Key Points

• The higher education market is stagnant. The vast majority of students attend colleges that are more than 50 years old, and rising demand for college has not seen the entry of new institutions.
• State authorization agencies, the first point of entry to the market for new colleges and universities, represent an underappreciated barrier to entry in higher education.
• Authorization agencies impose many requirements on new colleges that are counterproductive, such as accreditation mandates. State regulations also give rise to long approval timelines and disadvantage innovative educational models.
• Reformers should reduce authorization agencies’ emphasis on “inputs” to the education process and focus more on consumer protections and student outcomes.

Executive Summary

Higher education suffers from barriers to entry. Though the ranks of students at traditional colleges have grown by 29 percent over the past three decades, the number of active institutions has declined. Four in five students today attend an institution that was founded before 1970, and virtually none attend a school that formed in the 21st century. This stagnant market contributes to higher tuition—as new schools cannot enter the market to compete down prices—and arguably suppresses innovation that typically comes from new market entrants.

For aspiring colleges and universities in the United States, the first point of entry to the market is a state authorization agency, which decides which institutions are allowed to operate in the state. Though processes for approval differ from state to state, most state authorizers require would-be institutions to satisfy a list of inputs-based requirements and some demand new colleges justify the need for their existence to competitors. Most state authorizers also require new colleges to secure accreditation, which adds another layer of costs and restrictions.

As a result, the approval process for new institutions can drag on for years, as two case studies in this report illuminate. A new college in Rhode Island serving adult learners took five years to receive approval from its state authorizer and nine years to qualify for federal financial aid, in part due to heavy pushback from existing colleges in the state. In Texas, which has a reputation for friendliness to innovation, the University of Austin spent nearly two years preparing its application and waiting on a decision from its state authorizer. It has only just begun to enroll students.

State reformers have many options to improve their authorization systems to make higher education markets more competitive. First, authorizers should steer away from inputs-based requirements around faculty, pedagogy, and facilities, both to accelerate approval timelines and make regulations friendlier to new models. They should also drop accreditation requirements, which add costs but largely fail at quality control. Authorizers should maintain and strengthen consumer protections to ensure students are made whole when experimental models fail. They should also evaluate both new and existing institutions on an ongoing basis by examining student outcomes data.

Higher education is not a dynamic sector of the economy, and this is in no small part due to barriers to entry. Reform-minded state governments should consider how improvements to their authorization systems can lower costs and foster innovation in higher education markets.

Introduction

Artificial barriers to entry have been a feature of markets for millennia. From medieval guilds that prevented non-members from becoming weavers or blacksmiths, to modern patent systems that suppress generic alternatives to brand-name drugs, barriers to entry have kept would-be suppliers of certain goods and services out of the market. The usual justification for such barriers is to protect consumers from unqualified or fraudulent providers but, too often, barriers to entry have resulted in higher prices and artificial scarcity.

Market-friendly policy analysts frequently target barriers to entry such as unnecessary patents, occupational licensure, and certificate-of-need laws in health care. However, some of the most daunting—and underappreciated—barriers to entry in the United States constrain competition in higher education.

State governments play a key role in setting barriers to entry in higher education. Each state operates one or more state authorization agencies which must approve new colleges and universities to legally operate and enroll students. As the first point of entry to the market for new institutions, state authorizers have unique power to affect the landscape of postsecondary education.

Restrictive state policies keep the higher education marketplace closed to new entrants. This allows incumbent institutions to charge higher tuition and removes the competitive pressure that drives innovation. Higher education stagnates, and students continue to lose faith in the value of a college degree.

But smart policy can create a more open environment in which new and potentially innovative entrants can make their mark. Lower barriers to entry may reduce tuition, improve the quality of higher education, and open the door to potentially transformative changes in how colleges operate. Moreover, state authorizers can pair these lower barriers to entry with strong consumer protections that ensure both new and existing colleges are held accountable for their results.

Read the full report here.