Indiana Gov. Mitch Daniels answers question during a news conference after being named as the next president of Purdue University by the school's  trustees in West Lafayette on June 21, 2012. Photographer: Michael Conroy/AP Photo
Indiana Gov. Mitch Daniels answers question during a news conference after being named as the next president of Purdue University by the school's trustees in West Lafayette on June 21, 2012. Photographer: Michael Conroy/AP Photo

The college business model, says Mitch Daniels, is all wrong and deserves to be toppled. Other than that, he seems to like his new job as Purdue University's president. On Wednesday, he sat down with Bloomberg News reporters and editors for a discussion about college costs, online education and inequality.

Daniels is a former Indiana governor and White House budget director under President George W. Bush, who nicknamed him "The Blade" for his budget-cutting skill. He supports President Barack Obama's call for a better college-rating system. "The ratings of today are worse than none at all, because they tend to encourage bad behavior," he says, "like the more you spend, the better your ratings tend to go." A lot of schools have decided to chase the ratings, he says, resulting in serial tuition hikes.

He doesn't like Obama's idea of federal ratings, however, which he feels could be manipulated. Instead, Daniels would have schools provide better information about graduation rates and post-graduation success -- putting the emphasis on results and costs.

One of his first acts at Purdue: declaring a two-year tuition freeze. Next up is an increased emphasis on Internet classes. Already, Purdue has converted 63 of its larger courses to a hybrid model in which students watch most lectures online. Classes are reserved for projects or other exercises where students have to demonstrate what they've learned.

"We've got to answer the pajamas question," says Daniels, by which he means show how colleges add value beyond what students can get by sitting at home. He will be watching closely a Georgia Institute of Technology plan to offer an online master's degree in computer science next year. It will cost just $7,000, versus as much as $60,000 for the traditional course. The program is being subsidized by AT&T Inc. "If it had to stand on its own, it'd probably cost more," says Daniels.

Lower-cost colleges and easier access, he says, could help address the growing problem of income inequality. Young people whose families "can afford to send them to the finer universities, naturally enough, socialize with each other, meet each other, marry each other, and then they produce children who do the same thing. We're into the second, third generation of this, and it's part of the inequality problem we've got."

Another Daniels initiative will involve some form of graduation test, similar to the bar exam for lawyers, that will determine what students actually learned, versus what grades their professors have given them. "Employers have used the college diploma as a screening device," but it doesn't really indicate what an employer would find useful.

He also envisions a day when students can create their own portfolios of credentials that might appeal to an employer, instead of a traditional college degree. A student could acquire badges, for example, for having passed an accounting test, a statistics test and a management test. Each one could come from a different college. The result would be a stable of credentials that weren't bundled by one university.

Tenured professors may find that the brave new world of higher education will leave them the same way that blue-collar workers have been left by technology in recent decades -- without a job. Daniels doesn't shy away from that possibility, saying that's progress. While he doesn't oppose tenure per se, he says he would figure out ways to protect academic freedom through long-term contracts with built-in performance appraisals.

Daniels hasn't excluded himself from the pay-for-performance trend. He will receive a portion of his pay only if he meets several criteria, including how exiting graduates do on tests compared with when they came in. (Disclosure: I'm an ex-Boilermaker myself.) He concedes that it could take a few years to get the tests and the data right to really judge how well he is doing. "But why does the Frenchman kiss the lady's hand? The answer is he has to start somewhere."

(Paula Dwyer is a member of the Bloomberg View editorial board. Follow her on Twitter.)