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Higher Education Watchdogs Urge Oversight as Schools Push Programs Online

On the heels of a dubious deal, higher education experts sound alarms about the online learning sector.

In August, the University of Arizona announced a major move in its online programming. The public institution plans to acquire Ashford University, a large for-profit online education company that enrolls around 35,000 students annually. If the deal gets approval from the Department of Education, the University of Arizona will launch the online University of Arizona Global Campus, a brand new nonprofit entity that will buy Ashford University for the nominal price of $1. Ashford would then be deeply involved in managing the new program.

For watchdogs like Kevin Carey, Director of the Education Policy Program at New America, the deal immediately raised red flags. “Usually, if there's a transaction between two people,” said Carey, “it's the buyer who's giving the seller money and not the other way around.” Instead, Ashford’s publicly-traded parent company Zovio would guarantee Global Campus an upfront payment of $37.5 million and proceeds of $225 million in revenue plus operating costs over the next 15 years.

Carey is skeptical of such deals, which he has called “status laundering.” For Zovio, which has been embroiled in a series of scandals over its practices for recruiting students and is currently tied up in litigation brought by the attorney general of California, the new business partnership is a reputation boost. “I would say what Zovio is buying is the University of Arizona's branding, and paying them a pretty penny for it,” Carey explained.

The proposed merger between Ashford and the University of Arizona is perhaps the most egregious example of an arrangement that has become increasingly common in the last decade. Even as public opinion has turned against predatory for-profit schools, there is little public awareness that reputable public institutions often outsource their remote learning to private corporations. Because these institutions typically share tuition revenue, it can lead to predatory marketing and recruiting practices, not to mention an overall lack of transparency with students.

Critics worry that the emergency switch to online instruction during the COVID-19 pandemic will only exacerbate these problems, as for-profit institutions assume a greater role in higher education. They see the present moment as an important time to regulate the industry.

Under New Management

Online program managers, or OPMs, are third-party contractors that colleges retain to develop their online degree programs, including everything from administering the technology to developing the curriculum, running fellowships, hiring adjunct faculty, and marketing to students. In exchange, they are paid handsomely, typically with a share of tuition.

For public universities, OPMs offer tremendous benefits. As students have fled predatory for-profit programs over the past decade, OPMs have made it possible for prestigious colleges and high-quality state schools to step into the online learning space. “They are the powerhouse behind a lot of online degree programs,” explained Michelle Dimino, Education Senior Policy Advisor at Third Way. “They allow universities to expand into an online terrain without having to build up the expertise in-house.”

But even deals less suspect than the University of Arizona’s give advocates pause. The industry is unregulated and the contract terms are often onerous. “It really calls into question the hard line between for-profit and nonprofit higher education,” said Lanae Erickson, Senior Vice President for the Social Policy and Politics program at Third Way. “Colleges are getting trickier and trickier at integrating for-profit aspects into what is still seen under the law as a nonprofit entity, which means that they don't have to abide by a lot of the rules.”

It really calls into question the hard line between for-profit and nonprofit higher education.
Lanae Erickson Senior Vice President for the Social Policy and Politics program at Third Way

The most significant of those rules is about revenue sharing. OPMs make their money by sharing tuition with schools. This “incentive compensation” arrangement, through which a school pays a third party commissions based on enrollment or financial aid numbers, has long been banned by the federal government in other higher education contexts. But as a result of savvy lobbying, OPMs enjoy a loophole that allows them to share revenue as long as the marketing they do is part of a larger “bundled services” suite that also includes assistance in other areas like technology and curriculum design.

A 2019 report by Stephanie Hall, a fellow at the Century Foundation, examined over 70 contracts between universities and OPMs and found that over half rely on tuition sharing agreements. This incentivizes schools to set high tuition prices — indeed, sometimes OPM contracts mandate it. For example, the coding bootcamp at UCLA’s extension school, run by an OPM called Trilogy, is contractually obligated to set tuition as high as the market will bear. It’s no accident the Federal Trade Commission has flagged OPMs as a risk to student loan distress. “They're expensive degrees,” said Hall. “There's a whole lot of things combining for a potential student loan disaster within the larger student loan disaster.”

Meanwhile, many OPMs collect upwards of 50 percent of the proceeds from tuition for the online programs they run. John Katzman, who founded a company called 2U and then left to launch Noodle Partners in an effort to create a more sustainable business model, explained that the hazards of the industry were baked into the initial creation of the model. “There are all kinds of flaws in the regulations and in the way OPMs developed,” said Katzman. “They were effectively making higher ed more expensive, and the savings of using technology were all going to the OPMs themselves — or to Google for marketing.”

A breakdown of how 2U spent its revenue in 2019, originally reported by New America’s Carey, illustrates this dynamic: 19.2 percent went to marketing, 23.7 percent went to operating costs, and 14.6 percent went to instruction costs. The company split its 42.6 percent profits with its university client.

19.2%
Amount of online program manager 2U's revenue spent on marketing in 2019.
23.7%
Amount of online program manager 2U's revenue spent on operating costs in 2019.
14.6%
Amount of online program manager 2U's revenue spent on instruction in 2019.

Because their revenue model is based on enrollment, OPMs can be aggressive about their marketing and recruiting practices. “There's a really strong incentive there to enroll as many students as you can,” said Hall. “It lends itself to the predatory recruiting that we've seen in the for-profit college industry.”

Katzman said that while the true cost of recruiting a student is around 20 percent of tuition, many OPMs devote as much as 30 percent to marketing, in part because they have bid up the cost of search terms on Google and Facebook as they compete for favorable placement in search results. The result is a nearly $1 billion advertising market.

Opaque Arrangements

The world of OPMs is largely obscured from public view. “It’s just an unregulated space,” said Erickson. “A student's tuition might be going through one of these for-profit companies, and they have no idea.”

Some worry that status laundering will become increasingly common as for-profit education companies seek to become nonprofits. The arrangement between Ashford and the University of Arizona has precedent in a similar merger from 2017 between Purdue University, a public institution, and Kaplan University, a for-profit company. Another 2017 deal saw the publicly-traded Education Management Corporation set up a small nonprofit called Dream Center Education Holdings to take over its more than 100 campuses with 50,000 students. (It collapsed in scandal shortly after the Department of Education approved it.)

These nesting arrangements make it difficult for students to understand what kind of education they are getting. “There's an element of deception,” said Carey. “The legal status of accreditation and the brand status of a public university — those things go to trust in the marketplace. In higher education, where you can't walk into the showroom and kick the tires on what you're buying, trust and reputation is everything, and it's disturbing that it's apparently for sale.”

Even the schools themselves often have no idea how OPMs are operating their online programs, Katzman explained. Because schools do not determine what an OPM spends on instructional design, for example, OPMs spend less. Because schools lack say over which programs OPMs are marketing, OPMs may market the programs that are more expensive, less selective, and pay them a higher percentage. “That opacity only matters because, where the interests of the OPM and the university or its students diverge, you can't see it,” explained Katzman. “And the length of the contracts, by the way, makes it difficult to do anything about it if you do see it.”

Managing the Managers

Advocates in the higher education sector have a long wish list of policies that would make the operations of OPMs more transparent to the public.

Third Way and the Century Foundation want to see clearer disclosures to students about when an OPM is running an online program, and where tuition dollars are going, their representatives reported. Hall said federally auditing OPMs receiving 50 percent or more of a school’s tuition revenue would be a start. And most observers agree that the “bundled services” loophole in the incentive compensation ban must be reformed.

“Closing that loophole would be one major step in curbing the activities of OPM, limiting the risk to students, and making sure that the arrangements between universities and OPMs are more clearly designed to benefit students as opposed to the industry,” said Dimino.

Katzman believes that regulators should target marketing costs, in particular. “We have to, at minimum, force schools to disclose how much they're spending on marketing,” he said. “As taxpayers, we should not be subsidizing schools’ marketing. There is nothing about that that's a public good.”

For his part, Katzman aims to change the script through his work at Noodle Partners. Rather than tuition sharing, the company charges fees for service. It also aims for greater transparency, which includes setting budgets and target enrollments collaboratively with the schools it works with. “We’re totally transparent,” said Katzman. “You can see every check we write.” The result is a model that is less expensive: their services cost around 35 percent of tuition rather than the typical 50 percent and more of other OPMs.

Changing the model is especially important today. Because of the pandemic, and the fact that many people who have lost jobs are seeking new credentials, the OPM industry has reported increased interest from schools, said Hall. But if Hall and the Century Foundation have anything to say about it, the most aggressive OPMs will not have a chance to prey on vulnerable students. “We spend a lot of time monitoring the industry,” she said. “Oversight in the coming year is going to be essential.”