Editor’s note: This post is co-authored by guest contributors Jon Bischke and Semil Shah. Bischke founded eduFire and RG Labs and is an advisor to Altius Education and Udemy. Shah is an entrepreneur interested in digital media, consumer Internet, and social networks. You can follow Jon (@jonbischke) and Semil (@semilshah) on Twitter.
In the debate sparked by Peter Thiel’s “20 Under 20 Fellowship” (which pays bright students to drop out of college), one fact stands out: the cost of U.S. post-secondary education is spiraling upward, out of control. Thiel calls this a “bubble,” similar to the sub-prime mortgage crisis, where hopeful property owners over-leveraged themselves to lay claim to a coveted piece of the American dream: home ownership.
Higher education is another piece of this dream, offering a chance at social advancement and the potential for a high return on investment. During the sub-prime crisis, brokers financed home sales on the belief assets would appreciate. A similar situation is brewing on U.S college campuses, where institutions extract high tuitions from consumers in exchange for degrees and credentials that are thought to be like homes—assets that will always appreciate in value.
An investment in college education has historically been a smart bet. However, in the same way sub-prime housing models didn’t accommodate for potential price falls, the belief that the value of a college degree will always appreciate is potentially flawed. And, if the value of a degree stagnates while its price tag soars, our higher education system will become unsustainable. Some are going so far as to claim that some university degrees already lead to a negative return on investment.
What is driving this change? Assume, as many economists do, the primary value component of a post-secondary degree is the positive signal it sends to the market. In the 1970s, the economist Michael Spence released his work on labor market signaling mechanisms, which emphasized that a prospective employee’s credential was often a more powerful determinant of whether an employer would hire him, even if the applicant hadn’t yet acquired the relevant knowledge needed for that specific job. This thesis earned Spence a share of the 2001 Nobel Prize.
Today, however, the credentialing provided by universities is becoming decoupled from the knowledge and skills acquired by students. The cost of obtaining learning materials is falling, with OpenCourseWare resources from MIT and iTunes U leading the charge. Classes can be taken online on sites like Udemy and eduFire, either for free or a fraction of the cost to learn similar material at a university, and sites like Veri, which recently launched at TechStars NYC Demo Day, aims to organize and spread one’s accumulated knowledge.
While the “cost” of learning is falling dramatically, the cost of college continues to rise. College costs consist of a wide variety of items including room and board, entertainment, and materials. At least when it comes to materials (i.e. textbooks), start-ups are playing a disruptive role: Companies like Chegg and Bookrenter have changed the paradigm from owning to renting a textbook, and companies such as Inkling, Kno, and Flatworld are betting students will prefer to use digital and/or unbundled course materials.
With all this progress, the toughest nut to crack is tuition. One possible explanation for rising tuition is that universities have long held a monopoly on labor market signaling. Graduating high-school students, for instance, may have been less likely to advance in their careers or society without an undergraduate degree and, increasingly, without some sort of graduate degree. To date, universities have been the only real provider of such signals that young hopefuls need in order to convince employers to hire them.
The tide may be starting to shift. In Silicon Valley, for example, Y Combinator provides a learning environment that looks somewhat similar to an institute of higher learning, but rather than create graduates shouldering debts (which impact their career choices), it produces graduates who learn relevant skills, create companies, and earn money along the way.
The challenge with these new models, however, is that they are not very scalable. At the same time, more potentially scalable models for signaling are emerging. For the past year, certain companies have been hunting for engineers and designers by following projects and reputation metrics of users on Github and Dribbble, as well as Quora and Twitter. In fact, companies have been scouring sites like Stack Overflow to help with hiring so frequently, the company created Careers 2.0, a product designed specifically to pair employers with technical job seekers.
A tenet of Clayton Christensen’s theory of disruptive innovation is that potential disruptive threats are often dismissed as “toys.” If one asks university officials if the academy may face a signaling threat from an online community, the threat may often be dismissed. However, what was once measured through tests and GPAs could conceivably one day be comprised instead of entirely different metrics. This is the new reputation graph where, unlike a university degree, individuals can build a reputation online that doesn’t saddle them with astronomical sums of debt, nor require them to spend a better part of a decade in class during the prime of their lives.
If a scenario plays out where alternative signals begin to rival traditional degrees, this won’t necessarily be a bad thing for universities. In fact, it could be quite healthy by forcing schools to re-think their product offerings and tuition. The days of jamming 500 students into lecture halls supervised by graduate students and charging them several hundred dollars per credit hour for the “privilege” of learning in this fashion may be numbered. Universities may acknowledge that they are not the only stamp of endorsement. The numbers are showing a changing tide: The Economist reported this week that middle-ranking business schools are seeing a “significant decrease in demand” and a Slate article from last month cited an 11.5% year-to-year drop in the number of applicants to law schools.
The fresh cadavers from the shakeouts in the music and publishing industries should provide motivation to presidents, chancellors, and provosts to look seriously at this problem, as many of the same dynamics that disrupted those industries are now at play in higher education. As students around the world start preparing for their year-end exams, it will be interesting to see how seriously leaders of universities prepare for one of the toughest tests that they’ll ever face.