Marketwatch

By Jillian Berman

Partnerships with name brand universities to offer online degrees once made the company worth billions. Its cofounder CEO just left amid turmoil at the company.

It was a tip from an analyst at an investment firm roughly a decade ago that first pushed Kevin Kinser, an education professor at Penn State University, to start looking into companies that work with colleges to create online degree programs.

Back then, the typical model for these online program managers, or OPMs as they're known, was to provide recruiting, marketing and back-end support to name-brand universities as they launched online graduate degrees in social work, nursing, international relations and other fields. In exchange, the schools would pay the companies a large share of the tuition revenue the program generated.

The analyst was convinced the model wasn't sustainable, he told Kinser. It was at risk of running into the crosshairs of regulators or of universities deciding they didn't want to give up so much of what the programs were bringing in. The analyst bet against the best known company in the market, 2U, (TWOU) Kinser said. But a few years later, he had to get out of his investment because he was losing. The stock price was climbing and the sector was growing.

"If he'd only held out," Kinser said recently.

As of Monday, 2U's stock was trading in the $1 range, down from a high of around $98 in 2018, according to FactSet. At that point, it was worth more than $4 billion. The company announced Friday that Chip Paucek, the chief executive officer and cofounder, once an evangelist for the sector and his company, would no longer be the company's CEO and would leave its board. Analysts are worried 2U might not be able to satisfy its bondholders without large concessions. In November, the company announced that it's winding down a partnership with the University of Southern California, one of its biggest historic partners. The company expects to receive roughly $110 million in revenue from early contract terminations this year.

2U declined to comment for this story, beyond what company officials have already said publicly.

2U's stock-market debacle mirrors the bo-m and bust of other education-technology companies, like Chegg (CHGG) and Coursera (COUR), which have seen their stocks plunge in the last couple of years while the U.S. stock market, as measured by the S&P 500 SPX, soared. The 2U story is about the hype around online program manager that developed in education technology.

Experts like Kinser, who have been watching the OPM space for years, say 2U and companies like it helped fuel the rise in college costs and student debt. Now, these companies are reckoning with the scrutiny associated with the nation's $1.7 trillion student-debt crisis.

"This is part of a restructuring, a reconceptualizing of an OPM," Kinser said. "Some of the early ways that OPMs were presenting themselves and were operating, it looked like easy money, like no downside, guaranteed paycheck. In part that was because the regulatory environment didn't touch them."

In the years since, he added, "they were able to do things that got the attention of some policymakers, regulators et cetera, which made it less easy money and more of a risk."

Operated in relative obscurity for years

2U launched in 2008 and for years operated in relative obscurity. That was the goal one of its founders, John Katzman, told HuffPost in 2019. "The more invisible we are, the better," he said. The idea was that the degree had the brand of the university, even if during the recruitment funnel, prospective students would be dealing with OPM staff and the companies also had a role in the course design. In 2014, the company went public and the sector continued to grow.

The regulatory environment helped fuel the rise of 2U and other OPMs, particularly those that focused on graduate degrees, in two key ways.

Typically, the government bans colleges from paying admissions and recruiting staff based on how many students they enroll. But in 2011, the Department of Education issued a memo saying that companies that provided bundled services -- some combination of recruitment, technology help and other offerings -- could be paid a share of tuition revenue the programs generate.

In addition, the government's treatment of graduate student loans have made graduate degrees a lucrative market for universities and their partners. The federal government caps the amount in loans an undergraduate can receive. But graduate students can borrow up to a school's cost of attendance, meaning essentially whatever a graduate program charges, federal-student debt will pay for it.

During the 2021 to 2022 academic year, disbursement of graduate-student loans accounted for nearly half of the total amount disbursed in federal student debt. If trends continue, student-loan disbursements for graduate students may exceed disbursements of undergraduate loans in the next few years, according to the Department of Education.

Colleges have been eager to tap into this source of funds. But they often didn't have the resources to launch online programs that would enroll large numbers of students. Enter OPMs like 2U that could provide the robust marketing and technology operation that would allow these schools to expand graduate offerings.

Universities outsource many functions, but to some this appeared to be "a bridge too far," Kinser said. There's a range in how much of a role OPMs play in the content of the courses. But in some cases, they're heavily involved in how they're designed and delivered.

"It just caught people's attention because it just seemed like, 'wait a minute, if universities aren't doing their own teaching then what are they doing?'" he said. "If they're not good at teaching and learning and course design then what are they good at?"

After years of scrutiny from the media and advocates as well as the uptick in graduate-student debt, these partnerships and the companies that help facilitate them are now in trouble.

The Department of Education launched a review of the 2011 guidance that allowed this market to grow earlier this year. It could end in the agency closing the loophole that allows that allows OPMs to receive a share of a program's tuition revenue.

"Since issuing the guidance, the number of students recruited by entities operating under this exception has increased, particularly through online programs operated by third-party entities, including Online Program Managers," the Department of Education wrote in a press release announcing the review. "Given the growth in online enrollment and associated federal student debt, the Department is seeking public input to understand the impact of this exception and whether any updates are necessary to the guidance."

In addition, students as well as plaintiff lawyers are starting to question the value of the degrees offered. In many cases, schools charge the same price for online programs that these companies help design as they do for their in-person degrees.

USC programs face scrutiny

A lawsuit filed earlier this year by three former students in USC's online master's in social work alleges that the school illegally misled them by advertising that the online degree, which at the time cost more than $100,000, was comparable to the school's in-person program.

The suit, alleges that USC "outsourced substantial aspects of its online MSW [master's in social work]" to 2U. The lawsuit claims much of the online MSW program consists of pre-recorded asynchronous content and was largely taught by instructors who are "distinct from the regular tenured, tenure-track, and clinical faculty who teach in USC's in-person, on-campus MSW program."

The school declined to comment on the case, but they've pushed back at the allegations in legal filings. "Contrary to what Plaintiffs allege, the online and in-person versions of USC's MSW program have the same curricula, the same syllabi, and the same graduation requirements; and students who graduate from both programs receive the same USC MSW degree," attorneys for the school wrote.

In a November earnings call, Paucek acknowledged that the cost of some of the degree programs offered by 2U may be souring students. "The market for degree programs has changed over the years and some programs have become more difficult to run due to their pricing or other factors," he said. Paucek told investors that the company parted ways with schools recently over the cost of their programs.

At USC's Social Work, the cost of the MSW degree won't change following the split with 2U, said Vassilios Papadopoulos, the interim dean of the Suzanne Dworak-Pe-k School of Social Work. That's because the school overhauled the degree in recent years, including cutting the price, he said.

At the Rossier School of Education at USC, which also worked with 2U, the school may be able to use the savings from what it was paying 2U to provide more scholarships for students, said Pedro Noguera, the school's dean.

"It won't be immediate," he said, adding "that's one of the advantages for us of the separation is lower cost for students."

Ultimately from USC's perspective the decision to part ways was the result of changing times, Papadopoulos said. When the partnership first started, the school needed help from 2U to facilitate these online programs, both deans said. The pandemic helped to accelerate USC's ability to bring the online degree programs in house, they added.

For 2U, separating from USC and other schools offering degree programs at a relatively high cost with a tuition share model, "will hopefully reduce the political backlash on their business," said Brett Knoblauch, an analyst at Cantor Fitzgerald who follows the company. "They're going to be exiting a lot of degree programs that they've historically made a lot of money on."

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