February 6, 2019
The Creeping Capitalist Takeover of Higher Education
Just a few years ago, universities had a chance to make a quality education affordable for everyone. Here's the little-known and absolutely infuriating history of what they did instead.
A report by Kevin Carey
Tuition prices aren’t the only reason for this, but they’re a major one. Public university tuition has doubled in the last two decades, tripled in the last three. Prestige-hungry universities admit large numbers of students who can pay ever-increasing fees and only a relative handful of low-income students. The U.S. now has more student loan debt than credit card debt—upward of $1.5 trillion. Nearly 40 percent of borrowers who entered college in the 2003 academic year could default on their loans by 2023, the Brookings Institution predicts.
The colleges would have you believe that none of this is their fault. They would point out that public schools took a huge financial hit during the recession when states slashed their education budgets. This is true, but that hardly explains the size and pace of the price hikes or the fact that tuition at private schools has exploded, too.
It also doesn’t explain why colleges have failed to take advantage of the best opportunity to radically drop the price of a good degree that I’ve seen in 15 years of watching and reporting on the industry. This opportunity doesn’t have the daunting price tag of worthy proposals like “free college.” It doesn’t require any action from Congress at all.
The answer is online learning. When online degrees started proliferating 20 years ago, they earned their reputation for being second-rate or just plain scammy. Many were little more than jumped-up correspondence courses offered by for-profit colleges out to make a quick buck, and they were particularly ineffective for low-income students.
But there have been remarkable advances in online learning in the last decade. Nearly every prestigious college and university now offers multiple online degrees taught by skilled professors. And many of the courses are really good—engaging, rigorous, truly interactive. They are also a lot cheaper for universities to run. There are no buildings to maintain, no lawns to mow, no juice bars and lazy rivers to lure new students. While traditional courses are limited by the size of a lecture hall, online courses can accommodate thousands of people at a time.
This is how universities could break the tuition cost curve—by making the price of online degrees proportional to what colleges actually spend to operate the courses. So far, colleges have been more aggressive in launching online graduate programs. But there’s huge potential for undergraduate education, too, including hybrid programs that combine the best of in-person and virtual learning. And yet nearly every academic institution, from the Ivies to state university systems to liberal arts schools, has refused to pass even the tiniest fraction of the savings on to students. They charge online students the same astronomical prices they levy for the on-campus experience.
This is because many colleges don’t actually run online programs themselves. They outsource much of the work to an obscure species of for-profit company that has figured out how to gouge students in new and creative ways. These companies are called online program managers, or OPMs, an acronym that could come right out of “Office Space.” They have goofy, forgettable names like 2U, HotChalk and iDesign. As the founder of 2U puts it, “The more invisible we are, the better.”
But OPMs are transforming both the economics and the practice of higher learning. They help a growing number of America’s most-lauded colleges provide online degrees—including Harvard, Yale, Georgetown, NYU, UC Berkeley, UNC Chapel Hill, Northwestern, Syracuse, Rice and USC, to name just a few. The schools often omit any mention of these companies on their course pages, but OPMs typically take a 60 percent cut of tuition, sometimes more. Trace Urdan, managing director at the investment bank and consulting firm Tyton Partners, estimates that the market for OPMs and related services will be worth nearly $8 billion by 2020.
What this means is that an innovation that should have been used to address inequality is serving to fuel it. Instead of students receiving a reasonably priced, quality online degree, universities are using them as cash cows while corporate middlemen hoover up the greater share of the profits. In a perfect twist, big tech companies are getting the spill-off, in the form of massive sums spent on Facebook and Google ads. It’s a near-perfect encapsulation of the social and structural forces that allow the already-rich to get richer at the expense of everyone else. And it all started with a man named John Katzman, who has come to deeply question what has become of his own creation.
It’s 8:00 a.m. and John Katzman, education entrepreneur, is doing his morning workout while simultaneously explaining how he upended the business of American higher education not once but twice. I had suggested meeting for coffee. But Katzman had just arrived in Washington, D.C., on the red-eye from California and he likes to attack sleeplessness with exercise, which is how I wound up conducting an interview on side-by-side elliptical trainers in the gym at the Ritz-Carlton. Katzman likes to describe himself as “the ghost of unintended consequences”—a man who sees the corruption and inefficiencies at the heart of the education system and leverages them to get very, very rich.
Katzman is now in his late 50s, but you can still see traces of the boyish upstart who founded his first company out of his parents' apartment on Central Park West in 1981. He got the idea as an undergraduate at Princeton University, when he tutored local high schoolers for the SAT to earn extra cash. Pretty soon he was making so much money he nearly dropped out. He didn’t, but shortly after graduating, he founded a test prep company called The Princeton Review.
There were other test prep companies out there, but no one in the business embodied his customers’ aspirations quite like Katzman—old money, Ivy League degree, cool and a little bit brash, always willing to explain to a reporter that the SAT was a “scam” and “moronic” and that its supposed value as a meritocratic sorting instrument was “bullshit.” In attacking the SAT’s flaws, Katzman only created more demand for a service that could exploit them. Princeton Review was ultimately valued at $300 million—and helped spawn an entire industry of companies that would teach kids to game the test, if their parents could afford to pay. Elite universities became even more swollen with the children of the 1 percent.
Yet Katzman was still only tinkering on the margins of the higher education market, which is worth at least $300 billion. The majority of that money comes, in one way or another, from the government: state funding for public universities and community colleges, federally guaranteed student loans, tax credits, grants for low-income students. For most of the past seven decades, private companies could build thriving businesses on the periphery of higher education—broadcasting football games or selling expensive textbooks. But the big pile of government money was largely off-limits. It remained in the control of public and nonprofit colleges that, whatever their shortcomings, weren’t explicitly designed to put profits ahead of students. That is, until the arrival of the internet.
One of the first companies to locate a loophole was Kaplan, Inc., Katzman’s biggest rival in SAT prep. In 2000, Kaplan bought a chain of vocational schools called Quest Education. Most of the schools were modest storefronts serving a few hundred students. The real value was in the Davenport, Iowa, campus, which had “regional accreditation”—the same stamp of approval given to schools in the Ivy League.
For obvious reasons, Katzman could hardly start selling online degrees from Princeton Review University. Besides, he was no fan of for-profit colleges. “Just about all of them were levels of suck,” he says. “I didn’t want to do that.” So he decided to get Princeton itself, or an equally prestigious institution, to lend its name to online degrees instead. He would focus on graduate schools, where admissions standards are opaque. He would provide all of the upfront capital. He’d do the digital marketing and hire course designers and produce the videos of lectures and the software that allowed students and faculty to interact live online, with worldwide 24/7 support. In return, the colleges had to give him 60 percent of the tuition. This was still a good deal for them, since 40 percent of something was better than 100 percent of the nothing they had before.
In 2008, Katzman left Princeton Review and founded his second startup, eventually named 2U, which was one of the very first OPMs. He likes to joke that the acronym also stands for “other people’s money.” “The key insight was to take the systems from for-profits that were actually good ... married to the goodwill and good quality of the best traditional schools,” he says. “That is virgin snow.”
Selecting a college is one of the most high-stakes financial decisions a person will ever make, right up there with buying a house. And yet every year, millions of people do it on the basis of shockingly little information. College rankings are notoriously unscientific. There’s no form of independent quality control, since every school decides for itself what students need to do in order to pass courses. Accreditors assess the administrative practices of schools, but they are indirectly funded by colleges themselves. And the biggest financier of higher learning, the federal government, can’t force a school to reduce tuition if it believes students are being overcharged. What all of this means is that colleges essentially approve one another to be eligible for government money.
Nor can students expect “the market” to help them figure it out. Universities aren’t like restaurants that rely on repeat customers: pretty much nobody gets two bachelor’s degrees. If you choose the wrong place, as many students do, it’s not easy to signal your dissatisfaction by transferring to a competitor. Besides, every year, colleges are practically guaranteed a fresh supply of high school graduates and adults looking for new skills. The result is a profiteer’s paradise: millions of highly motivated, naive, overwhelmed consumers loaded up with armfuls of government money. Perhaps no one understands the many ways in which this can go horribly wrong better than Bob Shireman.
Shireman, a prototypically earnest D.C. policy wonk, is surprisingly genial for a man who is actively hated by an entire industry of powerful corporations. Over his three-decade career, he’s fought exploitative for-profit education companies more aggressively than anyone in Washington. In February 1990, as a newbie staffer for Illinois Senator Paul Simon, Shireman was dispatched to take notes on a series of hearings being conducted by Senator Sam Nunn, chairman of the Permanent Subcommittee on Investigations. The subject was abuses by for-profit colleges, and what the 28-year-old Shireman heard there was, he recalls, “eye-opening and appalling.”
There was the recruiter who described hunting for students outside welfare offices in poor, mostly black neighborhoods. A prospect was considered qualified if he could “breathe, scribble his name, had a driver’s license, and was over 18 years of age,” the recruiter explained. There was the bricklaying institute in Texas that bused in hundreds of what the Senate termed “homeless street people” from New Orleans. There was the culinary school in Washington, D.C., where training consisted of working—for free—in a water treatment facility cafeteria. There was the college owner who brazenly declared, “I’m a businessman out to make a profit. Truly I don’t care about the well-being of these students.”
These schools had been gorging on government money. During the previous six years, the guaranteed student loan program had almost doubled to $12.4 billion, while defaults had increased by a staggering 338 percent. The bad debt was heavily concentrated in schools that paid salespeople on commission to sign up as many students as possible in order to harvest their grants and loans. Since many of the degrees were essentially worthless, the students had little hope of ever getting out of debt.
It wasn’t the first time Congress had uncovered misconduct on this scale. It was at least the third. After the 1944 G.I. Bill, most vets used their benefits to attend for-profit schools, many of them fly-by-night operations offering substandard training in fields with no jobs. A second feeding frenzy came in the late 1960s and early 1970s, when expanded G.I. Bill benefits for Vietnam War veterans and Lyndon Johnson’s Great Society injected billions of dollars into higher education. “Every time Congress has been led to believe these scandals are a thing of the past, they come roaring back,” Shireman says. “Government action always ends up being too late for hundreds of thousands of students.”
The Nunn investigation was no different. In 1992, Congress banned “incentive compensation”—meaning that if colleges wanted federal financing, they could no longer pay employees or outside recruiters based on the number of students they signed up. More than 1,000 unscrupulous operators unceremoniously closed up shop. Then, in the early-2000s, the George W. Bush administration softened the ban and the industry began to reformulate again.
In November 2008, Shireman joined the Obama transition team and in early 2009, became the deputy undersecretary for higher education policy at the Department of Education.
This boom was built on easy access to government money. Very few federal student loans require credit checks, and they can be used at any accredited college. With incomes stagnant, borrowing exorbitant sums became the norm. The warning signs were all there. The nonprofit Shireman founded, the Institute for College Access and Success, had reported a tenfold increase in college graduates with large debt burdens. A fourth wave of scandal was cresting.
This time, it fell to Senator Tom Harkin to issue the damning report with findings that could have appeared verbatim in the previous three. He convened a commission to investigate for-profit colleges, which found that some of the biggest for-profits were among the more notorious offenders. From 2006 to 2008, the loan default rate at online Kaplan University nearly doubled. Undercover Government Accountability Office investigators recorded recruiters at its campus in Pembroke Pines, Florida, misleading prospective students. (Kaplan did not admit wrongdoing, but reached an agreement with the Florida attorney general to improve its practices and donated $350,000 to a scholarship fund.) In December 2009, the University of Phoenix paid a $78.5 million fine to settle allegations of incentive compensation malfeasance brought by whistleblowers working with the Department of Justice.
The schemes were not subtle. Recruiters at a for-profit called Westwood College were trained to promote tuition costs of $4,800 per term without mentioning that Westwood had five semesters instead of the standard two. Westwood also falsely told students their tuition would be completely covered by grants. In reality, the school gave students private loans—they were instructed to call them “student supplemental financing”—at an interest rate of up to 18 percent. (Federal loans currently charge 5 percent.)
Shireman had already decided to fix the incentive compensation rules. He also used a long-dormant clause in the Higher Education Act to create new quality standards for the industry. For-profit colleges fought the changes, hiring lobbyists on both sides of the aisle, including Democrat Tony Podesta and, perhaps inevitably, longtime D.C. fixer Lanny Davis.
The industry managed to tie up new regulations in court for years. But there were just too many horror stories to ignore, too many lawsuits and state investigations. Enrollment in for-profit schools dropped, cratering share prices that had been premised on rapid growth. Both the president and CEO of two Kaplan higher education divisions departed in 2011, not long after the Post published a self-flagellating expose.
Shireman had stepped down the previous year. He was 48 years old with a wife and family, and he wanted to get back to California. In the hour between the announcement of Shireman’s impending resignation and the close of trading on Wall Street, the value of the major for-profit companies jumped by hundreds of millions of dollars.
During the for-profit meltdown, no one paid much attention to 2U, John Katzman’s fledgling company. In 2008, he struck his first deal with USC, for an online master of teaching. At the time, the university was in the middle of a dogged, decadeslong climb to the top tier of the U.S. News & World Report rankings. It lacked the money to compete with deep-pocketed rivals like Stanford or Harvard, so it issued a mandate to the deans who ran schools and colleges like independent fiefdoms: Be creative. Marilyn Flynn, then the dean of the School of Social Work, recalls that online education was a “very high priority” for USC President C.L. Max Nikias. “Our merit reviews would reflect our ability to do this,” she says. She signed up with 2U in 2010. USC’s online master of social work would cost exactly the same as the on-campus version: currently, $107,484.
Katzman’s pitch was hard to resist. Back then, many online programs were extremely lo-fi. 2U, by contrast, offered live video interaction with teachers and other students, arrayed on screen in squares like the opening credits of “The Brady Bunch.” Plus, the company assumed all of the financial risk. College deans could use their cut to lure star research professors by promising them large salaries and small or nonexistent teaching loads, pushing programs up the rankings. The online courses would be staffed by adjuncts, most working far from the campus and much cheaper to employ. “This is a cash cow,” Flynn says bluntly. “Universities are struggling to find a business plan that works. And I was very aware that we would have a dramatic increase in revenue from this.”
Hundreds of students across the country and overseas signed up for the USC degrees. In 2010, 2U began negotiating to launch an online MBA with UNC Chapel Hill and a nursing degree with Georgetown University. The partnership with USC’s education school was especially smart, because there is a huge market for master’s degrees in education. A graduate degree almost always qualifies a teacher to an automatic raise: More than half of America’s 3.8 million public schoolteachers have one. Many earn their degrees while working full time, making the convenience of online learning a major draw.
Master’s degrees are also an entirely different market from undergraduate ones. Colleges are legally required to publicly report undergraduate admissions statistics, including SAT scores and what percentage of their applicants gain admission. This prevents elite schools from simply jacking up the number of students admitted to their most prestigious undergraduate programs to make more money—those programs are sought after precisely because they are exclusive. Ph.D. programs at elite universities tend to be similarly selective.
By contrast, master’s programs are a black box—there is no requirement to publish any admissions data. This means universities can dramatically lower their admissions standards and enroll thousands of highly profitable students without sullying their brand. The University of Pennsylvania, for example, offers a master’s in “Applied Positive Psychology,” which is essentially a $66,000 Ivy League degree in self-affirmation. It has “no specific prerequisite courses” and applications are accepted from anyone with a minimum 3.0 grade point average.
There are also strict limits on how much government money students can borrow for an associate or bachelor’s degree. But as long as a master’s degree is accredited, students can take out federal loans for the entire cost of tuition, fees, books and living expenses, with no limit on what the college can charge. These loans can easily top $100,000.
By 2009, private investors had caught on to the potential of OPMs. 2U raised $100 million in four years to expand its operations. And then the company hit a snag, in the form of the regulations Bob Shireman and his colleagues authored before his departure. The new incentive compensation rules strengthened the existing prohibition of any “commission, bonus, or other incentive” based “directly or indirectly” on enrollments or financial aid. Sharing tuition revenue, however, was how 2U made all its money.
In 2010, 2U’s then-chief operating officer, Chip Paucek, met with Secretary of Education Arne Duncan to lobby for an exception for OPMs. He brought along a dean from the Georgetown nursing program to help argue the case.
According to four former Department of Education employees who were involved with or had knowledge of the issue, career staff had serious misgivings. But they told themselves that the OPMs' university partners wouldn’t risk their reputations by offering shoddy degrees or defrauding students. In March 2011, the department issued a final clarification: It was OK to share tuition with a third-party firm, as long as the recruiting was part of a larger package of “bundled services” that included marketing, support services, the provision of technology and career assistance. 2U’s business model was now enshrined in federal regulation.
If there’s one thing you can count on in these uncertain times, it’s that the cost of college will rise—and then rise some more. Almost every year, whether the economy is in a state of boom or bust, tuition hits a record high. But why? Is it really twice as expensive to provide a degree as it was 20 years ago? Colleges go to absurd and extraordinary lengths to avoid answering this question, reporting their financials in a way that deliberately obscures how much money different units spend and make. They don’t even like to use the word “profits,” preferring euphemisms like “surplus.” If nobody knows how much your degree really costs to run, then nobody can accuse you of charging too much, which is an excellent strategy for charging too much.
One of the very few prestigious colleges that has attempted to create an affordable online degree is the Georgia Institute of Technology. In 2014, its college of computing created an online master’s with the radical objective of charging the lowest tuition possible. Charles Isbell, a Georgia Tech dean, says he saw the effort as part of the university’s mission of public service. Udacity, an online education provider, helped design the program. AT&T chipped in a $4 million gift for startup costs. Georgia Tech sets a price that allows it to break even—currently, $6,600.
To understand just how jaw-droppingly low this figure is, consider that Georgia Tech has the eighth-ranked computer science department in the country, according to U.S. News & World Report. Here are the prices for similar online degrees, along with the department’s ranking:
Georgia Tech is charging around one-tenth the tuition of Columbia University. Even if Georgia Tech wanted to make a 100 percent profit, it would still be charging $47,000 less than what USC demands for a lower-ranked degree.
There are two main reasons most online degrees are so expensive. The first is that middlemen like 2U spend enormous sums on marketing, a cost that is then passed on to the student. In materials it provides to investors, 2U helpfully estimates what happens to every $100 in revenue for a typical program that's not being launched or expanded. Approximately $15 is spent on actual teaching. Developing and administering the courses costs around $23. Marketing and sales eats up $19. And the cost of buying ad words and search terms on Facebook and Google keeps on rising, as OPMs compete with each other and with colleges running their own online programs.
Based on the size of the OPM industry, 2U’s spending patterns, and Facebook and Google’s share of the digital advertising market, nearly $1 billion in online education cost savings may be going straight into the pockets of Mark Zuckerberg, Larry Page, Sergey Brin and their fellow shareholders every year. That doesn’t include billions more paid by colleges that don’t use OPMs. Recently, I tried a Google search for “Georgia tech online masters computer science.” The first result was a paid advertisement for Johns Hopkins’ version of the same degree, which costs $42,500.
The second reason online degrees are so expensive is the generous profit margins sought by both OPMs and the colleges themselves. The beauty of the model is that after a course is taught for a few years, up-front development costs get paid off and profit margins rise. At that point, 2U estimates that out of every $100 in tuition revenue, the profit is almost $43, split evenly with the university at about $21 apiece. On a recent call with Wall Street investors, 2U revealed that for programs operating for at least four years, profit margins are up to 25 percent, 4 percentage points above their projections. I asked a number of schools why the prices for online and on-campus courses were the same. Most declined to explain their reasoning, but former USC dean Marilyn Flynn said there had been a “policy decision” to charge the same amount for both versions of its social work master’s degree “because there is no difference in the quality.”
When the Department of Education officially endorsed the 2U model, it essentially removed any incentives for colleges to create cheaper online degrees. The decision, says David Bergeron, then a senior department official who worked on the regulations, “caused an explosion in the marketplace.” By 2014, 2U’s annual revenue had passed the $100 million mark. It also had an increasing number of competitors. According to Tyton Partners, more than a third of colleges with online programs—525 total—have signed OPM contracts. Paxton Riter, founder of an OPM called iDesign, told InsideHigherEd that proportion could soon reach 50 percent.
The upper ranks of these companies are a who’s who of refugees from controversial for-profit colleges. To name just a few examples, OPM executives include the two high-ranking Kaplan executives who left in 2011, a former University of Phoenix vice president and a president at Career Education Corporation, a scandal-ridden for-profit that has been investigated by the SEC, the DOJ and more than a dozen state attorneys general.
Also scrambling to get in on the action: textbook publishers. With the internet imperiling their comfortable racket selling $300 textbooks, publishing giants such as Wiley, Pearson and Bertelsmann have snapped up OPMs for hundreds of millions of dollars. One analyst described the current state of the industry as “a scene out of ‘Mad Max,’ a chase through these dystopian hinterlands with obstacles in the way and people attacking each other.”
All of this has created serious doubts from the man who made the OPM market possible in the first place: John Katzman. As 2U’s board began preparing in 2012 to go public, he moved to an executive chairman role, with Chip Paucek running the company day-to-day. What happened next is disputed. Katzman says the two agreed on a vision, but then Paucek made “a series of decisions that I consider to be not in the interests of kids, not in the interests of educators, but in the interest of stockholders.”
Katzman notes that after Paucek took over, UC Berkeley launched a 2U-supported master of information and data science without in-state tuition. All students pay the same for the 20-month program: $66,150, plus fees. Katzman watched in dismay as enrollment declined in USC’s master’s in teaching, even as it surged in its much more lucrative social work program, which costs more than twice as much. (Karen Symms Gallagher, the dean of USC's education school, observed that around the time the teaching master’s was created, post-recession education budget cuts significantly reduced job opportunities.) “There are CEOs who believe they have a fiduciary duty to their stockholders to just market the most expensive programs and encourage schools to jack up tuition,” Katzman says. “I am horrified. That was not the goal.”
2U’s headquarters is next to the last stop on the D.C. Metro’s Orange Line, in suburban Maryland. Walking inside is like teleporting into a neon-and-teak-accented Silicon Valley startup—except, because office space is a lot cheaper here, on a heroic scale. There’s a coffee bar in the lobby, a cafeteria that serves affordable gourmet food and fridges full of lightly flavored carbonated water.
I met with Paucek, now the CEO, who readily acknowledged the key role he played in the Department of Education rule change. “I personally had a lot to do with that,” he said. He made no apologies for the profit margins that have made him a very wealthy man. “Some folks don't think that there should be any profit motive in education whatsoever,” he said. “I've been in for-profit education, in one way or the other, my entire life.” His position on Katzman’s departure is that the two men simply had a difference of opinion over leadership style and the focus of the business. “Every company has founding drama,” Paucek said.
Katzman quit in August 2012, a year and a half before 2U listed on the Nasdaq. By then, OPMs had punctured a hole in the distinction between for-profit and nonprofit education. The breach started out small and manageable. But the exception to the incentive compensation law is now being expanded by multibillion-dollar companies that have realized that the best way to avoid for-profit regulation is to pretend to be something else. “The department opened Pandora's box,” says Protopsaltis. “Closing it will not be easy.”
Kaplan Higher Education never really recovered from the combination of business missteps and the intense public scrutiny of the for-profit industry in the late 2000s. In April 2017, Donald Graham announced that Kaplan University was being sold for $1 to Purdue University, Indiana’s public land grant college. It sounded like Purdue had picked up a distressed asset and turned it into a public concern. But that’s not exactly what happened.
What Purdue really did was create a separate organization, eventually named Purdue University Global. It was granted a highly unusual legal status by the Indiana legislature, in which it is simultaneously considered a nonprofit institution immune from Bob Shireman’s for-profit regulations and a private institution immune to public records requests. Purdue University Global took ownership of Kaplan’s few remaining physical campuses, all of its online programs, and hired its academic personnel.
But Kaplan Higher Education still very much exists as a division of Graham Holdings. It is now being paid 12.5 percent of Purdue University Global’s revenues to provide recruiting services, marketing and other OPM capabilities under a long-term contract. The contract, which Purdue tried to keep secret, penalizes the university if it tries to lower prices, raise admissions standards or otherwise cut into Kaplan’s revenue stream. In other words, Kaplan University became an OPM to itself.
Once again, Kaplan is at the forefront of a trend—this time, for-profit colleges that have discovered a way to secure all of the benefits of a nonprofit institution with none of the obligations. One of the most striking cases is a former for-profit college named Grand Canyon University.
In July 2018, the college's parent company (known as LOPE on the Nasdaq), got final approval to create a nonprofit, also named “Grand Canyon University.” LOPE lent the nonprofit $870 million plus interest. The nonprofit promptly paid the $870 million right back to LOPE to purchase Grand Canyon's physical campus in Phoenix, Arizona, as well as the university’s academic operations. (Most of its roughly 90,000 students are online.)
Meanwhile, LOPE signed a 15-year contract with the nonprofit to provide OPM-style services. In exchange, LOPE gets 60 percent of Grand Canyon University’s tuition and fee revenues, in addition to $52 million in annual interest payments on the loan.
It sounds impossibly convoluted, but it’s actually quite simple. Grand Canyon put all of its academic operations into a nonprofit that serves as a conduit for federal financial aid. (Last year, Grand Canyon received over $760 million from federal student loans, the most of any college or university nationwide.) The nonprofit university is also able to avoid local property taxes and for-profit regulations, not to mention the industry’s toxic reputation. But most of the profits eventually end up in the same place—with LOPE, a $5 billion corporation. Grand Canyon University is “not non-profit in any meaningful legal sense,” wrote Brian Galle, a former attorney in the tax enforcement policy section of the Justice Department, in a letter to the Department of Education. He later added, “[It’s] a trustworthy-looking wrapper around a for-profit business.”
As a general rule, it’s in students’ best interests if university contracts with private companies are arm’s-length transactions between independent firms. But in this case, Brian Mueller, former CEO of the University of Phoenix Online, is the CEO of LOPE and president of the nonprofit Grand Canyon University. In 2017, Grand Canyon’s accreditor, the Higher Learning Commission, issued standards allowing, among other things, the president of a nonprofit university to run the for-profit company that gets most of the nonprofit’s money. Which is great news for Mueller: According to the Chronicle of Higher Education, he has made at least $15 million selling LOPE stock since January 2017, far more than the salary of any other nonprofit college president. This entire structure wouldn’t be possible without the exception that the Department of Education granted to OPMs.
And nonprofit conversion has spread like a virus. The remaining big half-dozen for-profit companies are all, industry insiders say, considering similar moves. Luckily for them, the Trump administration is about to take the rickety structure of regulation protecting college students and burn it to the ground.
The person in charge of higher education at the department is Diane Auer Jones, a onetime official in George W. Bush’s Department of Education who worked for some of the most powerful operators in the previous for-profit scandals.
Jones’ proposed rules, released in January, amount to a sweeping deregulation of higher education. They include abolishing a rule that prevents colleges from outsourcing more than half of a program to outside companies—for example, OPMs—and a rule that bans federal aid to programs where students don't interact with an instructor. “We’re talking about basic questions here, like the amount of student learning we should expect and what the faculty role is,” says James Kvaal, an Obama White House official who is now president of the Institute for College Access and Success. “The prospect of removing any federal guardrails at all is really scary.”
The rules, if adopted, would also weaken the power of accreditors, as well as the government’s oversight of whether colleges are eligible for federal money. In a December speech, Secretary of Education Betsy DeVos said that her department’s current oversight role “stymies competition.” (An accreditor is also one of the few outside organizations that can block an OPM contract.) Late in the Obama administration, the department shut down an accreditor that had approved many of the for-profit colleges cited in the Senate's investigative report a decade ago—including several belonging to Career Education Corporation, Jones’ former employer. Soon after taking office, Jones resurrected the accreditor, citing support from nine others. In fact, only one of the accreditors she named endorsed the move. The department blamed an “inadvertent error in the editing process.”
If Jones’ proposed rules are finalized later this year, it will be almost impossible to prevent another armada of private profiteers from rolling in. This time, they will be much harder to detect. By now, the public is largely aware of the dangers of shady for-profit colleges. But OPMs are taking Katzman’s approach of “the more invisible, the better” to extremes. The next wave of for-profits are becoming so entangled with well-known, trusted institutions that it will be impossible to tell where one ends and the other begins.
John Katzman created yet another company in 2015, this one intended to “decimate the OPM industry,” he later told InsideHigherEd. Katzman now talks about OPMs with the same virtuous venom he once aimed at the SAT. “Why are colleges and universities handing over more than half of their tuition to online program managers?” he demanded in one opinion piece. The long-term contracts that universities are signing in order to earn revenue from online education, he wrote, amount to a “payday loan.”
Katzman’s latest venture, Noodle Partners, aims to be more virtuous: by helping universities create online degrees without charging them 60 percent of tuition forever. The company manages the programs and negotiates prices for services and capital, which lowers the long-term cost to the university. (Once the startup costs have been covered by either Noodle or the university, Noodle will charge a fee that, according to Katzman, equals about 34 percent of tuition revenue.)
But if higher education circa 2019 is a contest between the original 2U model and Katzman’s new vision, the 2U model is, for now, still winning. OPMs have migrated from institutional heavyweights like Harvard or Yale that have plenty of leverage to protect their academic integrity, to smaller colleges buffeted by financial challenges. If there’s a fifth wave of for-profit scandal on its way, the most likely candidates are colleges where OPMs threaten to seize control of their hosts, like the fungus that turns carpenter ants into six-legged zombies.
For a preview, take a look at Concordia University in Portland, Oregon, once a small, respected Lutheran teachers college. After creating an online master’s program with a Silicon Valley-based OPM called HotChalk, by 2015 Concordia had become the single biggest provider of education master’s degrees in the nation. (It’s currently the third-biggest provider.) An Oregonian investigation found that in five years, the number of graduate students went from 800 to 6,200, with HotChalk getting as much as 80 percent of tuition revenue.
Then, the program was hit with very some familiar-sounding accusations. In 2013, a whistleblower lawsuit alleged that HotChalk ran a “classic boiler room” in which recruiters employed misleading practices to sign up students, including offering them “phony ‘scholarships.’”
By now it should be obvious that this isn’t merely a matter of identifying the unscrupulous operators and shutting them down. It’s about something more fundamental. American universities have long been caught in the push and pull between their lofty academic ideals and societal obligations on one side and the temptation to maximize profits as a market actor on the other. When states slash funding and force public universities to find replacement money, they tip those scales toward profit-making. When universities let tuition rise to $70,000 a year and promote degrees in terms of “return on investment,” they hardwire their entire organization with the logic of privatization. I’ve seen a department chair’s eyes light up after an OPM market analysis encouraged him to increase tuition, on the logic that it would signal prestige and stoke demand.
So it’s not entirely a coincidence that 2U’s first and still-biggest partner, USC, is also at the heart of the college admissions scandal. In order to vault the school into the top tier of American colleges, its former president, C.L Max Nikias, and his predecessor, Steven Sample, turned USC into a money-chasing machine. Carmen Puliafito, the medical school dean, claimed to have pulled in $1 billion in donations. At dazzling galas, he mingled with luminaries like Gwyneth Paltrow and Larry Ellison. Apparently, his fundraising prowess was so valued that for years nobody noticed he was spending much of his time in hotel rooms smoking meth.
Marilyn Flynn, the USC dean who signed one of the first 2U deals, abruptly stepped down last summer. Weeks later, the chair of USC's board of trustees sent a letter to the university community about “alleged inappropriate financial transactions and agreements involving Marilyn Flynn.” The U.S. Attorney’s office has launched an investigation into a $100,000 donation made to the school of social work. (Flynn noted that at age 80, her decision to retire was “an appropriate and natural option.”)
And when the college admissions scandal broke in March, USC again managed to stand out. At the other seven university athletic departments named in the charging documents, according to the government, individual coaches took bribes in isolation. At USC, the complaints say, it went deeper. Four people were indicted, including a senior athletic department administrator who allegedly coordinated the flow of bribes and fraudulent admissions.
As our most trusted universities continue to privatize large swaths of their academic programs, their fundamental nature will be changed in ways that are hard to reverse. The race for profits will grow more heated, and the social goal of higher education will seem even more like an abstraction. Even the partnerships that are undertaken with noble intentions never truly put the student first. After Katzman's impassioned pitch about how his new business was helping colleges save money, I asked him if that meant tuition would fall. He paused for a moment. “Can I put into my contract that the university is going to take the surplus generated from this program and give it directly back to the students?” he asked me. “No. That's way over my pay grade.”