Does US higher education need fundamental reforms to survive and thrive?

Even as they deal with the short-term difficulties arising from the pandemic shock and the resultant decline in enrollment figures, many regional public universities and mid-tier private colleges will need to reevaluate their underlying economic model. They must also consider reforming their basic approach to revenue generation and expenditure allocation in order to survive and thrive in an increasingly challenging environment. 

The pandemic shock and recent technological breakthroughs offer an opportunity to fundamentally rethink the economics of higher education. That’s especially true as they apply to two of the most vulnerable segments — regional public universities and mid-tier private colleges

Institutions of higher education have long faced a problem of rising price and declining quality as flawed incentive structures have encouraged rapid cost escalation and poor financial management. Furthermore, the higher education sector is riven with agency problems (the interests of the principal – students, parents, taxpayers and donors – is often not aligned with those of the agents – faculty, administrators and trustees) that lead to increased budgets and thus expenditures. 

Students and parents often have limited information at the outset about the actual quality of undergraduate instruction available at the higher education institution under consideration. In many ways, college education is like an experience good (its quality is unknown prior to purchase) and yet it is somewhat unique in that it is costly to switch to another provider, is usually purchased only once in a lifetime and cannot be transferred to someone else.

Reputation-based competition and usage of high price as a signal of quality are strategies or tactics often employed in the market for experience goods to overcome information asymmetries. In the case of the higher educational sector, however, they create significant distortions that lead to excessive growth in consumption amenities and non-instructional costs. 

These challenges require reforms on multiple fronts. To partially reduce risks associated with the high tuition discounting model, private colleges may find it beneficial to partly replace merit-based grants with income sharing arrangements. By increasing the “skin in the game” for higher education institutions, this may reduce some of the agency problems as well. Colleges and universities will have a direct stake in making sure that their graduates succeed in their careers after graduation. 

Furthermore, straightforward measures to assess value added by higher education institutions can help alleviate asymmetric information problems. Colleges and universities can collect detailed information on graduate school acceptance and job placements of recent graduates and make the information publicly available. They can provide accurate longitudinal salary data on average earnings of alumni from one to 10 years after graduation. Such information can be quite valuable to future applicants and their parents and provide a way to reduce uncertainty regarding the quality of a particular institution.

Better placement of graduates could be ensured by curbing grade inflation and boosting the signaling aspect of college performance to potential employers. For instance, transcripts could list course GPAs alongside the student grade to provide a truer reflection of course rigor and academic achievement. Reworking faculty teaching evaluation metrics to be more outcomes-based would also better align the interests of faculty, students and future employers. 

College and university leaders must do the difficult work of allocating resources to ensure inputs on the margin generate the same “bang for the buck.” For many institutions this will mean making the hard-nosed budget management decisions to avoid the long-term commitments of tenure in some cases and increasing the opportunity for full-time non-tenure track practitioners with rich hands-on experience and strong networks valued by students, parents, taxpayers and donors.

Recent improvements to information and communication technology may finally allow the higher education sector to achieve productivity improvements. The biggest impact of the pandemic may have been the exposure to remote learning technologies gained by faculties across the nation. The potential to incorporate synchronous and asynchronous remote and virtual lecture tools into a wide range of courses may finally provide a noticeable productivity boost. Efficiencies and quality gains can also be obtained via technology enhanced student-faculty interactions. 

The pandemic may also force geographically proximate colleges and universities to pool resources and share facilities in order to lower costs. This can reduce the need for each and every institution to try to offer a comprehensive set of services and support facilities. With the aid of smart classrooms and remote technologies, it may even be feasible for nearby colleges and universities to share instructional resources and potentially achieve a dramatic reduction in operation costs.

Rarely do great companies have a proprietary position that insulates them from the constant hand-to-hand combat of competition. The pandemic has proven that regional public universities and mid-tier private colleges are not insulated either. Long before the 2025 demographic cliff hits the higher education market, colleges and universities must adapt in ways described herein and a thousand more to out-execute the competition day in and day out.

Vivekanand Jayakumar is an associate professor of economics at the University of Tampa. Brian Kench is a professor of economics and dean of the Pompea College of Business at the University of New Haven.

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