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Three Trends That Will Challenge Colleges

July/August 2015

By Andrew P. Kelly

Entrepreneurs outside the higher education system are finding opportunities to deliver some of the same benefits that institutions offer—but at lower costs—and could eventually cut into colleges’ market share.


Colleges and universities are under immense pressure to prove their value proposition. And for good reason: Tuition prices have grown much faster than the rate of inflation or family incomes, pushing more students to take on debt to finance their education. Many of those borrowers have graduated into a soft labor market. The Federal Reserve Bank of New York found that in 2012, nearly 45 percent of recent graduates were working at jobs that did not require a college degree. Those who don’t graduate have it even worse, as the earnings for those with “some college, no degree” now look a lot like those of high school graduates. The effective delinquency rate on student loans is now as high as it was on subprime mortgages during the housing crisis. 

Some of this is out of colleges’ control. State legislatures, buffeted by economic crises and competing demands, have cut funding to public institutions, leading to tuition increases. But colleges and universities can—and must—do more to enhance the value of their product. For a long time, institutions have used the robust wage premium attached to a college degree to paper over these troubling trends. In reality, though, the wage premium reflects worsening labor market prospects for high school graduates. The absolute return of a college degree—the quantity that determines whether students can pay back their loans and live comfortable lives—has not kept pace with increases in tuition. 

What existing institutions need to realize is that the gap between college tuition prices and the absolute return of a college degree has created space for entrepreneurs to challenge the traditional higher education business model. Entrepreneurs who can deliver some of the same benefits (a signal to the labor market and connection to potential employers) for lower cost can cut into colleges’ market share. As the gap grows, so do these opportunities.

I know what you’re thinking: “Not another tale about how online education is going to disrupt higher education!” The spread of low-cost digital content and online education is certainly one of the important trends that existing institutions must confront. But other innovations on the horizon arguably pose an even greater threat to colleges’ value proposition. New models of credentialing and immersive career training—currently on the periphery—are working to provide learners with a clearer signal to the labor market of what they know and can do. Whether they will challenge the college degree as the signal of choice remains to be seen, but colleges would be foolish to ignore them.

What’s Next?

So, what trends should colleges be watching? 

But the surplus of digital content almost certainly spells trouble for parts of the college business model. Many colleges have responded to the rise of online learning by “making” their own digital content and instruction, and trying to sell it to consumers. Hence the proliferation of homegrown online courses and degree programs that are carbon copies of traditional, in-person degrees in terms of their structure and tuition prices.  

Colleges should think more strategically about where to invest scarce resources. In a chapter for my 2013 book, Stretching the Higher Education Dollar: How Innovation Can Improve Access, Equity, and Affordability, entrepreneur Michael Staton laid out the components of a college degree, in order, from those that are most readily replaced by technology to those that are nearly impossible to replicate online. Not surprisingly, “the content loop”—the authoring and delivery of academic content—is the most readily replicated by competitors. Staton argues that colleges’ comparative advantage lies in the intangible components of what they provide, such as the opportunity for students to build a network, work closely with a mentor, and transition into adulthood.

Despite this, many traditional colleges seem preoccupied with creating their own online courses when they should be doubling down on their most valuable products. Rather than making their own digital content, colleges could use what is now abundant to rethink the way they deliver lower division courses, thereby freeing up resources to enhance the services that are most valuable.

But the diploma/transcript combo is a very noisy indicator, and employers routinely report dissatisfaction with the skill levels of recent graduates. Bachelor’s degrees are not all created equal, nor are all degree programs. In response, organizations within and outside of higher education have begun to organize assessment and credentialing around a much smaller unit of learning—the competency. 

Competency-based models of education are on the rise in higher education. Schools such as Western Governors University, Excelsior College, and College for America allow students to accumulate credits based on what they can prove they’ve learned rather than how long they’ve sat in class. In theory, competency-based programs benefit learners by allowing them to not only earn credit more quickly and economically, they also furnish a clear map of graduates’ competencies that employers can use to identify those who have the skills they need.   

The focus on bite-size competencies and credentials is spreading more aggressively outside higher education. The Mozilla Open Badges project has created an entirely new set of microcredentials that allow students to collect proof of their competencies (the badges) plus additional data that allow observers to see who issued the badge and what tasks students completed to earn it. MOOC providers Udacity and edX now offer short sequences of related courses that result in formal credentials: the Nanodegree (Udacity) and the XSeries certificate (edX). And startups like Degreed and Accredible allow learners to collect and summarize all this learning in one place.

These approaches to credentialing are still very new, and are not yet challenging the degree. But existing colleges should recognize and plan for the possibility that employers may well come to consider alternative signals as being equally informative (if not more so) to a traditional degree. At that point, incumbents may find that they’re selling a product that is both far more expensive and inferior to what their competitors offer. Forward-thinking colleges could work to integrate competencies, badges, and other credentials into their traditional degree programs.  

The skills gap has created an opportunity for new educational organizations. One set—nicknamed learning accelerators—offers an array of short-term, immersive training programs designed to prepare students for jobs that require tech skills (Web development, data science, design, and others). Organizations such as Dev Bootcamp, Flatiron School, General Assembly, App Academy, Galvanize, and others have created a new genre of career training, and students shell out $10,000 to $15,000 to attend a 10- to 15-week program. Many of them are selective, and most are high-touch affairs; students work closely with fellow classmates and instructors for up to 60 hours a week. 

For now, these organizations act as a complement to traditional programs. But that dynamic could change quickly. It may be only a matter of time before they work backward and begin offering more of what traditional colleges provide: general education courses, access to an affinity network, perhaps even a chance to live and work with other learners. 

When or if that happens is truly anybody’s guess, but it would make life a lot more challenging for expensive, tuition-dependent colleges.

Looking Forward

The futurists think traditional colleges are doomed. I think that many institutions can adapt to these new challenges, but only if they’re willing to question the structures and routines that too often go unquestioned. Why does a course have to be 15 weeks long? Who says credentials have to be either 60 or 120 credits? Why should we sell high-priced general education credits when we could focus on the immersive seminars and student-life programs that make our graduates successful? Why can’t my college offer a battery of exams that certify learners as meeting our standard for engineers, economists, or art historians? No diplomas or credits need be involved, just a signal that this person learned enough to master the material. 

These are the kinds of questions that entrepreneurs outside the system are asking. Those within existing colleges would be wise to follow suit.   

ANDREW P. KELLY is a resident scholar and director of the Center on Higher Education Reform at the American Enterprise Institute.


SECTION I: ECONOMICS IN MOTION

Funding Dynamics

Presidential Perspectives

Essay: The Power of a College Degree

Essay: It’s Not Us Versus Them

Rather than making their own digital content, colleges could use what is now abundant to rethink the way they deliver lower division courses, thereby freeing up resources to enhance the services that are most valuable.