Online University Courses Have Growing Pains, But Are Supported By Secular Trends

Guild Investment Management |

On several occasions over the past few years, we have brought readers’ attention to the emerging world of massive, open online courses (MOOCs). Some institutions have embraced them, such as Harvard and the Massachusetts Institute of Technology, who teamed up to run the nonprofit edX. MOOC giant Coursera now partners with dozens of world-class universities, including Caltech, the University of Pennsylvania, Stanford, the University of Chicago, and Princeton. Udacity, founded by Google VP Sebastian Thrun, operates on a for-profit basis, focuses on tech-related subjects, and has teamed up with Georgia Tech and AT&T (T) to offer an inexpensive master’s degree in computer science. Other institutions -- notably Oxford and Cambridge Universities in the UK -- have yet to join the party.

Criticism of MOOCs

As online courses and programs have grown, so has a chorus of criticism. Participants in free MOOCs have a pretty abysmal completion rate -- about 10 percent of those who sign up go on to finish the course. (Since they’re free, many who sign up may not be committed, but the numbers are worrisome to providers who generate revenue by charging a fee for a certificate of completion.) There’s concern about cheating by participants, who might, for example, pay someone else to take a final exam for them. Instructors at established institutions seem to fear that online courses will elevate popular “superstar” professors and exacerbate the “prestige gap” with their colleagues.

More existential worries focus on the epochal change in educational model. MOOCs, critics say, are moving away from Socratic teaching that focuses on dialogue between student and instructor, and towards a more atomized delivery of content (as opposed to the facilitation of deeper reflective learning). That marginalizes the community of learning that has allegedly been central to the western universities since medieval times.

However, we believe that the debate over MOOCs, and over online education in general, is following a pattern that’s familiar from other instances of disruption from new technologies.

Answers to the Critics

The proponents of online education, of course, have answers to the critics. They point out first of all that the structure of MOOCs is highly adaptable, and that course providers will be able to make rapid changes to improve outcomes. Since MOOCs are so new, it is likely that they will develop rapidly in the next few years as they seek to capture the best of online and offline educational systems.

Anant Agarwal, the MIT professor who runs edX, thinks that a hybrid model will ultimately predominate. He notes that students’ first year could easily be spent in a MOOC environment -- realistically, first-year undergraduates in brick-and-mortar institutions don’t get any of the one-on-one contact with professors that supposedly makes offline learning superior. He imagines two years after that spent on a traditional campus, and then a final year combining online studies with part-time work in their chosen field. This sort of blend leverages MOOCs for their strongest features and would greatly reduce the total cost of a degree.

We See the Secular Trend as the Real Story

MOOCs will cope with their growing pains. They’ll do so because the trends driving their adoption are secular, powerful, and likely irreversible.

First is the funding squeeze faced by post-secondary institutions. They suffer from an economic phenomenon known as the Baumol Effect. According to economist William Baumol, salaries in jobs that don’t show productivity growth will continue to rise with the salaries of jobs that do show such growth. University professors -- like those in many professions that center on one-on-one interactions, such as nursing -- have shown little growth in productivity over time. If the “value” each professor produces is measured as the number of graduating students, teachers’ productivity has increased considerably less than that of workers in sectors such as manufacturing or retail. Yet their salaries have continued to grow as fast as those of workers whose productivity has increased dramatically -- and they have to, since universities are competing with other industries to attract qualified teachers. This is one reason why the price of a university education has risen, while the prices of many manufactured goods have fallen.

Indeed, as the price of a university education has skyrocketed over the past generation, administrators have often justified those costs by referring to their high labor and capital expenditures. The result is that tuition costs have far outstripped consumer price inflation overall -- rising nearly tenfold since 1980.

As government has found itself in more and more of a fiscal bind, its contribution to higher education funding has dropped back well below the growth rate of tuition costs. In the five years between 2007 and 2012, U.S. tuition rose, on average, by 20 percent -- but government funding per student dropped by 27 percent. Between 1993 and 2012, the average total debt burden accumulated by borrowing students doubled.

The burden of rising tuition costs has largely fallen on students themselves. That burden can be seen in the rapid rise of student loan debt. Many commentators have observed that the current trend of student debt accumulation is unsustainable. While university degrees do convey a “wage premium” to those who hold them, that premium is becoming too small to justify the cost of the education that confers it -- especially outside the elite national institutions, or outside STEM fields.

The Inexorable Rise of Student Debt

Much of the motive force behind the growth of MOOCs is simply the market for more realistically priced education, as the established system pushes students to the breaking point.

Disruption In Other Sectors Calls For Changes In Education

It’s not just the cost of post-secondary education that is driving the change. The established life-pattern that underlies university education is also shifting. It used to be that the model was the completion of undergraduate and graduate degrees in a student’s early 20s, followed by entry into a career path and steady advancement.

However, disruptive forces are at work to render that model increasingly irrelevant to many workers.

We’ve commented before on the confluence of technologies -- big data, cloud tech, and ever-faster processing -- that are bringing more and more former middle-class professions under pressure by automation. Automation continues to do its disruptive work in the blue-collar world -- and is beginning to affect the white-collar world as well, as professions that until now have needed human workers (such as technical writing, for example) are automated. A recent study by two Oxford professors estimated that some half of American jobs are at risk of “computerization” -- many in middle-class bread-and-butter fields such as services, sales, and administrative functions. This trend will only accelerate over the next several decades.

This disruption means that more and more workers will be seeking retraining when they face wage pressure from automation. And that means that more education will be needed not just at the beginning of a student’s career, when job and family obligations are light, but later on in that career, when a student will have to juggle work and child-care responsibilities. edX says that the median age of its students is 31. Traditional brick and-mortar institutions, whose schedules are largely built around what’s convenient for instructors rather than students, will be hard-pressed to meet this demand unless they adopt MOOCs and their methods.

MOOCs continue to gain ground on their traditional peers, driven by some of the forces identified above. We believe that MOOCs will secure acceptance by more and more institutions for transfer credit, and that the emergence of a blended online/offline program such as that envisioned by Mr. Agarwal is likely. The preeminence of degrees that require the investment of years of study may also come to be challenged by targeted micro-programs, which could come to be highly regarded by employers. What’s increasingly certain is that the university education of the future will not be tied to what we know from the past -- and that will be good for students and employers alike.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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