The ever-increasing cost of higher education is making the system unsustainable. The time has come to examine a different model of delivery, and indeed a different business model.

According to the National Center for Public Policy and Education, over the past 25 years, the cost of higher education has grown 440%, nearly four times the rate of inflation and double the rate of health care cost increases. These cost increases have occurred at both public and private colleges. Just take a look at articles with headlines like: “The End of Higher Education Enrollment as we Know It”; “Is College Worth the Investment?”; “Will Higher Education be the Next Bubble to Burst?”; and “Drowning in Debt: The Emerging Student Loan Crisis.” And higher education tuition is out of control, creating a debt crisis. The number of graduates in debt increased by 27% over just the past five years. And, not surprisingly, the default rate has grown each year. In June of last year, student loan debt surpassed credit card debt in America.

A Los Angeles Times article pointed out some of the grim facts, such as college debt for students is now above $1 trillion; and unlike other forms of debt, student loans are virtually impossible to discharge through bankruptcy. The U.S. federal government frequently garnishes paychecks, tax refunds, even Social Security payments from people who haven't paid their government-backed loans.

The higher education bubble idea is based on the proposition of speculative boom and bust phenomenon in higher education creates the risk of an economic bubble that could have repercussions in the broader economy. According to the theory, while college tuition payments are rising, the rate of return of a college degree is decreasing, and the soundness of the student loan industry may be threatened by increasing default rates. College students who fail to find employment at the level needed to pay back their loans in a reasonable amount of time have been compared to the debtors under sub-prime mortgages whose homes are worth less than what is owed to the bank.

Glenn Reynolds, the author of The Higher Education Bubble, predicts that the bubble will burst “messily”. People have long believed that “whatever the cost, a college education is a necessary ticket to future prosperity.” Easy credit has allowed them to pay ever more, and colleges have raised fees to absorb the extra cash. However, this cannot go on forever, says Reynolds, especially when people start asking whether a degree in esoteric studies is worth the $100,000 debt incurred to pay for it.

More recently, a report based on the book Academically Adrift: Limited Learning on College Campuses found that after two years of college, 45% of students learned little to nothing. After four years, 36% of students learned almost nothing. (See: Brain Drain: Most College Students Learn Next to Nothing, New Study Says.)

A 2009 article in The Chronicle of Higher Education related concern from parents wondering whether it is worth the price to send their children to college. The Economist in turn hypothesized that the bubble bursting may make it harder for colleges to fill their classes, and that some building projects will come to a halt. The Boston Herald further suggested the possibility of mergers, closures, and even bankruptcies of smaller colleges that have spent too much and taken on too much debt. National Review writer Dan Lips has proposed that the bubble's bursting may bring down higher education prices.

Ohio University economist Richard Vedder has remarked on the PBS Newshour ,"The reality is: there is a growing disconnect between what the labor market is telling us on the one hand and what college enrollments are on the other. By one way of measuring things, using U.S. Government Bureau of Labor statistics data, as much as one out of three college graduates today are in jobs that previously or historically have been filled by people with lesser educations, jobs that do not require higher-level learning skills, critical thinking skills, or writing skills or anything of that nature."

Economist Joseph Schumpeter, writing in the Economist, argues the past is not a reliable guide to the future: “the current recession-driven downturn in the demand for Western graduates will morph into something structural. The gale of creative destruction that has shaken so many blue-collar workers over the past few decades is beginning to shake the cognitive elite as well.” Schumpeter goes on to say emerging economies—especially China—are pouring resources into building universities that can compete with the elite of America and Europe. They are also producing professional-services firms such as Tata Consulting Services and Infosys that take fresh graduates and turn them into world-class computer programmers and consultants. The best and the brightest of the rich world must increasingly compete with the best and the brightest from poorer countries who are willing to work harder for less money.

At the same time, the demand for educated labor, Schumpeter argues, is being reconfigured by technology, in much the same way that the demand for agricultural labor was reconfigured in the 19th century and that for factory labor in the 20th century. Computers cannot only perform repetitive mental tasks much faster than human beings. They can also empower amateurs to do what professionals once did: Why hire a flesh-and-blood accountant to complete your tax return when Turbotax (a software package) will do the job at a fraction of the cost? And the variety of jobs that computers can do is multiplying as programmers teach them to deal with tone and linguistic ambiguity.

Other economists are adding to this “doom and gloom” scenario for higher education. Paul Krugman, argues that post-industrial societies will be characterized not by a relentless rise in demand for the educated but by a great “hollowing out”, as mid-level jobs are destroyed by smart machines and high-level job growth slows.

While a university education is still a prerequisite for entering established professions such as medicine, law, and academia, Schumpeter says, these professions are beginning to buckle. Newspapers are fighting a losing battle with the blogosphere. Universities are replacing tenure-track professors with non-tenured staff. Law firms are contracting out routine work such as “discovery to computerized-search specialists such as Blackstone Discovery. Even doctors are threatened, as patients find advice online and treatment in Walmart's new health centers.

Thomas Malone of MIT argues that these changes—automation, globalization, and deregulation—may be part of a bigger change: the application of the division of labor to brain-work. Just as Adam Smith's factory managers broke the production of pins into 18 components, so companies are increasingly breaking the production of brain-work into ever tinier slices. TopCoder chops up IT projects into bite-sized chunks and then serves them up to a worldwide workforce of freelance coders.

Schumpeter concludes: “These changes will undoubtedly improve the productivity of brain-workers. They will allow consumers to sidestep the professional guilds that have extracted high rents for their services. And they will empower many brain-workers to focus on what they are best at and contract out more tedious tasks to others. But the reconfiguration of brain-work will also make life far less cozy and predictable for the next generation of graduates.”

It’s not only the costs of higher education and the volatile job market that has impacted it, but also our view of the purpose(s) of higher education. The traditional notions of the value of higher education, or a liberal education was to develop an educated citizenry, and the acquisition of socially beneficial knowledge. Somehow, those lofty purposes have been replaced by a process to guarantee certain kinds of jobs. And in time, the higher education programs that had a clear pay-off to professional jobs—particularly scientific and technical ones—had the biggest rewards, whereas those students engaged in a liberal arts programs were relegated to finding entry level jobs (if any), and the notion of a liberal education became diminished.

Larry Cuban, professor Emeritus at Stanford University and author of As Good As It Gets: What School Reform Brought To Austin, summarized the problem of higher education:

  • In California, 260,000 college graduates under the age of 30 are working in low-paying jobs that have historically gone to high school graduates and dropouts such as food services, retail sales, and clerical work.
  • Pathways in Technology Early College High School—P-Tech for short—opened to 230 students in Brooklyn (NY) this year to prepare students for technical jobs. A six-year program in cooperation with IBM and other companies will produce graduates with associate degrees prepared for entry-level jobs paying $40,000 like software specialists who answer questions from customers.

Cuban says, “I know it may be a stretch but here is how I tie these facts together. When high school students enter a six-year technology program to earn associate degrees that will lead to middle-class jobs at places like IBM, and when B.A. and B.S. graduates take low-paying service and retail industry jobs while other college grads return to community colleges to get training for medical and technical jobs, serious questions arise about the current mantra of everyone has to go to college.”

According to Louis E. Lataif, Dean Emeritus of Boston University’s School of Management and former president of Ford of Europe, free market capitalism abhors a vacuum, so the increasing cost of education has inevitably given rise to alternatives, including a new, for-profit college industry. There are today about two million students enrolled in institutions like the University of Phoenix, Corinthian, Kaplan, and DeVry University. There are reportedly 5.6 million students, or nearly 30% of all higher education students, enrolled in at least one online class. Digital technology offers fascinating approaches to improve cognition. If you can buy a self-paced calculus course on DVD for $67, is it worth spending $5,000 to take the same course at a private university? Will you know more calculus? Of course the mutual learning that occurs in college is of value. But is it worth spending 75 times more for the same body of knowledge? The Chronicle of Higher Education reported: “Several studies have shown that students learn a full semester’s worth of material in half the time when online coursework is added.”

So part of the discussion of the future of higher education needs to revolve around the business model of higher education. Has the old model, like many old business models, outlived its usefulness?

John O. Harney, writing in the New England Journal of Higher Education, cites the research of Jay A. Halfond of Boston University and Peter Stokes of Northeastern University recently who conducted a non-scientific "pulse" survey of presidents at smaller New England institutions about their views of new models. The presidents generally agreed that to become more sustainable, colleges need to change their financial model, lower discount rates, reach new audiences through online learning, and strengthen their institution's competitive differentiation.

Certainly the whole area of online education in its various manifestations needs to be seriously explored. So too do education business models in other countries. For example, higher education is free for citizens in Finland, Norway, Sweden, and Germany, underwritten by the state governments. How do they manage their cost structures and make higher education relevant to the original purposes of education and the workworld?

The time to take a look at higher education seriously has arrived, before the “bubble” bursts.

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