Transforming higher ed: Explaining the QV Index

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May 27, 2010

In an op-ed in the Washington Times a couple weeks ago, I introduced the idea of a QV Index in higher education to create the conditions for what we all want to see happen rather than regulating against what we don’t want to happen. There are a few points embedded in this concept that are worth explaining. For reasons of brevity (this blog will be quite involved as it is), I won’t ground the whole argument here.

To quote from the piece:

“One possible way the government could influence the demand side would be to establish a new track for institutions to access its money based on measures of quality and student satisfaction relative to cost. The better a school performed on these measures compared to its peers, the higher percentage of its educational operation it could finance with federal aid — thereby eliminating the all-or-nothing access to federal dollars and encouraging students to make decisions based on quality and cost, which would drive institutions to innovate.

To create this metric — an institution’s Quality-Value Index — the government could add together four measures: First, does the institution help a student get where she wants to go — or what is its job-placement rate? Second, upon leaving the institution, how much do the student’s earnings increase — over some amount of time to account for growth in salaries in a given profession — relative to the total revenue the institution received? Third, would alumni choose to repeat the experience? Fourth, are the students able to repay their loans — or what is the institution’s cohort default rate (CDR)? If this measure is used, CDRs should be indexed to credit scores or a similar measure upon matriculation, or else institutions would retreat from serving students who are the least well-off and need education the most. “

The formula, in essence, would be the following:

QV* = 90-Day Hire Rate + Change in Salary/Revenue per conferral + Retrospective Student Satisfaction + Cohort Repayment Rate

*(Each factor is normalized and measured relative to the average)

The first key to this is that it changes a college’s access to funds from an all-or-nothing game, as it is now, to a sliding one based on how well it does on the QV Index. There are lots of advantages to a system like this. Students would feel the pressure to make smarter investment decisions in their education based on the historical quality of that investment because it would be easier to get financing to schools that offer higher value. This is a big departure from the current state where an institution either clears a bar or doesn’t—and therefore there is no pressure on the demand side for all of those institutions that clear the bar (which in the current system can’t be too high or it just eliminates access for many). Moving to this system will also calm some of the volatility we’ve seen as of late during the debate over the change in gainful employment rules.

I’m not sure the right sliding scale to use to determine how much an institution can finance its operations through federal Title IV funds. One of my colleagues has suggested something along these lines:

QV Ranking

Percent of Revenue that can be drawn from Title IV

Top 25%

100%

50-75th Percentile

90%

25-50th Percentile

85%

0-25%

70%

The above system might produce some unintended consequences, but it does seem like a reasonable and simple place to start the discussion. The ranking system, which is based on how an institution does relative to the others—not on an absolute number—is important because it will keep institutions competing to improve and jump into (or remain in) higher tiers.

The components of the QV Index itself are all based on the idea that students attend higher education to improve their futures.

The first part—the 90-day placement rate upon a student’s departure—is self-explanatory. If institutions are serving their ultimate customers (employers) and their clients (students) well, there will be a clear connection here.

The second element is vital— a student’s change in salary upon leaving an institution divided by the revenue per student (or total cost—this includes tuition, alumni gifts, financial aid, endowment payments, other subsidies, etc.). This serves as an incentive to offer an education that is affordable—not an education that we’ve just allowed people to afford regardless of true cost. Right now there is little incentive to be lower cost in the market because of the ready access to the dollars regardless of price. Of course, if an institution markedly increases one’s salary upon leaving—and therefore improve their fortunes considerably—paying more for that may make sense. But we shouldn’t incentivize institutions to be more costly as we do right now based on U.S. News & World Report rankings and the like. At its heart, this says students should be able to make good money because of—and relative to the cost of—the investment.

The third element—one’s retrospective satisfaction rating—would be based on answering, on a 10-point scale, the following question: “Knowing what you know now, would you choose to repeat your experience at X university?” The purpose of this is two fold. First, it corrects some for the student that is not attending college to get the highest paying job and instead, for the benefit of her future and her long-term happiness (the most important thing), wants to work for a lower paying job—say in the non-profit or government sector—and believes it’s worth paying more for that particular experience (of course, it could also be the case that we could deliver a great program for those wanting those experiences at lower cost). It also judges a school not only on how its students do upon leaving, but also while they are in attendance. Do students there enjoy the experience? As the clients, that’s a worthwhile thing for someone to know.

The fourth element is one that receives a lot of attention already—the cohort default rate. This is another measure that asks if people can afford the debt they have to incur to take what you’re offering (of course, if this works correctly, maybe people will have to incur a lot less debt in the future)—that they can repay their loans on time. This should be adjusted for credit risk so that there is not a disincentive to not serve those who are the least well off. By having this be a sliding scale of access to the government’s funds, rather than a binary all-or-nothing game, we solve a big problem that the current debate over gainful employment has brought to life as discussed above.

The overriding incentive here for students from this is to choose schools that are likely to deliver a lot of value at low cost because that’s where the money is. One of my colleagues is working on how this would affect different students in different scenarios and life circumstances to make sure it works for all of them. I’ll potentially share some of that on a future blog.

Back to the providers themselves. Schools looking to take advantage of financial aid will have to innovate to improve outcomes relative to costs. Their incentives will be to:
– Target a student population they can serve uniquely
– Create new business models that don’t push students out unless those students can pursue their goals better outside the system
– Deliver what the student herself needs (be it good learning, connections, etc.)
– More affordably serve students
– Make students happy
– Connect students to what they want
– Serve students well while consuming

My gut is that in many cases a new group of providers will rise up to deliver education that is fundamentally affordable because most of the providers around today of all stripes have competed on dimensions other than cost. For example, online providers today have largely competed on convenience, not cost, so this won’t be something that their business model can readily absorb, and they may be disrupted. That could be a good thing.

That said, because this is a big shift, you would want to implement this responsibly. One way would be to make this just one way initially to get access to a limited pool of total government funds and bypass the accreditation process that encourages institutions to look like the others out there and not necessarily be all that innovative. Another way might be to implement this gradually—over a 4-to-6 year window perhaps so that schools could build their capacity to innovate on these new metrics.

As I said in the initial op-ed, I recognize that we certainly don’t have all the answers. This blog is more to post this idea and then allow others to join the conversation and improve it. What did we miss? How can we collaborate to create a better system? I’m always worried about unintended consequences from formulae like this; what are the ones here?

I hope to hear from you as we seek to transform higher education.

Michael is a co-founder and distinguished fellow at the Clayton Christensen Institute. He currently works as a principal consultant for Entangled Solutions.