Regulatory and enrollment changes heap pressure on online program managers. What happens next matters for the companies and colleges.
For most of the past decade, 2U has been on a meteoric rise. The company originally built its brand by enabling top-ranked universities to break into online education by helping them launch and run degree programs, and it has since expanded into alternative credentials.
The company has snagged dozens of contracts with colleges to provide help with marketing, recruitment and curriculum design. In 2021, 2U neared $1 billion in annual revenue, up from only $29.7 million in 2011.
But 2U has hit several hurdles over the past couple of months.
In July, the company announced across-the-board layoffs to bring down employee expenses by 20%. It also said that revenue for its degree segment had declined slightly. And the company has faced bad press, with two Wall Street Journal investigations suggesting that 2U uses aggressive recruitment practices in order to lure students into boot camps and degree programs.
It isn’t the only online program management company, or OPM, that has run into problems. Several reported revenue declines or lost some of their biggest clients in the past few months. And the entire OPM industry is facing heightened scrutiny from lawmakers and policy advocates, who question whether these companies’ business models comply with federal laws meant to prevent aggressive recruiting.
Take Coursera, a MOOC platform that has a small OPM business. The company announced a 4% year-over-year revenue decline in its OPM segment during 2022’s second quarter, largely due to lower-than-expected student enrollment. Wiley, a publisher with an OPM division, reported a 0.7% revenue decline in fiscal 2022 for this part of its business.
Pearson, which is largely known for its publishing business, reported that its OPM segment shed 1,000 students during the first half of 2022 compared to the year before and is losing a prominent client, Arizona State University, in 2023.
And Zovio, a company that became an OPM provider less than two years ago, terminated its contract in August with its one and only OPM client, the University of Arizona Global Campus — an operation it used to own under a different name.
The troubles aren’t likely to subside soon, with several trends portending more issues ahead. The current climate for OPMs could even make it harder for some to survive, said Phil Hill, partner at ed tech consultancy MindWires.
“It’s chaos out there if you ask me,” he said.
2U, Coursera and Wiley all recently reported that enrollment-related revenue troubles were hurting their bottom lines.
At 2U, around 60,300 students were enrolled in degree programs at the company’s partner institutions in 2022’s second quarter, roughly the same as last year. But average revenue per student declined 1.9%.
Meanwhile, Coursera said about 17,500 students were enrolled in degree programs on its platform during the second quarter, up 19% from a year ago.
But revenue in the segment still fell.
That’s because enrollment numbers didn’t reach expected levels in some of the platform’s oldest European and U.S. programs, where revenue is concentrated.
On the other hand, Wiley said online enrollment at its partner universities fell 8% in fiscal 2022. Revenue in this segment declined 1% to $226.1 million.
“It’s chaos out there if you ask me.”
Phil Hill
Partner, MindWires
But these issues aren’t unique to online programs — the higher education sector has been shedding enrollment since the pandemic began.
Colleges have lost almost 1.3 million students since spring 2020, representing a 7.4% decline over the past two years, according to the latest figures from the National Student Clearinghouse Research Center.
Although graduate enrollment initially rose during the pandemic, last spring it began to decline. That spells trouble for colleges and OPMs, many of which rely on online graduate programs for a substantial chunk of their revenue.
“OPMs are being impacted by the same things impacting higher ed across the board,” said Daniel Pianko, managing director of Achieve Partners, a private equity firm focused on the future of learning and work. “They’re in the public more, so I think you’re seeing almost a canary in the coal mine for the broader industry.”
College enrollment usually rises during economic downturns, but that hasn’t been the case during the pandemic. Instead, a strong job market has been pulling students away from higher education.
And these troubles are expected to linger. Higher education is barrelling toward the so-called demographic cliff, a drop-off in the number of high school graduates expected to start around 2025 due to lower birth rates during the Great Recession.
“We’re going through a fundamental shift,” Hill said.
Enrollment will only recover for some colleges in the future, while many others will continue to see headcount decreases, Hill said.
“You’re going to see a lot more winners and losers,” Hill said. “It’s going to be a very mixed bag.”
“You’re seeing almost a canary in the coal mine for the broader industry.”
Daniel Pianko
Managing director, Achieve Partners
Increased competition in the sector could prove dangerous for some OPMs whose business models are based on growth. 2U, for instance, has never posted a profitable year as a public company and has around $1 billion in debt and other liabilities.
The narrative to investors is changing, Hill said.
“Maybe it’s not so easy to assume that you’re constantly going to grow,” he said.
Paxton Riter, co-founder and CEO at iDesign, an OPM, echoed those comments.
“We’re really going to see which OPMs have sound business models as they emerge from this because there is going to be a premium on finding ways to really generate profitability,” Riter said. “That’s going to be interesting. There may be a little bit of a culling of the herd.”
OPMs are also grappling with a shifting regulatory environment. These companies — which only emerged about 15 years ago — have largely escaped government oversight since their inception.
A recent report from the U.S. Government Accountability Office, a federal watchdog, found that the Education Department hasn’t been doing enough to ensure the contracts colleges have with OPMs comply with federal guidance.
Many OPMs use revenue-share contracts, meaning they provide services for college programs in exchange for a cut of their revenue. These amounts are often between 41% and 60%, according to the GAO report.
These services often include recruitment. Colleges are typically barred from contracting with companies on a revenue-share basis for recruitment services in order to prevent aggressive practices. But 2011 guidance carves out an exception for companies that provide these services as part of a larger package.
The GAO report indicated the Education Department was planning to revise that federal guidance, with unclear impacts on companies that use revenue-share models.
A timeline for such regulatory changes is hazy.
The Education Department is currently pursuing several sweeping regulatory proposals — including those that affect college athletics, student loans and for-profit education — so OPM-specific rules might not take priority.
“There may be a little bit of a culling of the herd.”
Paxton Riter
CEO, iDesign
Still, OPMs should be ready to change their playbooks. Many of these companies rely on revenue-share agreements for the majority of their business, but lawmakers and policy advocates increasingly question this practice.
“I don’t know what’s going to happen,” Riter said. “I wish I did. But whether it happens over 10 or 15 years, or five years or three years, I think if you’re not thinking about alternative models that are non-revenue sharing, you’re probably making a mistake.”
Some companies have been broadening their businesses. In recent years, 2U has expanded into certificates, short courses and boot camps. The company even bought edX, a prominent MOOC platform, in an $800 million deal that closed last year.
Other threats to revenue-share agreements are potentially coming down the pike.
For instance, the Education Department is crafting regulations that would add stricter rules to colleges converting from for-profit institutions to nonprofits. Some prominent for-profit college owners have used such deals to turn into OPM providers.
That includes a deal involving Purdue University, which bought the for-profit Kaplan University in 2018 in order to build a public online college. In exchange, Kaplan’s former parent company became an OPM for the new institution under a 30-year revenue-share agreement.
Zovio followed this playbook when it sold Ashford University, a for-profit college, to the University of Arizona, which rebranded the school as University of Arizona Global Campus, or UAGC. Zovio became an OPM for the new online college under a 15-year deal, but the two parties dissolved that contract earlier this year following enrollment challenges.
“If you’re not thinking about alternative models that are non-revenue sharing, you’re probably making a mistake.”
Paxton Riter
CEO, iDesign
The Education Department’s new rules propose that a college would generally not be considered a nonprofit institution if it had a revenue-share agreement with its former owners — unless it was priced at fair market value. Public comment for the proposal closed last month, and the Education Department is aiming for regulations to take effect by July next year.
The agency also released guidance this summer reminding colleges that they cannot outsource more than half of their programs. It noted that using a company to provide course design, as many OPMs do, counts as outsourcing, according to a recent post from The Century Foundation, a left-leaning think tank.
Colleges should recalculate how much they’ve outsourced their programs based on this guidance and make adjustments if they’ve crossed the limit, said Stephanie Hall, senior fellow at The Century Foundation.
“That’s huge,” Hall said. “I would think that alone would trigger some rethinking about arrangements, if not also just provide a greater incentive for schools to own their operations and to outsource less.”
Get the free daily newsletter read by industry experts
A comprehensive rework of the Higher Education Act hasn't taken place since 2008. It probably won’t happen now, either, but are smaller changes possible?
Explore how universities are working to boost student outcomes by integrating remedial education, providing mental health tools and making education more accessible.
Keep up with the story. Subscribe to the Higher Ed Dive free daily newsletter
Keep up with the story. Subscribe to the Higher Ed Dive free daily newsletter
Subscribe to Higher Ed Dive for top news, trends & analysis
Get the free daily newsletter read by industry experts
A comprehensive rework of the Higher Education Act hasn't taken place since 2008. It probably won’t happen now, either, but are smaller changes possible?
Explore how universities are working to boost student outcomes by integrating remedial education, providing mental health tools and making education more accessible.
The free newsletter covering the top industry headlines
