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The #2 Port in the Academic Storm Is About to Close

Gary North
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June 23, 2011

The wave of the future for higher education is distance learning. The World Wide Web is a revolution. It offers people opportunities to buy information from anywhere. The cost of delivery is close to free. The need for bricks and mortar facilities is ending. There are several accredited colleges with no physical facilities that offer low-cost degrees.

As of 2006, there were 3.5 million students taking distance learning courses. The figure is higher today.

When I wrote the early editions of my manual, College for $15,000 (or Less), I realized that the bricks and mortar colleges now face a major crisis. They are facing price competition. Management guru Peter Drucker wrote a generation ago that any industry that faces price competition from a new source that offers the same product or service for 10% of the existing price will be replaced by the existing industry. Drucker saw what this means for university education.

Thirty years from now the big university campuses will be relics. Universities won't survive. It's as large a change as when we first got the printed book. Do you realize that the cost of higher education has risen as fast as the cost of health care? . . . Such totally uncontrollable expenditures, without any visible improvement in either the content or the quality of education, means that the system is rapidly becoming untenable. Higher education is in deep crisis. . . . Already we are beginning to deliver more lectures and classes off campus via satellite or two-way video at a fraction of the cost. The college won't survive as a residential institution. Today's buildings are hopelessly unsuited and totally unneeded. (Robert Lenzner and Stephen S. Johnson, "Seeing things as they really are," Forbes, March 10, 1997)

All bricks and mortar campuses are in a position to enter the field of distance learning, yet with only one major exception, Louisiana State University, none of them is doing this. They are in a position to offer low-cost courses to out-of-state students in many fields and do so at a profit, yet they resist.

In 2009, there were three main campuses that offered a wide range of courses at a price of under $200 per semester credit: LSU, Texas Tech, and Eastern Oregon University. Texas Tech offered courses at under $170 per semester credit. In 2010, the school hiked its fees to out-of-state students to over $770 per credit hour. It went from the #2 school in the nation in terms of course offerings and price to one of the most expensive. It thereby killed its distance learning program.

As of summer, 2012, Eastern Oregon will double the price of its courses to all students other than Oregon, Idaho, and Washington. That will effectively remove it from contention.

The former governor of Georgia, Roy Barnes, described the thinking of any college administration that prices its courses at a significantly higher rate to out-of-state distance-learning students.

Many will ask whether states can afford to do this in times of a sluggish economy and state budget cuts. This question is based in large measure on the fallacy that thousands of students will pay out-of-state tuition for a college course they take on a computer at work or at home. When a distance-learning course is priced at an out-of-state tuition rate of $1,200, for example (three times the average in-state charge), the revenue for a college or a state is usually $1,200 x zero students = zero dollars.

Barnes understood pricing, but university presidents do not. The president of Eastern Oregon University offered this explanation for the school's decision to double the price of its distance learning courses to out-of-state students.

In order to increase our revenues, and as mandated by the state, we must develop a non-resident tuition model that fits in with our strategies of being cost competitive. This can be done (Western Oregon is a prime example of this) and we are working diligently in this area. Non-resident tuition will not be our "silver bullet" and save EOU from future budget issues; however, if implemented correctly and aggressively, it will enable us to control our revenue streams much more effectively.

This is economic nonsense. With the defection of Texas Tech in 2010, Eastern Oregon University could legitimately claim to be the second-best deal in distance learning in the United States. There are 4,000 colleges and universities. Eastern Oregon is now in second place. Yet the school never promoted itself for what it was: in the top three. It then moved from #3 to #2 because of Texas Tech's suicidal policy. But it will keep this position for only one more academic year.

Meanwhile, the University of Phoenix has 500,000 students at tuition fees far higher than Eastern Oregon University's.

The University of Phoenix is the wave of the future: the largest university in the world. It is also the most profitable. Yet college presidents of obscure colleges such as Eastern Oregon University, whose schools could give the University of Phoenix a run for its money, hike prices to out-of-state students and think that this is effective marketing. Or, to quote the president of Eastern Oregon, doubling prices above in-state tuition, "if implemented correctly and aggressively . . . will enable us to control our revenue streams much more effectively." Yes, it will, because the revenue streams from out of state students will disappear. They will be so much easier to manage!

Eastern Oregon remains a great deal. The school will let out-of-state students who enroll before summer 2012 to keep the in-state tuition structure for six years. I recommend that any cost-conscious student consider enrolling. But the reality is this: the school is about to forfeit its enviable position as the #2 bargain in American higher education.

You might think that the school's administration would have actively promoted its distance learning program. This never happened. The program was always an afterthought, as these programs are in most schools. The administration and the faculties are geared to an 800-year-old tradition of bricks, mortar, classrooms, and physical presence. For 800 years, students came to the universities. The old rule held true: "If the mountain cannot come to Mohammed, Mohammed must go to the mountain."

With the advent of the World Wide Web in 1995, the academic mountains have been able to go to the Mohammeds of the world. But the administrators do not see the opportunity. They in fact fear it. They see what the University of Phoenix has done, and they do not know what to do to compete. So, they adopt policies of price discrimination. They charge more to out-of-state students. For a tax-funded school, this is simply ridiculous. For any school, it is ridiculous. Brigham Young University, which is private, charges $153.

Schools charge bricks-and-mortar prices for digital education. Digital education is not only superior academically in most liberal arts subjects, it can be sold far cheaper. But administrators pretend that someone is going to buy overpriced services. They are wrong. The administrators are killing their distance learning programs. Meanwhile, the whole world is going digital. Salaried bureaucrats are not entrepreneurial. Does this come as a surprise?

Any school that offered liberal arts courses at $100 per semester credit hour could pay its faculty members on average $90,000 a year for year-round education, and pocket 40% of the fees. But administrators are in the hip pickets of faculty members, and faculty members with tenure (a tiny percentage these days) resist wage hikes for non-tenured members and increased teaching loads (four whole classes per semester!) for themselves. The administrators are walking away from positive cash flow. They do not see it. Even if they did, they would not care.

In this sense, college administrators are like parents. Parents shell out $10,000 a year to send their children to tax-funded universities, unaware that it takes five or six years for the average student to graduate. They do not understand that over 45% of those who enroll as freshmen do not graduate. They do not understand that a standard bachelor's degree can be earned in less than four years for a total outlay of $15,000 or less. They are not price-sensitive. They are under peer pressure and also under pressure from their children.

And then, $23,000 in debt, their children return to live at home and work at some minimum-wage job that they could have gotten five or six years earlier.

The system of higher education in the United States is economically irrational. It survives only because of government regulation through the nominally private accreditation system. But there are still ways around the system.

For two semesters more, Eastern Oregon University is a good way to beat the system.

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