Solving the Sheepskin Effect

His strongest evidence is the sheepskin effect. The returns to education cluster in graduation years. Three years of college without a diploma is worth a fraction of four years with one, though the difference in learning is a single year. If school were mainly building human capital, the payoff would accumulate steadily. It doesn’t. It arrives when you cross the line.

Caplan puts the split at roughly 80 percent signaling, 20 percent skill. We could argue about the number, but the direction is not seriously in dispute.

The consequence is a zero-sum game. If the degree mainly sorts people, everyone has an incentive to get one, and each new graduate makes the last one’s credential worth slightly less. Students spend more years and more money to hold the same relative position. American degree-granting institutions spend around $700 billion a year. Students carry about $1.8 trillion in debt. Caplan’s conclusion is that we should stop subsidizing the race.

Signals do real work. No employer can see productivity at the moment of hire. They can only see proxies. The better the proxy, the better the match between a person and a job, and matching is not zero-sum. Better matching means lower churn, higher productivity, less time between jobs, higher incomes. Delete the signal and you do not free the economy from a wasteful contest. You blind it.

The literature makes the point precisely. Altonji and Pierret showed that employers lean on education early in a career and lean off it as they learn what a worker can actually do. The weight on the credential falls; the weight on hard-to-observe ability rises. Read that finding forward. The degree is a stopgap for information employers do not have yet, and they abandon it the moment they get something better. The gap between what an employer knows on day one and what they know in year three is exactly what a better signal is worth.

So the problem is not that we signal, but the instrument for doing so. The most important sorting mechanism in the labor market runs on a device that costs four years and six figures and outputs a few bits: degree or no degree, elite or not, and a GPA nobody trusts. It’s the most expensive low-bandwidth data transfer in the economy.

If such a device would exist, employers would require the brain map instead of the degree. Not out of hostility to universities, but because the report is better, faster and cheaper. Applicants would follow, because $200 beats $100,000 for the same job. The teaching would then have to survive on its own merits, priced against everything else a person could do with four years and the money. That’s the honest test of what higher education sells. Most of it doesn’t survive the brain mapper.

Unfortunately, the device doesn’t exist, but something close enough to it can be built now.

The important thing is the byproduct. A system that teaches you and then tests you necessarily knows an enormous amount about you: what you know, at what depth, how fast you got there, what you do when you’re stuck, whether you finish. Run that across a full curriculum and you have a continuously updated map of a person’s capability. Add serious collaborative project work and the map extends to everything a transcript has never captured: how someone performs against a deadline, with other people, on work that’s real.

That map is a knowledge graph, and it’s a better signal than a diploma has ever been, granular and current, while the degree is a high-level snapshot of someone still in development. And it’s verified, unlike a resume.

A graph is also machine-readable, so the endpoint is not a document at all. An agent holding your record can read a job description, judge the fit, apply on your behalf and tell you exactly which parts of your history to raise in the room. On the dimensions an employer actually cares about, it knows you better than you know yourself.

That’s the brain mapper, approximated in software, at a price much closer to $200 than to $100,000.

Of course they did. Online courses competed with the part of the university that was never the product. Nobody pays six figures for the lectures. You can get better lectures for free on the internet.

To displace a university you have to displace its signal. That’s the position nobody attacked, because until recently nobody could produce a signal an employer would accept in place of a diploma. Now it can be built, and whoever builds it takes the part of higher education that carries the value.

The moat has the same shape as the incumbent’s. A credential is worth whatever employers believe about the population standing behind it, and that belief compounds. Better members produce better outcomes. Better outcomes make the record more credible. A more credible record attracts better members. It’s a two-sided network in which the currency is trust, and the incumbents’ trust is depreciating in public.

We’re changing who pays. Universities are paid up front by the student for seat time regardless of what happens next. We think the signal should be paid for by the party that requires it from applicants, and that the institution producing it should hold a real stake in the member’s long-term success.

Employers. Recruiting is a market measured in hundreds of billions of dollars a year, in which intermediaries charge 15 to 30 percent of first-year compensation to forward resumes a hiring manager could have read themselves. Hiring managers don’t have much more information than the employers themselves do. We have access to the knowledge graph and our placement fee is 10 percent, against a pool already filtered on cognitive ability and proof of agency and continuously verified afterwards. We can charge less and deliver more because the expensive part, finding out whether the candidate is any good, is already done and doesn’t have to be repeated for every employer who asks.

Members. The online membership will be very affordable and the campus membership is $449 a month. No tuition, no four-year lock-in, no debt necessary. (Pricing is indicative for the first cohort.) We’re also exploring a model where we offer these memberships below cost, offset by our other revenue streams. This would give us access to a larger pool of applicants, higher talent density and, simply, more business.

Equity. Membership is priced partly in equity in whatever a member builds: one percent on joining, and one percent for each year of membership. This aligns our interests with the entrepreneurial ambitions of our members.

The revenue we’ll make from recruitment fees and equity will far exceed what we’ll receive in membership fees, even if we charge double for membership. This firmly aligns FrontierU’s interests with those of our members. Our revenue is a claim on their outcomes. A university is paid the same whether its graduate founds a company or never finds work. We’re not. The incentive to select well, teach well and signal accurately is structural here, not aspirational.

Everything cruel about the arrangement follows from that. A student who leaves after three years has paid three quarters of the price for a fraction of the signal, and the debt doesn’t adjust. So people stay enrolled for reasons that have nothing to do with what the next year will teach them. They’ve borrowed money and now they’re locked into the system. Their only way out is through, leading to a great deal of waste: instead of building a startup or taking a great job offer, or changing to a program that fits them better, they complete their program. Young people who chose the wrong track when they couldn’t know better pay a big penalty for pursuing their dreams.

FrontierU doesn’t grant degrees, and that’s deliberate. Members who want an accredited one can enroll in parallel with a partner university at a fraction of traditional tuition, and that stays their choice rather than our product. Our goal is to make that unnecessary, through our knowledge graph and the report based on it. What we issue is not a certificate awarded at the end, but a record that updates the day something happens: an exam passed, a project shipped, a skill verified. It’s worth something from the first month and increases continuously. None outsized part of its value sits behind a line you have to cross.

Remove the line and the dropout disappears as a category. Nobody drops out of FrontierU. Members arrive when it serves them and leave when it stops serving them, and three years of membership is worth three-quarters of four years. Membership is open-ended and can be paused or ended at any time, allowing members to pursue projects, work or try out a startup idea. A member who leaves to run a company can come back, and the record picks up where it stopped.

The obvious objection is that the diploma proves persistence, and that a system without a finish line cannot. The truth is the reverse. At FrontierU, persistence stops being inferred from a single finish line and becomes visible in detail: what someone actually finished, how long they stayed with the hard thing, how much they learned and what they shipped when it got difficult. It’s the trait the diploma was standing in for, measured instead of assumed.

It disciplines us, too. An institution that can’t lock a member in for four years has to be worth paying for every single month.

Any serious challenger has to compete there. A better learning product aimed at an elite institution misses, because the elite institution is not selling learning.

So we also compete on selection. We admit roughly the top 2 percent of applicants, and we admit them on raw talent and drive. No legacy preference, no DEI allocation, no athletic recruiting. Every seat awarded on a basis other than ability and drive is noise pushed into a signal that employers are paying to read, and it makes the credential worth less to everyone holding it.

Where the elite institutions read SAT scores and high school transcripts, we test cognitive ability directly. A tested IQ of 120, roughly the top 10 percent of the general population, is a hard floor. Above it, the odds rise with the score.

The reason is reach as much as prediction. An SAT score is partly purchased: enough tutoring moves it, and the tutoring goes to the households that can pay for it. A high school transcript records a particular school, a particular curriculum and a particular set of parents, and it’s less readable outside the country that produced it. Both instruments in large part measure how much investment a young person has already received. A cognitive test, sat cold, measures their potential, which is all that matters at their age.

That matters most for the applicants the incumbents never see. The seventeen-year-old whose national transcript nobody in a US admissions office can interpret. The one whose family could not buy test prep. The one who has never appeared on anybody’s list. A test they can sit from anywhere, at almost no cost, is the widest net available. Then give them what actually converts potential into output: peers of the same caliber, individual teaching that adapts to them, campuses to build on, and employers who can finally read what they can do.

Widening access means finding potential and funding it. It means making higher education more affordable in terms of time and money, while removing the institutional barriers existing in the accredited system. It doesn’t mean lowering the bar and calling the result inclusion.

There is another conclusion available: Signals are worth keeping. They’re simply overpriced by orders of magnitude and starved of resolution. Cut the cost of producing one by a factor of a thousand, make it richer than anything a university has issued, and sell it to the employers who need it most. The four-year degree then loses the last argument it has.