Higher Education Free Trade Agreement (HEFTA)?

Distance education removes the geographic barriers to educational choice. Once removed, those courses that are the same across schools --typically those taken in the last two years of high school and the first two years of college -- become commodities. As a commodity, standard economic theories can be applied to their pricing and consumption (or lack thereof). When you look at the higher education market through the lens of international trade theory, one can see ways in which the cost of high school and college can be dramatically reduced. One can also see why such changes are slow to happen.

Here's an excerpt from my master's thesis that I wrote in 1997, which, astoundingly and unfortunately, is still relevant today:

"The problems of integrating institutional course offerings is similar to the evolution of international trade and the creation of a global, integrated economy. In the international arena, each country could be said to produce roughly two classes of goods, those that they produce exclusively and those in which they compete. For instance, the climate of Mexico allows the growth and export of oranges and the cold waters of Finland provide cod fishing unavailable in Mexico. Clearly the orange and cod trade between both governments will help the other. However, both America and Japan compete to produce automobiles. Although Japan might produce better and cheaper automobiles, and the American consumer would prefer to purchase a better and cheaper automobile, political pressures conspire to prevent such purchases. Because “competitive” products are common to both countries, they are likely to affect more consumers, therefore, the benefits gained by sharing these products are likely to be larger than the benefits gained by sharing “exclusive” goods. As countries increase their trade, their economies become more integrated.

In distance learning, the colleges can be considered countries and their course offerings can be considered to be “exclusive” and “competitive” goods. Finally, as national economies or institutional curricula become even more integrated, industry specific government subsidies and regulatory barriers in international trade and state subsidies to specific institutions in distance education could affect the competitive balance."

To extend the analogy, two schools will be willing to import and export their low-enrollment, highly specialized courses (say, Mandarin Chinese and bio-mechanical engineering) because importing these does not threaten their existing courses. However, they are much less willing to import college algebra, english composition and chemistry 101, because these courses will threaten a school's existing math, writing, and chemistry faculty. To put it more bluntly, why won't a 4 year college which charge $1000 per course simply outsources its english 101 course to a community college which charge $250 per course? While consumers benefit from the first scenario, they REALLY benefit from the 2nd.

Though much of higher education has become a commodity in the last decade and the number of educational providers has grown substantially, the established educational players have little interest in "opening their borders" to credits granted at other colleges. Like taxation, subsidization and regulatory barriers in international trade, schools have a number of tools and policies at their disposal to keep their borders closed. For instance, individual schools set articulation policies and graduation requirements. Groups of like-minded schools set accreditation requirements which have important financial implications. State and federal governments provide price subsidies that affect the market for courses. Lastly, the byzantine labrynth of articulation policies, graduation requirements, accrediting agencies, and financial aid information limits the transparency of the process. Even if credits are officially transferrable, if it is difficult to find that out, students will be discouraged from trying in the first place.

* Articulation policies: Each school sets its own policies about the courses from other schools that it will count as credit. For instance, even when a public institution and a for-profit institution are accredited by the same body, public institutions (importer) are reluctant to accept credits from for-profit colleges (exporter), where for-profit colleges (importer) are very likely to accept credits from public colleges (exporter). A similar dynamic exists among 4 year and 2 year institutions. These are similar to regulatory policies that might be enacted at a national level. For instance, a government may decide that only products from countries with certain environmental or labor laws are allowed to be imported.

* Graduation Requirements: Even if a school does import another school's credits, other regulatory barriers are likely. For instance, an importing school might count a student's course as credit, but not credit toward graduation, or not credit in a specific discipline necessary for graduation. Though not monetary, this is, effectively, a tax. A student may import the course as credit, but may have to pay for this course again or pay for a different course when it's unnecessary to meet graduation or distribution requirements.

* Accreditation: The regional accrediting agencies are funded by their member institutions. The agencies' purpose is to help institutions improve. However, because this is a quality assurance body created by the members that it oversees, its ability to impose dramatic change, impose requirements contrary to its members vested interest, and to respond to external forces is dramatically limited. By linking regional accreditation to a student's ability to receive federal financial aid, regional accrediting agencies are the de-facto quality assurance bodies for higher education. This is similar to the multi-national groups that govern economic policy. For instance, an accrediting body could be compared to the OECD, European Union, or World Bank donor countries.

* Price Subsidies: Higher educatoin is one of the few industries where for-profits, non-profits, and publicly subsidized non-profits offer the same product at radically different prices. All states subsidize their public higher education systems to greater or less degrees. These subsidies, in turn, affect tuition. With tuition artifically lowered, it is difficult for cost-effective solutions to enter the marketplace. The United States continually complains about how EU countries subsidize AirBus in its competition with Boeing in the sale of aircraft.

* Information Asymmetry: This means that the school knows its articulation policies and graduation requirements, but it is extremely difficult for the student to find it out. It is even more difficult to find it out for many schools that the student might be considering. Without having the appropriate information, the student is discouraged from piecing together a lower-cost educational path.

In every other industry, new technologies increase productivity which drives costs down, improves quality, or both. Usually, it is the free market which forces these productivity improvements. Companies that use new technology effectively, frequently start-ups, force established companies to comply, thereby improving the productivity of the entire market. In education, though the technologies exist to dramatically reduce costs and improve quality, the market dynamics do not.

However, I believe that market realities are creating serious cracks in the regulatory structure that protects existing colleges. First, the cost of college continues to rise faster than the rate of inflation and students are seeking ways to piece together an affordable college education. Even the cost of publicly subsidized education has risen to the point that low-cost, high quality, unsubsidized course offerings can enter the market place. Second, students are increasingly turning to distance education for convenience, if not price. This creates a competitive market for distance education classes. As schools compete for students, they are increasingly willing to accept another school's credits in order to attract a new student. Third, as schools are increasingly willing to accept another school's credits, schools are being forced to examine and open up their articulation policies. Public institutions are increasingly enacting articulation agreements among themselves or are being forced to do so by the state government. Fourth, as a result of greater articulation agreements and the searching power of the Internet, credit transfer policies are becoming increasingly transparent. Fifth, the federal government is beginning to take a much harder look at the role of accreditors. Ultimately, the federal government needs to decide if an accrediting body is a self-improvement club or a quality assurance entity. If the former, the financial aid shouldn't be tied to it. If the latter, schools should have a more limited voice in the standards that it sets.

It is a shame that the Internet has not driven the cost of education down. However, today, in higher education, one can see the first cracks in a market that has been protected for a century. If I'm lucky, higher education will be cheaper for my kids than it was for me.