/The Corporations Devouring American Colleges

The Corporations Devouring American Colleges

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:

The Real Cost Of An Online Degree

#8

Georgia Tech

Charges students at cost

  • #20 University of Southern California: $60,150
  • #25 Johns Hopkins University: $42,500
  • #43 North Carolina State: $49,197
  • #68 Syracuse: $46,770
  • not ranked Louisville: $21,420

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.

Source: 2U investor materials.

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.
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According to a 2019 settlement with 48 state attorney generals and the District of Columbia, the company forgave $493 million in student loan debt, affecting nearly 180,000 students, and paid $5 million in fines to the states.

“When you have similar incentives and similar actors involved, it’s difficult not to worry,” says Spiros Protopsaltis, a senior education official during Obama’s second term.

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.”