Let's Deregulate Online Learning

David Plunkert for The Chronicle

November 06, 2011

Both nonprofit and for-profit colleges profit, usually handsomely, from providing online courses. While aggregated data on cost and revenue are difficult to find, all the recent online-learning business models point to substantial profit margins.

The quick growth of for-profit colleges results from recognition that an online course can be priced as if it had the same overhead as a face-to-face course, when it has almost none. Nonprofit colleges use the same tactic when offering prestige-label online degree programs in conjunction with private-sector providers who share the tuition revenue. Colleges running separate online divisions usually transfer their profits back to the main campus, thereby using revenue derived from online students to subsidize campus-based expenses.

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But doesn't developing online programs require substantial up-front investment? you ask. They did, once, but the plummeting price of learning software and digital content, and the rise of cloud computing, make start-up costs very low, particularly when amortized across the scale of an online course.

So, if all colleges act like for-profits when it comes to online learning, why are nonprofits considered, well, nonprofits?

Let's think back to the mid-20th century, when accreditation first became the gatekeeper for students' eligibility for government grants and credit. At the time, the basic economic model of a university was, more or less, the same that it had been since the 1500s. Because subject-matter experts were scarce and real-time communication options were limited, it made sense to build impressive campuses to attract professors and enable teaching. With such large fixed costs, adding a few more professors was relatively cheap. A critical mass of professors attracted a critical mass of students, who attracted more professors, and so on.

That model—substantial fixed costs with low marginal costs (the cost to offer one more class)—is the economic model that was "hard-wired" when colleges' accreditation status and revenue streams were inextricably linked. Because the strongest signals of value in a high-fixed-cost model are the physical plant and faculty credentials, accreditation mostly measures variables related to those. Because student mobility was quite limited, standards governing the transfer of credits were unnecessary. All that worked—for a long time.

But online learning has a fundamentally different economic structure. Real-time and speedy synchronous and asynchronous communication options abound. The location of the professor and the student is irrelevant. Content can be cheap or free. The price of the software that enables such learning experiences is plummeting. Courses are mobile, so students don't have to be.

Online education is characterized by extremely low fixed costs and low marginal costs. Without having to carry the overhead of a face-to-face course, online courses should, more or less, cost only as much as the professor's labor. However, almost all colleges—for-profit and nonprofit—price online courses the same as or higher than their face-to-face courses. When state support is added to tuition and fees, the price is frequently 10 to 20 times higher than the professor's labor costs. In theory, such sweeping profit margins would quickly disappear as competitors move into a market. However, an accreditation system tailored to a high-fixed-cost business model, postsecondary education's dependence on taxpayer-supported financial aid, and the reluctance of colleges to honor courses taken elsewhere conspire to restrain course-level price competition, keeping prices to online students much higher than they should be.

If the existing regulatory model is not appropriate for a product with low fixed and low marginal costs, what is? The answer for online learning might be no regulation—or very little, anyway. Government intervention in private markets is usually done to protect consumers, fix market failures, protect local industries or, possibly, foster an informed citizenry. Of these, consumer protection, market making, and fostering an informed citizenry are relevant to education.

But think about it. College tuition has risen four times faster than inflation, grade inflation is rampant, studies indicate that students are learning very little, per-student debt is skyrocketing, profit margins for online courses are substantial, and the federal government felt it necessary to reregulate already accredited for-profit institutions. Given all that, it's hard to argue that the existing regulatory structure is protecting customers.

Further, with starkly lower tuition resulting from marginal-cost pricing, the financial risk to consumers could be—should be—sharply reduced. Given that there are hundreds of providers willing to provide online courses to students, the online learning market hardly needs stimulation or protection. Anyone with an Internet connection can access an online course, so the real limit to educational accessibility is price.

To be sure, minimum consumer protection and quality-assurance standards are necessary, but they would be far more protective, accurate, and efficient if they reflected a set of minimum expected outcomes around core general-education courses, rather than an all-encompassing, input-focused evaluation system. Put plainly: If a program is effective, who cares how many Ph.D.'s it touts among its administrators or how grand its home office looks?

States or the federal government could assess what is easily assessable—general-education and skills-based courses. For courses and programs whose outcomes aren't as easily measurable, the market does a much better job of determining value. Let a hundred providers bloom, whether they be colleges; companies like mine, StraighterLine; single professors; teams of professors; or, most likely, some combination of all of these. Those that offer the best product for the best price will succeed, and the others will fail.

The remaining obstacle is ensuring that government funds are being used appropriately. One solution is to shift the financial risk of supporting online courses entirely to private lenders. Or, if the public chooses to stimulate the private market, subsidize some portion of the loan to deserving populations. As with Gainful Employment rules, but far more efficient, private lenders would quickly determine what combination of student characteristics, online programs, and interest rates represent a good investment.

The question of whether online learning is worthy of college credit has been implicitly settled. Thousands of accredited colleges offer online courses, and there is nothing to distinguish an online course from a face-to-face course on a student's transcript.

The obvious next question is why isn't it cheaper? The answer is that online learning has been shoehorned into a financial and quality-assurance model that does not fit its economics. When online learning is regulated differently, its price will plummet.


Burck Smith is founder and chief executive of StraighterLine, which offers college courses online, and founder and former chief executive of Smarthinking, which offers online tutoring. He is a member of the American Enterprise Institute's Higher Education Working Group.