How for-profit middlemen are raising the cost of online higher education

Boosters of online higher education have long held out the lofty promise that it would bring down the spiraling cost of college while also widening its reach.

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But a little-known industry of for-profit middlemen, which is skimming off as much as 80% of the proceeds and has U.S. revenues of $1 billion annually, may be thwarting the innovative potential of online education.

Known as online program managers, these companies have been hired largely to connect universities with customers who want graduate degrees. Such students are seen as a source of much-needed revenue at a time when drops in state funding and declining undergraduate enrollment have squeezed higher education budgets.

Hiring these online program managers is quicker and easier for public and private nonprofit universities than building and marketing their own online graduate education programs. But in exchange, the institutions are giving up what is often a large share of the money the programs bring in.

Experts say this is likely keeping prices for students higher than they would be if the universities didn’t have to pay such a large share of revenue.

“The profit incentive is just something that needs to be monitored in these kinds of arrangements,” said Stephanie Hall, a fellow at The Century Foundation, a progressive New York City think tank. “It warrants scrutiny figuring out who is setting the price, who is taking what percentage of that money and doing what with it in return.”

OPMs take a significant cut of revenue brought in by graduate programs

While attention is often paid to for-profit universities and colleges whose students sometimes end up with worthless degrees or no degrees at all, this other kind of profit-driven business has more quietly inserted itself into higher education.

The OPM industry started in earnest about 15 years ago, as more public and nonprofit colleges were looking to ramp up their online programming, and educational technology companies saw a business opportunity in helping them.

In the years since, the industry has expanded and evolved, but the arrangements between colleges and OPMs in their most traditional form — still widely in use today — look something like this: OPMs market the programs, recruit students, counsel them through the admissions process, enroll them, provide the software and tech support needed for the programs to function and even help instructors design online-friendly courses.

Though the faculty teach the courses and the universities control admission standards and confer the graduates’ degrees, much of the work of building and managing the courses is done by the companies.

Even though the companies are often taking the bulk of the tuition revenue the degree programs pull in, the firms still aren’t profitable in many cases. That’s because as the companies add more programs, they need to shell out large sums to ramp them up, said Brett Knoblauch, an equity research analyst at Berenberg Capital Markets, who follows companies like 2U. It takes a few years for the programs to turn profitable, he said.

Online program managers take anywhere between 30% and 80% of the revenue that online degree programs bring into colleges and universities with which they work.

The challenges of this rapid expansion strategy were laid bare this summer, when Chip Paucek, chief executive officer of 2U, told investors on a call that the company would slow down its rate of launches after 2019 to “support our path to profitability.”

The July call also offered a sign that colleges may be pushing back on sharing so much revenue. 2U has historically given colleges only the opportunity to partner through a traditional revenue share, in which it offers its full suite of services in exchange for a cut of the tuition. But Paucek told investors on the call it will soon give at least one school, the University of North Carolina at Chapel Hill, the opportunity to use a fee-for-service model for some programs.

Nick Hammerschlag, president of Entangled Group, an education consulting and investment firm, suspects that shift may be a recognition on the company’s part that asking universities and colleges to give up a large share of the programs’ revenue may make it harder for 2U to hold on to its partners once they reach the end of their agreements.

Companies that offer revenue share arrangements make significant investments in the programs they help to launch up front, Hammerschlag said, but they also get “an extraordinary deal on the back end. I think people realized that ultimately they didn’t need to give up as much opportunity.”

Graduate students are an attractive market

For many reasons, graduate programs make up a particularly attractive market both for these companies and for universities looking to shore up their bottom lines, said Kevin Carey, vice president for education policy and knowledge management at the think tank New America.

One is that there’s no limit to how much the federal government will lend to graduate students to pay for school — they can borrow up to the entire cost of a program. In addition, graduate students’ needs are smaller, and likely cheaper to address than those of undergraduates who need more intensive advising and other services, he said.

“They just want an education and credential that will help their career,” said Carey, who has written critically about the relationship between colleges and OPMs. “It’s a simpler, more profitable market that also has an unlimited source of debt financing courtesy of the federal government.”

There’s no definitive data on how colleges’ relationships with these companies affect the cost of the programs — which include MBAs, master’s in public health, master’s in social work and more — to students. But basic math suggests that having to hand over so much of the tuition to someone else may make it challenging for colleges to provide the programs to students as cheaply as possible.

And though the colleges are still technically responsible for setting the prices of the programs, a recently published review of some of these contracts by Hall and her colleagues at The Century Foundation found that, in at least some cases, the OPMs do play a role.

Her review found a wide swath of approaches to price setting and revealed that it’s been common for OPMs to insist that a school price its program no higher than on-campus offerings, while also requiring that the price be market-competitive.

In addition, Hall and her team found that in the case of one OPM-university partnership to build a coding bootcamp, the contract explicitly provided the OPM with veto power over the program’s price. In another contract between an OPM and a school offering a master’s in social work, reviewed by Hall and her colleagues, there’s a provision specifying that the company might recommend a revised tuition fee based on market research.

“You have a third party that needs to make a profit off this,” said Brendan Cantwell, an associate professor of educational administration at Michigan State University. “Just the cost associated with the revenue share and for the university to make some revenue to cover its costs — it’s probably at a high or a higher price.”

Whether working with an OPM will drive up the price of a degree program for students is one of the many factors universities consider when assessing whether to enter into an agreement with one of these companies, said Deborah Seymour, owner and principal at Higher Education Innovation Consulting, LLC.

“No institution that brings in an OPM is naive enough to think that some of the cost of using an outside vendor” won’t have an impact on the cost to students, she said.

2U’s July call with investors signaled that the company may have some influence over the price of its programs — though the tuition decision ultimately rests with the university offering the program, Jemila Campbell, a 2U spokeswoman, noted in an email. The company reset its growth expectations for the third time in several months in part because of pressure from increased competition, as more colleges launch online programs — in some cases, at a cheaper price point than those 2U offers.

“We’ve got some really good plans in tow to attack one of the things that we think is an important component, which is tuition cost,” Paucek told investors, saying he would reveal the plans at the company’s investor day in November.

The company also announced a partnership in August with the University of London and the London School of Economics and Political Science to offer a Bachelor of Science degree in data science and business analytics for $25,000. That’s substantially less than overseas undergraduates pay to attend the London School of Economics in person.

Institutions that work with OPMs and try to keep their programs affordable could actually lose out on students, according to Dennis Gephardt, an analyst in Moody’s public finance group, which covers nonprofit higher education institutions. That’s because an OPM that works with one university may also partner with others offering the same program, but at a higher price. That means the company may be incentivized to push the programs offered by the school from which they’ll get more money.

Kevin Kinser, a professor of education at Pennsylvania State University who directed a project that involved secret shopping for online degree programs offered through OPMs, said that in that secret shopping, a request for information from one program was answered with information for another program instead.

“Because they have multiple clients, they’re looking to try to put as many virtual bodies in the classroom as they can,” Kinser said of OPMs. “From their business model perspective it might not matter what programs those bodies go into, because it all goes to the bottom line.”

Skewed incentives

Kinser’s example is just one of many ways the companies’ incentives aren’t totally aligned with those of the colleges. That can be a big problem for schools, which are turning to graduate degrees as a way to bring in revenue amid declining undergraduate enrollment.

“The companies have done well. The schools? It depends.”

Gephardt, of Moody’s, said he’s “skeptical” that online graduate degree programs offered through an OPM could provide a “net revenue salvation” that would compensate for other deep revenue challenges.

As Seymour noted: “For every dollar that flows to the OPM, that’s a dollar less in revenue that can be spent on other aspects that the institution may need. Over time, is the investment in the work that the OPM is doing and the revenue that online programs will bring in worth the offset?”

Howard Lurie, principal analyst at Eduventures Research, puts it more bluntly: “The companies have done well. The schools? It depends,” he said.

The arrangements also threaten more than the bottom line. If a school works with an OPM, it may be under pressure to grow a program very quickly to recoup the revenue it’s turning over to the company, said Joshua Kim, director of digital learning initiatives at Dartmouth College.

In some cases, the companies also require that the programs maintain a certain number of students to keep operating, according to a 2017 review of contracts between OPMs and public universities by The Century Foundation. Growing a degree program as quickly as possible may be in conflict with providing a quality educational opportunity, Kim said.

On a call with investors in May, 2U’s Paucek acknowledged the tension between growth and quality. At the time, the company lowered its revenue guidance for the fiscal year in large part because the schools it partners with were becoming more selective, he said.

“It has become clear in the rearview mirror that we were prioritizing growth a bit too much based on the feeling — on feeling the need to be past expectations,” Paucek said on the call.

Amid growing scrutiny of the online program management industry, 2U later announced that, beginning next year, it would disclose more information about its partnerships with universities, including contractual terms relating to academic oversight as well as the nature of its financial relationships.

“Providing greater transparency around our partnerships is the right thing to do and will foster a more constructive dialogue about the value of OPMs,” Paucek said in a statement.

Other online program managers have been accused of going too far to enroll students. A 2013 whistleblower lawsuit filed by former employees against HotChalk alleged the company violated a federal law against providing performance-based bonuses to college recruiters. In the suit, the employees claimed representatives from the company would push students to sign up for courses by offering free iPads and textbooks. If students didn’t meet the college’s admissions requirements, company representatives gave them the chance to explain away any bad grades, the suit alleged.

The company, along with the school it partnered with, Concordia University-Portland, paid $1 million to settle the lawsuit in 2015 and acknowledged no wrongdoing.

At George Mason University, which recently struck a 10-year deal with Wiley & Sons to offer master’s programs in business, health systems management and other areas, some faculty have expressed concern that this drive for growth could result in predatory recruiting behavior. GMU is one of a number of schools across the country that have faced challenges from faculty advocacy groups over these partnerships.

A 2017 fact sheet on the GMU-Wiley partnership touted Wiley’s ability to take advantage of tracking tools and analytics to better reach prospective students. The company also uses “a proprietary, consultative approach” to recruit students and ensure they’re a right fit for the program, according to the fact sheet.

“These programs make me very nervous because they’re profit-driven and they seem to be more about the shareholders than the students.”

The company also plays a role by providing “extensive market analysis” of the tuition students will ultimately be charged for the program — though GMU and its trustees maintain final control over the price. The result is that the price for online courses may be higher than the in-state on-campus price, according to the fact sheet.

“There’s a place for it and I think it can be of high quality and meaningful to the student,” Bethany Letiecq, an associate professor and president of the school’s advocacy chapter of the American Association of University Professors, said of online education. “But these programs make me very nervous because they’re profit-driven and they seem to be more about the shareholders than the students.”

Ashley Frost, who earned a master’s in health administration through a George Washington University-2U program, learned of the company’s involvement only after she was admitted.

“Before I got into the program, I knew nothing about it,” she said of 2U. “It was my understanding that everything was George Washington University. I didn’t understand that it was another program that this was all going through.”

Nonetheless, she was satisfied with her experience. “I would imagine that it takes a lot of burden off of the school to try to create and manage that,” she said of the deals between companies like 2U and colleges.

Thanks in part to the program’s technology, Frost said, she felt connected to her fellow students throughout the time she was completing her degree, even though they all lived in different areas of the country. And the program did for Frost exactly what she expected: furnished her with a master’s degree that she needed to move up into a new position. But it was costly.

As a member of the Commissioned Corps of the U.S. Public Health Service, Frost had access to the GI Bill to pay for her courses. She used up that money (about $23,000 per year) and then some, acquiring her master’s degree and winding up with about $15,000 in debt.

The school discloses 2U’s role in its online degrees to prospective students on its website, said Stacey DiLorenzo, executive dean of external relations for GW’s Milken Institute School of Public Health, which runs the MHA program.

DiLorenzo added that the Milken Institute maintains “complete control” over curriculum, admissions standards and tuition decisions, in addition to other aspects of the program.

“Tuition for the online program and the campus-based program is the same and so is the quality,” she said in an emailed statement.

Why colleges choose to partner

Proponents of these partnerships argue that the companies’ motivations track with the students’ and schools’ best interests. If students and universities aren’t satisfied, the degree programs won’t continue to operate, the business will stop growing and the company will ultimately make less money, Paucek said in a May interview with The Chronicle of Higher Education.

“The notion inherently that my tax status means that I can’t be mission-aligned with the university? It’s just wrong,” he said.

And indeed, colleges can reap benefits by working with these companies. Building an online degree program from scratch requires infrastructure and marketing expertise that universities often lack. For example, 2U is the third-largest advertiser on LinkedIn, Paucek said in the interview — a capacity that’s hard for any single school to match.

More broadly, universities on their own often just don’t have the resources and know-how to launch and make these programs profitable on their own, said Knoblauch of Berenberg Capital Markets. As of June 2018, universities that partner with 2U earned about $6 million to $7 million on average per year from those programs, according to the company.

“Higher education is abysmal as a business,” said Jeff Seaman, co-director of the Babson Survey Research Group, which tracks online education.

In some cases, college leaders are under pressure from boards of trustees or other stakeholders to meet certain revenue goals so quickly that “they don’t have much choice but to bring in an OPM because they just don’t have the time” to develop the capacity internally, said Seymour of Higher Education Innovation Consulting.

In addition, the companies offer a smooth technological experience that, some faculty say, makes it possible for them to put more emphasis on meaningful interactions with their students. Pam Baker, the division director of special education and disability research at GMU, is one of those faculty members. (GMU connected Baker with MarketWatch in response to an inquiry about its partnership with Wiley.)

Baker began exploring a partnership with Wiley in 2016 to take some of the courses her division already had online “to the next level,” she said. It offers an autism spectrum disorders graduate certificate, a graduate certificate in applied behavioral analysis and a master’s of special education through the Wiley partnership.

The 24/7 tech support provided by the company as well as the structure of the courses, which require faculty to essentially preload much of their content before the course begins, are among the ways Baker said working with Wiley has helped to smooth out the technology experience for students.

“If I were to show you the pre-Wiley version of the course that I teach and show you the Wiley version of the course that I teach — same course objectives, same syllabus — the Wiley version is an upscale version,” Baker said. “It is more engaging, it is more consistent.” That’s important, she added, because “in my book if you can’t make the technology invisible for the student, then they can’t concentrate.”

Baker said she doesn’t believe those benefits have come at the expense of students’ needs. Though Wiley helps with recruiting, the department maintains control over admissions standards, and Baker said she hasn’t felt any pressure to let more students in.

“We’re not going to compromise quality for anything,” she said. “We’re very committed to that.”

Nonetheless, some colleges are reconsidering whether it makes more sense to build that infrastructure in-house. Increasingly, public universities, which are facing state funding challenges, are becoming more hesitant to work with outside corporate partners and share valuable revenue, according to an Eduventures Research report.

Southern Methodist University, a private institution that works with 2U and other companies to offer online master’s degree programs, is switching to an online degree operation that’s run fully in-house.

Officials have been happy with 2U’s work, said Larenda Mielke, associate provost for SMU Global and Online, but realize there are benefits to having the school offer the programs itself without having to rely on an outside partner.

For one thing, having that intellectual property within the university means that if a contract with an OPM ends, the program can continue to move forward. “It’s sort of like renting a house versus buying a house,” Mielke said. And, of course, the school will also be able to keep all the revenue.

But for the program to be successful, SMU in many ways needs to mirror the approach of the for-profit OPM industry.

Mielke’s team has explored search engine optimization and geotargeting to get the school’s message to the prospective students most likely to respond to it — those living in Texas and other areas with large populations of SMU alumni, such as Southern California. And to figure out which programs to offer, the university is starting with the needs of the market instead of simply its own capabilities, Mielke said. In addition, she’s focused on metrics like internal rate of return and product mix.

“I think about it in the same way as if I’m running a business, honestly,” she said.

This story about online higher education was produced in collaboration with The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education. Sign up for Hechinger’s higher education newsletter.