In a globalized, knowledge-driven economy, the quality of higher education is a pivotal contributor to socio-economic advancement, yet its assessment remains complex due to its inherent subjectivity and multifaceted nature. This study presents an innovative methodological approach for evaluating the quality of higher education within the knowledge economy framework, utilizing the context-input-process-output (CIPO) model, exploratory factor analysis, and stochastic frontier analysis. The input indicators include financial resources (government spending per student, direct public funding for a student, share of capital/current expenditures, compensation to the teaching/nonteaching staff), human resources (student–teacher ratio, share of enrollment in higher education, number of teachers), and expected duration of higher education. The output indicators include the general level of graduation from first-degree programs and level of education, at least completed short-cycle higher education. Indicators of economic (GDP per capita) and social (employment rate and Gini index) development of the country were chosen as context parameters. Conducting a comparative analysis across 36 European countries from 2001 to 2017 available data, the authors identified integrated factors for input and output parameters, as well as context parameters characterizing the quality of higher education. Then we categorize national higher education systems into five distinct quality levels: very low, low, satisfactory, high, and very high. This classification enables us to dissect and understand the challenges faced by countries at the lower end of the quality spectrum and propose strategic solutions informed by the best practices of the leading nations. Our findings offer critical insights into optimizing higher education quality to enhance competitive advantages for educational institutions, improve employment prospects and living standards for students, secure a more qualified workforce for employers, and spur economic growth and productivity at the national level. This comprehensive assessment underscores the role of quality education as a cornerstone of the knowledge economy, driving innovation, economic development, and societal progress.