Bending the Cost Curve

Economics paper suggests online education can lower the cost of tuition -- but is it due to increased competition or productivity?

January 27, 2015

Online education can “bend the cost curve” of an undergraduate degree, according to a working paper from the National Bureau of Economic Research, but whether the lower tuition is caused by a boost in productivity -- as opposed to more competition -- is still undetermined.

The paper (abstract available here), authored by business and economics professors at Harvard University and the University of California at Berkeley, explores the fluctuations in the cost of an undergraduate degree -- and if online learning impacted that change -- since the federal government removed a rule that restricted most institutions from offering more than half of their courses online. Known as the 50-percent rule, the regulation was removed in February 2006.

The researchers, David J. Deming, Claudia Goldin, Lawrence F. Katz, and Noam Yuchtman, used data from the federal government’s Integrated Postsecondary Education Data System, or IPEDS, for their analysis. Since data on the number of students taking courses online only goes back to fall 2012, the researchers filled the gap between 2006 and 2012 with enrollment and tuition cost data from institutions where more than 50 percent of enrolled students took all their courses online. They then compared those numbers to institutions where most students took courses in the classroom.

Specifically, the researchers focused on undergraduate students enrolled in “open access and less selective” institutions -- a group that made up about 59 percent of the IPEDS data.

Between 2006 and 2013 -- the latest round of IPEDS data available -- fully online bachelor’s degrees got a price cut, the researchers write. Weighted for enrollment, the median cost (in 2014 dollars) of a full-time online undergraduate degree dropped by 34 percent, while an equivalent face-to-face education at a nonselective public institution rose 9.2 percent. Tuition for traditional programs at large for-profit and nonprofit institutions, meanwhile, posted a more modest decline of about 8 percent.

The researchers also found “modest evidence” that colleges and universities that grew their fully online student populations cut the cost of tuition. Between 2006 and 2013, they found, a 10 percent growth in an institution’s online student population lowered the cost of tuition for all students by 1.5 percent. That finding only applied to the for-profit and public sectors of higher education, however -- the researchers found “no detectable impact” at private colleges and universities.

Those findings may come as encouragement to administrators at public institutions who in recent years have pushed online education as a solution to accessibility and affordability concerns. As examples from across the country have shown -- from Rutgers University to the University of California -- such initiatives often meet resistance from faculty who argue that focusing on online education could compromise the quality of face-to-face instruction.

But the working paper’s conclusions also come with two important caveats. The researchers note that “it is possible that the quality of education suffers when more content is delivered online,” which could warrant a lower price tag. And as the removal of the 50-percent rule caused many institutions to expand their online education offerings, it is possible online learning exerted “competitive pressure on the entire postsecondary education sector, lowering prices and/or increasing efficiency,” they write. “Thus, one needs to be cautious before concluding that lower costs and prices in online programs will raise the productivity of U.S. higher education.”

The paper also has yet to be peer reviewed.

The findings were met with skepticism by officials at the WICHE Cooperative for Educational Technologies, or WCET, an organization that helps member institutions improve their online education programs and that is part of the Western Interstate Commission for Higher Education.

Mike Abbiatti, WCET’s executive director, questioned the “amazingly large number of variables” in the analysis. In addition to controlling for which sector of higher education institutions belonged to, the researchers also looked at selectivity and urbanicity.

Abbiatti also pointed out that many institutions have invested in online education as a potential new revenue stream.

“Most of these institutions that have started these online programs don’t do so to save money,” Abbiatti said. “They do so to make money, and they find out very shortly thereafter that it doesn’t really happen in many cases.”

For all their talk about the cost of an online degree, said Russell Poulin, WCET’s deputy director of research and analysis, the researchers don’t discuss the investments colleges and universities make up front to launch those programs. Poulin described the absence of that factor as a “red flag.”

“Have you changed anything other than adding technology to the course?” Poulin said. “If you do everything exactly the same, and you add in the cost of technology, the cost of instructional designers, all you’ve done is add cost.... The bulk of the cost is people.”


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