I think you'd have to get kids in physical classes to learn reading and basic math concepts, but otherwise, I think it's a great idea: low over-head, student-centric education. The only other thing I'd add is the need for moderated online forums since half of retention and inspiration to learn more comes from discussion. And the mentor-students are another great idea for saving money.
I can imagine academic fraud might become an issue, but perhaps nothing so glaring that technology couldn't be developed to stanch it.
Anyway, all in all, this seems like a very feasible, cost-effective solution to many of the problems we were discussing in the other thread. Nice work