In its early days, education company 2U built its brand by helping top-ranked colleges launch and maintain online programs in exchange for a share of their tuition revenue. 2U’s cut often hovers around 60%, though it depends on the individual contract.
The 15-year-old company still relies on tuition-share deals for its online program management, or OPM, business. But in early August, the company’s CEO, Chip Paucek, told analysts that the company was rolling out a new flat fee pricing model to complement its tuition-share agreements.
Under the model, 2U will charge a flat fee for its standard services. Colleges that choose this pricing model would also receive shorter contract terms of about three to five years, Paucek said. 2U contracts typically span five to 10 years.
“It will be very difficult for competitors to replicate,” Paucek told analysts. “We have the track record to sell it, the operating history to price it, and believe the response will be strong based on initial conversations.”
The announcement could suggest that OPMs and colleges have a growing appetite for alternatives to tuition-share agreements, higher education experts said. Though Paucek said the rollout was to offer more pricing options to colleges, experts point out the announcement comes amid growing public scrutiny over tuition-share deals.
2U is something of a bellwether for the broader market. The publicly traded company has a massive footprint in the online education space: Its annual revenue is nearing $1 billion through offerings that include its OPM business, boot camps and ownership of edX, a prominent MOOC platform.
A model under regulatory fire
The company’s announcement comes as tuition-share deals are under fire.
U.S. law bars colleges that receive federal financial aid from giving out commissions, bonuses or other types of incentive-based compensation to companies that recruit students into their programs on their behalf. However, federal guidance issued in 2011 carved out an exception for companies like 2U.
The guidance permits colleges to enter tuition-share deals with companies that offer recruiting help — but only so long as it is part of a larger package of services. In 2U’s case, the company also helps build courses, market programs and provide student support services.
However, Democratic lawmakers have put the model in their crosshairs, arguing that they incentivize OPM companies to aggressively recruit students into their programs as a way to boost their earnings.
The Education Department announced earlier this year that it would review the guidance amid mounting public criticism of these deals.
Student advocates have asked the agency to rescind the guidance altogether, which would force OPMs to bill colleges for their services through fees rather than tuition-share agreements. Meanwhile, companies like 2U, along with some colleges, have urged the department to keep the guidance in place, arguing that revenue-share agreements are lawful and help higher education institutions launch online programs with less risk.
Paucek told analysts last month that introduction of a flat fee model wasn’t in response to potential regulatory changes. Instead, he said it is focused on broadening the company’s offerings to university clients who don’t want to share their revenue.
“We didn’t announce flat fee because of a regulatory reason,” Paucek said. “We announced flat fee because we like it, to be honest.”
However, it would make sense for OPMs to have alternatives to tuition-share agreements in place should the Education Department decide to do away with the 2011 guidance, said Stephanie Hall, acting senior director for higher education policy at the Center for American Progress.
It could also help business, as colleges could be interested in deals that don’t lock them in for long periods and extract a large share of their revenue.
“Because these models last so long — some of them [are] 10-year contracts — you can see how there might be an appetite by institutions to have shorter-term contracts and have alternative fee structures that would perhaps make it easier for schools to keep tuition prices lower,” Hall said.
College officials also may be wary of the string of bad press some OPM companies are facing, said Carolyn Fast, a senior fellow at The Century Foundation, a left-leaning think tank.
That includes 2U.
Fast pointed to a recent USA Today investigation into a program offered by Morehouse College that it built with the help of 2U.
Morehouse, a historically Black college in Atlanta, cast the online offering as a degree completion program for Black men who left college before finishing their credentials. However, USA Today reported that 2U and Morehouse struggled to keep up with demand for the online program and failed to launch promised majors and classes.
In a public statement in June, Paucek said the USA Today investigation focused on “early operational issues” while ignoring the program’s wins. He also stressed that Morehouse refunded any student who couldn’t pursue their chosen field of study, and that the college retains control over key academic functions like admissions criteria and tuition pricing.
“If I were a potential client institution and I were seeing that, I would wonder, ‘OK, if I sign a long-term agreement with a third-party OPM, what happens five years from now when the market shifts and they decide they no longer want to support that program?’” Fast said.
Pivoting to lower-cost options
In an emailed statement last month, Paucek contended that tuition-share agreements will remain an important model for colleges.
"There is no one-size-fits-all in education. By delivering a wide range of partnership options, we're empowering universities to shape their own future in the digital education landscape,” Paucek said. “The flat fee model signifies our ongoing commitment to meet universities where they are, offering solutions that support their unique needs.”
Offering a flat fee model isn’t the only recent change 2U has made to its OPM business.
Last year, the company unveiled a new tuition-share model that provides colleges with a core bundle of services, including student support and marketing, in exchange for just 35% of program revenue — much lower than the company’s typical cut.
Colleges can also stack additional bundles on top of those services — if they agree to higher revenue shares. For instance, colleges that want more marketing support would give up an additional 15% of their revenue. And those that want more assistance with program and curriculum design would sacrifice an extra 5%.
“It can lower costs and give schools more options,” said Phil Hill, an ed tech consultant and analyst. “That one I see as much more strategic in nature than this move of adding flat fee.”
The offering appears to be popular with colleges. 2U plans to launch 50 new degrees next year, all of which will be offered under the new flex pricing model, a company spokesperson said via email last month.
“Universities clearly want revenue share deals, and the current regulatory climate is not dissuading them,” Paucek said during the August call.
Colleges are also still interested in 2U’s full revenue-share model. The company expects to launch new degrees in 2024 under its traditional agreements from the University of North Carolina at Chapel Hill, the University of Sydney, and Russell Sage College, in New York, the spokesperson said.
Is student demand slowing?
In August, investors balked at 2U’s performance. In 2023’s second quarter, 2U’s revenue from its degree programs fell to $119.5 million, down 16% from the same period last year, due to a decline in full course equivalent enrollment.
2U’s stock price tanked on the news, falling 28.7% to just $3.05 per share the day after 2U announced the results.
Part of the enrollment decline may be due to falling student headcounts at colleges across the U.S. But Hill questioned whether some of it is also due to broader attacks on the OPM industry.
“How much of this drop is starting to get attributable to this big public discussion around OPMs?” Hill said.
Meanwhile, other higher education experts pointed broadly to price concerns, saying students may be questioning the value of expensive degree programs.
The cost of degree programs offered by 2U’s clients varies widely. Tuition for a master’s of science in artificial intelligence at the University of Texas at Austin is advertised at just $10,000, while a master’s in social work at the University of Southern California is priced at nearly $86,000.
Daniel Pianko, managing director at Achieve Partners, a private equity firm focused on the future of learning and work, pointed to enrollment declines across the higher education sector, arguing they are especially prevalent in higher-priced degree programs.
“You’re seeing a general pullback from expensive degree programs that don’t have strong return on investment,” Pianko said. “It doesn’t matter if you’re an OPM or you’re a college offering these programs directly, the cost structure of higher education is going to change driven by consumer attitudes.”