In 2011, just a few years after 2U was founded, the company brought in about $30 million in revenue, selling colleges on the idea it would help them launch and run online degree programs by offering a suite of services, including marketing, recruitment and course design.
As more colleges sought to expand their online footprint over the next decade, the company's size exploded. Last year, 2U neared $1 billion in revenue — roughly 30 times more than it brought in 10 years prior. Meanwhile, it's amassed over $1 billion in debt and other liabilities and never posted a profitable year as a public company.
2U's growth illustrates the boom that online program management companies, or OPMs, have seen in recent years. Typically, these companies help colleges grow online programs in exchange for a cut of their tuition revenue, usually between 40% and 60%.
Hundreds of colleges have contracts with these companies, including top-ranked schools such as the University of Southern California. But the proliferation of OPMs has stoked concerns among key Democratic lawmakers, who worry these deals drive up the price of online education and don't comply with federal law.
Five such legislators commissioned the U.S. Government Accountability Office, an auditing agency for Congress, to look into the OPM sector. This spring, the GAO delivered that report, which concluded regulators haven't exercised enough oversight over OPM contracts to ensure they were complying with federal laws meant to protect students from aggressive recruitment practices.
But the report was hardly an indictment of the OPM sector. The GAO mentioned no specific instances in which contracts violated federal law or harmed students.
"Perhaps some people were hoping there would be a blockbuster GAO report, finding fault with the OPM industry, but the GAO answers the specific questions that Congress asks it to answer," said Kevin Carey, vice president for education policy and knowledge management at New America, a left-leaning think tank, and one of the most prominent critics of the college-OPM complex. "It's a neutral, analytic and investigatory body that acts within the mandate that it's given, and I think that's what it did in this case."
Still, the report will likely kick off heightened monitoring of the sector and suggests regulatory changes are coming that could affect how OPMs work with colleges. And it remains to be seen how much any such changes would affect companies' ability to use tuition-share agreements, the bedrock of some of their business models.
More oversight is coming to OPMs
The GAO report concluded that independent auditors conducting reviews of colleges aren't adequately checking that their contracts with OPMs comply with federal law designed to prevent predatory student recruiting. The law bars colleges that receive federal funding from giving incentive-based compensation, such as commissions or bonuses, to companies or employees that recruit students into their programs.
The U.S. Department of Education considers tuition-sharing deals to be incentive compensation, but it carved out an exception for OPM companies in 2011 guidance. The exception says OPMs that offer recruiting services can strike tuition-sharing deals with colleges — so long as recruitment is part of a larger bundle of services, such as course design and career counseling. Colleges also must retain control of their admissions decisions and determine the number of students who enroll.
The GAO report recommends that the Ed Department provide information to independent auditors so they can better review such contracts for compliance with this guidance. It also suggests the department instruct colleges about the information they must furnish about their work with OPMs during audits and program reviews. The Ed Department agreed with both recommendations.
Lawmakers who commissioned the report ramped up their calls for more oversight of the OPM sector when it was released.
"The business arrangements between these companies and institutions raise many questions about costs and incentives," Sen. Tina Smith, a Democrat from Minnesota, said in a statement. "This report confirms these concerns are warranted, as there’s been a serious lack of effective oversight while these arrangements have proliferated. The U.S. Department of Education needs to take a much closer look at this issue, OPM business practices, recruitment tactics, and ultimately the costs borne by students."
The Ed Department agrees that it has too little information about how colleges are partnering with OPMs, how these contracts may enable risky behaviors and whether these companies are complying with all federal rules, a spokesperson said. Moreover, the agency is concerned about allegations that some companies are using tactics similar to those commonly employed by for-profit colleges.
However, the Ed Department did not answer questions about when it plans to implement GAO's recommendations.
Stepped-up oversight could detect contracts that aren't square with federal law.
“You’re gonna find stuff at the margins that needs to be changed."
Managing director, Tyton Partners
That level of enforcement "almost by definition" will result in some findings of noncompliance, said Trace Urdan, managing director at Tyton Partners, an investment banking and consulting firm focused on higher ed.
"You're gonna find stuff at the margins that needs to be changed," Urdan said. "We're talking about really marginal changes, not substantive changes, and I think that's the main point."
Higher Ed Dive asked eight OPM companies whether they supported the GAO's recommendations. Five answered by publication time.
Academic Partnerships, Grand Canyon Education and Wiley University Services said they support the GAO's recommendations. And 2U and Pearson said they support greater transparency and oversight.
That aligns with comments some company leaders have made publicly.
“We reviewed the report and we’re very supportive of the GAO’s recommendations,” Chip Paucek, 2U's CEO, said on the company's latest call to discuss quarterly earnings. “Greater transparency and continued oversight will actually ensure that the industry as a whole is serving the best interests of students.”
Do tuition-share agreements have a future?
Lawmakers have questioned whether tuition-share agreements comply with federal law. And some policy advocates have called on the Ed Department to rescind the 2011 guidance that allows OPMs to set up these arrangements with colleges.
The GAO report, however, doesn't evaluate the legality of tuition-share agreements.
"There's nothing explosive in here to that end," said Michelle Dimino, a senior education policy adviser at Third Way, a center-left think tank. "The report doesn't really open new doors, but it also doesn't close them in terms of future conversations around tuition-share agreements, marketing, spending and other areas of OPM contracting."
Indeed, the Ed Department is considering revising the 2011 guidance to provide clarity on what constitutes an acceptable bundle of services and how to determine whether a college is sufficiently independent from an OPM, according to the GAO report.
“The report doesn’t really open new doors, but it also doesn’t close them in terms of future conversations around tuition-share agreements."
Senior education policy adviser, Third Way
It's unclear how the Ed Department will change the guidelines. But Urdan sees potential new guidance as a positive development for the sector.
"Even if the rules are tightened, they will also be made more clear, and the clarity is something that will be good for business," Urdan said. "The clarity will make the schools more comfortable and will make the OPM investors more comfortable."
A spokesperson for Wiley said the company looks forward to working with the department to clarify the guidance.
"The revised guidance should continue to support online program managers that assume the initial risk of launching and scaling online education programs, and provide technical capacity and know-how, while institutions retain control over key decisions relating to admissions, financial aid, academic programs and faculty," the spokesperson said in an emailed statement.
"It’s time to rethink the way the incentive compensation ban is applied and the way it is enforced.”
Senior fellow, The Century Foundation
However, some higher education experts are continuing to call for the guidance to be rescinded altogether — a move that would crumble a pillar of the OPM industry.
"It has served its purpose," said Stephanie Hall, a senior fellow at The Century Foundation, a left-leaning think tank. "Colleges have been able to rely on it for 11 years now, and I think now it's time to rethink the way the incentive compensation ban is applied and the way it is enforced."
The Century Foundation has found examples of contracts where colleges rely on OPMs for a massive share of their enrollment. Lamar University in Texas, for instance, uses an OPM to recruit over half of its students.
Hall said the bundled services exception could be wound down without harming colleges. The OPM industry has known for years this policy change is possible, she said.
“It would be a monumental change to the market.”
Rescinding the exception could enable colleges to renegotiate their contracts — even for those locked into long-term agreements, Hall said. In a recent report for The Century Foundation, she outlined two options for colleges with revenue-share agreements if the guidance were rescinded: they could either remove recruiting services from those deals or continue contracting with an OPM for recruitment but switch to a flat flee arrangment.
"This would give colleges an opportunity to renegotiate for better terms now, which would be amazing," Hall said.
But others note that such moves would likely shake the foundation of OPMs, which pay for the up-front costs of launching online programs in the hopes they will recoup their expenses later through the revenue brought in by long-term tuition-share agreements. In filings with the U.S. Securities and Exchange Commission, two public companies with OPM contracts — Coursera and 2U — have repeatedly listed a change to the guidance as a risk factor to their current business models.
"This would not be an issue of, 'Okay, we can handle it. We'll adjust some things,'" said Phil Hill, partner at ed tech consultancy MindWires. "It would be a monumental change to the market."
Correction: A previous version of this article used an old corporate name to refer to Wiley University Services. This article has been updated.