Disruptive Competition: Online Degree Programs in the Higher Education Market

In February 2006, Congress repealed the “50 percent rule.” Originally enacted in 1992, this rule prevented undergraduate institutions from receiving federal financial aid — including funding through Title IV or the Higher Education Act (HEA) — if more than 50 percent of courses were offered online or more than half of the students were enrolled in online degree programs. The repeal of the 50 percent rule resulted in a sharp increase in online degree program offerings and enrollment. By 2012, more than six percent of all bachelor’s degrees in the United States were awarded online. This rapid increase in online education has raised an important question: How does this change affect traditional brick-and-mortar postsecondary institutions?

In their recent NBER working paper, David Deming, Michael Lovenheim, and Richard Patterson examine the impact of the growing online degree industry on the overall higher education market. The disruption caused by online degree programs puts competitive pressure on non-selective brick-and-mortar institutions, which provide services similar to those offered by online institutions. This pressure is expected to be especially high among institutions located in areas with very few competitors. The easy accessibility of online programs has the potential to eliminate some of the market power possessed by many providers of postsecondary education, pushing them to offer lower tuition and higher-quality education.

Deming, Lovenheim, and Patterson examine how enrollment, expenditure per student, and tuition changed in non-selective traditional schools following the repeal of the 50 percent rule. In order to examine this effect in various markets, the authors utilize the Herfindahl index. High values of the Herfindahl index indicate that a market includes a small number of competitors that enjoy monopoly power. The authors predicted that brick-and-mortar institutions located in markets with a high Herfindahl index would experience a greater decrease in enrollment, a larger increase in instructional spending, and a greater decrease in tuition rates, when compared to those located in low-Herfindahl index markets.

Using the Integrated Postsecondary Education Data System (IPEDS), the authors find that an increase of one standard deviation in a market’s Herfindahl index value is associated with a decline in post-2006 enrollment of about two percent and an increase in instructional spending per student of about 1.8 percent. These findings support their prediction that non-selective brick-and-mortar schools would experience stronger competition following the change in access to federal financial aid dollars for online degree programs, and would invest in improving their services to stay competitive.

However, contrary to the authors’ expectations, tuition actually increased after 2006 among non-selective private institutions with a high Herfindahl index. This was particularly true among four-year colleges. Yet, it is plausible such schools suffered a greater drop in student enrollment compared to schools with a lower Herfindahl index and because of this raised tuition to make up for the lost revenue. Additionally, these private for-profit universities tend to charge high prices and serve students who are heavily subsidized by Title IV financial aid, so it is possible that they responded to pressure from online competitors by improving service quality rather than by offering lower tuition.

Notably, online universities have long been at the center of legal controversies. In December 2016, DeVry University, a private for-profit college based in suburban Chicago, agreed to a $100 million settlement with the Federal Trade Commission after being charged with deceptive advertising regarding employment outcomes. Past studies and empirical evidence also point to lower educational outcomes, lower completion rates, and poor employment rates for online students compared to traditional college students.

Deming et al. offer a new perspective when considering online degree programs. Despite the varying quality of the services offered by online institutions, they may force some traditionally sluggish colleges to improve their service quality and better respond to labor market needs. If the increased competition raises the quality of educational offerings, more students might be drawn to higher education. While online education remains a relatively young industry, it has grown at a fast pace. Further research is needed to better understand its impact on education and labor markets in order to craft sound regulatory policies.

Article source: Deming, David, Michael Lovenheim, and Richard W Patterson. “The Competitive Effects of Online Education.” NBER Working Paper No. 22749 (2016).

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