I'm sorry if this topic has been put to bed (it hasn't been touched in a while) but as a hopeful grad student I'd like to point out the obvious downside of isolated education: social interaction is greatly diminished.

In a subject like philosophy I found, as an undergrad, that a very significant portion of my understanding of an area came through informal discussion with my classmates outside of the lecture theatre.  We'd understand different points in different ways, and by chatting (not formally discussing or analysing) about what each of us understood, we would drive each other's understandings.  Appeals to everyday, demographic-related analogies and parallels helps students to better understand what can be dauntingly formalised in a textbook or a lecture.  (An overweight friend lost several kilos after being inspired by Plato's physiological description of the tripartite soul; we had a discussion about the pre-lunch lecture with relation to the ham and cheese croissant he'd just bought.)

This is certainly the case with undergrad students, but bear in mind that graduate students are often simply undergrads with an extra bit of paper and a (sometimes false) air of comprehension.

I think that the lack of social interaction between students on-campus would have huge negative effects on how well a student comes to understand what s/he's just heard in a lecture.  I also don't think that attempting an alternative "virtual classroom" atmosphere would do well as a subsitute since, as I've said, it's not all about what goes on in the classroom or lecture theatre that's important to a student's education.