portion of the curriculum online through edX before students enter the on-campus program. Arizona State University allows students to take the first year online as part of the Global Freshman Academy. In both programs, students complete a portion of the degree online and then apply for the on-campus, full degree at a fraction of the price.
2. Competency-based education (CBE) lowers costs and reduces completion time for students.
There is an increase in CBE, which allows students to apply their work and life experience to their education. These degree programs tend to be less expensive, self-paced, and more career-oriented. If students—either through workplace training, outside reading, or purely life experience—happen to have the competence and knowledge required for a particular subject, they can take the test and get credit without having to take a class. Title IV funding (financial aid) is available for some of these programs, which includes the University of Wisconsin and Southern New Hampshire University, a sign that the U.S. Department of Education recognizes their importance. In previous discussions, the global strategy company Parthenon estimated that more than 600 institutions are either exploring or have launched CBE programs, with double-digit growth expected annually from 2013 to 2020. It is too early to predict the efficacy of these programs, but their popularity with students and employers continues to rise.
3. Income Share Agreements (ISAs) help students reduce the risk associated with student loans.
In the U.S., the private sector is improving the student loan dilemma for students with ISAs. Countries like Australia have government-run agreements—where students don’t pay back their loans until they get a job and meet certain income thresholds—but currently, private companies provide ISA options in the U.S. Vemo Education works with universities and skills-providers to establish these agreements. Institutions can also make direct offerings, such as at the previously mentioned Make School, which provides a newly accredited applied computer science degree designed to take two to three years. This requires students to pay back 20 percent of their income for the first five years of employment, and if they don’t find a job, they aren’t responsible for payments. Institutions share the risk with the students, and in this particular program, are held accountable for student outcomes.
4. Online Program Manager (OPM) organizations benefit both universities and nontraditional, working-adult students.
OPMs help traditional universities build and maintain their online degree or program offerings, while opening new and flexible options to nontraditional students. Generally, through a revenue share model, the university provides the content, while the OPM primarily puts it online and leads the marketing efforts. The leader in this market is 2U, which, for example, partners with the University of North Carolina to deliver an online master’s degree in public health. Another smaller but fast-growing player in this market, which according to Eduventures, is expected to reach $2.5 billion by 2020, is Coursera, which works with the University of Pennsylvania, Michigan, and HEC Paris, among others. Companies like Trilogy Education partner with top universities to deliver in-person skills training on-campus in fields such as coding and cybersecurity. Other companies like Orbis Education partner with universities to help bridge the healthcare provider shortage through a hybrid approach to pre-licensure healthcare programs, while ExecOnline partners with top business schools to deliver executive leadership courses online.
5. Enterprise training companies are filling the skills gap by working directly with employers.
Given the massive mismatch in employer needs and worker skills, there are many companies working with corporations to ensure employees are rightfully skilled. Trilogy Education not only partners with universities, as mentioned above, but also leverages its network of partners and its platform to help companies bridge their own tech-talent gaps in both hiring and training. One of the more successful models has been Pluralsight, which is an online platform for IT and software developer training. Its focused, industry-updated content, and close ties to employers are key success factors. A unique model to address this mismatch is Revature’s platform, which utilizes university partnerships and close collaboration with employers to deliver a program where students pay their tuition over a two-year period after they are employed.
6. Pathway programs facilitate increasing transnational education, which serves as an additional revenue stream for universities.
The brightest students around the world that can afford to study abroad are increasingly embarking on journeys overseas, primarily to the U.S., U.K., and Australia. According to Studyportals, the number of internationally mobile students is expected to increase from 4.5 million in 2015 to nearly seven million in 2030. International students are increasingly attractive to universities, as they allow expanded reach and programs offered at different price points. Students from China, India, Saudi Arabia, and South Korea account for more than 50 percent of students who go abroad to earn their degree, with China as the largest source. The U.S. has seen a recent decline in its growth of international students, which some link to stricter immigration policies, but student flows are expected to increase globally. Pathway programs, which are a small but fast-growing segment of the transnational education market, help foreign students get admission into U.S. institutions through bridging academic entry standards. Companies such as the U.K.-based Study Group and U.S.-based Shorelight partner with universities to set up these programs and use revenue share models, providing an additional revenue source for universities. Most of these programs are in countries that have been traditional draws for higher education like the U.S., but some are now also in countries like China that traditionally send many students overseas.
There will undoubtedly be on-going opportunities for new approaches and actors to innovate in higher education as the sector continues to face high costs, decreasing returns on investment, and skills mis-matches. Watching these six trends and how they develop over time will be interesting. It is unlikely that they will reverse course anytime soon.
Emal Dusst, a Robert S. Brookings Society member, serves on several education-related boards, including Coursera (observer) and American University of Afghanistan. Dusst was vice president, strategy and chief of staff to the CEO at Laureate Education, a B Corp and the largest international network of degree-granting higher education institutions. Dusst has a Bachelor’s in economics from UCLA and an MBA from the Kellogg School of Management at Northwestern University. As a Robert S. Brookings Society member, Dusst provides financial support to the Brookings Institution. The views expressed in this blog are solely those of the authors and the content adheres to Brookings’s commitment to quality, independence, and impact.