California Mulls Crackdown on Online Partnerships

State lawmakers in California have proposed seven interrelated bills that would tighten regulation of for-profit and private colleges.

The goal of the legislative package, bill sponsors say, is to make colleges put student success before profit -- and to ensure that fewer students are saddled with debt and low-paying jobs.

One bill would seek to enact a gainful-employment rule, similar to the Obama-era regulation that was based on loan-repayment rates of graduates of career education programs, which the Trump administration rolled back. Another aims to reduce the amount of taxpayer-funded revenue that an institution can generate from 90 percent to 85 percent. It would also give California's attorney general power to decide whether an institution claiming to be a nonprofit is truly a nonprofit.

It's not the first time for-profit institutions have been a focus of Democratic politicians in California. But it may be the first time state lawmakers have sought to tighten regulation of online program management (OPM) companies. Other states are considering bills aimed at for-profits, but none have addressed the role of OPM companies.

For example, a proposed bill would explicitly prohibit any private for-profit or nonprofit postsecondary education provider that is registered with California’s Bureau for Private Postsecondary Education (BPPE) from entering into tuition-sharing arrangements with OPMs or other academic service providers.

State law requires that all private institutions with a physical presence in the state must apply for approval to operate with the bureau, unless they meet specific criteria for an exemption, such as accreditation from a regional accreditor, said Matt Woodcheke, a spokesman for the bureau.

According to an analysis by lawyers at CooleyED, the law could apply to out-of-state distance education providers that enroll California residents.

Regionally accredited private institutions, such as the University of Southern California, which has partnered with OPM provider 2U on an online master of social work and several other academic programs, apparently would not be directly affected. The bill could, however, impact institutions such as Ashford University, a for-profit institution seeking to convert to nonprofit status, which works closely with its parent company, Bridgepoint Education (now called Zovio).

Anthony Guida Jr., a lawyer and partner at Duane Morris LLP, said the bill's impact would be fairly limited in scope. “The portion of the California education code that we’re dealing with only deals with proprietary institutions that by definition would not include any public California colleges,” he said. Guida also cited the exemption for private, regionally accredited universities such as USC. “If you look at the institutions that are actually authorized by BPPE, a lot of colleges that OPMs would want to market with aren’t covered by this legislation.”

The bill would not impose a ban on OPMs operating in California, although lawmakers might consider further restrictions on how the companies operate with other institutions in the state. Where California ventures, however, experts said other states could follow. And while the Trump administration is unlikely to take aim at OPMs at the federal level, Congress or a future Democratic administration just might.

As for-profit universities and colleges continue to close their doors, many are asking: Could OPM companies become the next bogeyman of higher education?

Growing Dependence on OPMs

College partnerships with online program management companies have become commonplace over the past decade. Institutions of all shapes and sizes, including large public universities, work with OPMs to launch online programs.

These arrangements often feature decade-long revenue-share deals, where the company takes a significant cut of tuition revenue in exchange for up-front investment and services such as student recruitment, marketing, instructional design, tutoring and career advising.

Kevin Carey, vice president for education policy and knowledge management at New America, recently wrote a scathing critique of the role of OPM companies for The Huffington Post, titled “The Creeping Capitalist Takeover of Higher Education.”

“As our most trusted universities continue to privatize large swaths of their academic programs, their fundamental nature will be changed in ways that are hard to reverse,” wrote Carey. “The race for profits will grow more heated, and the social goal of higher education will seem even more like an abstraction. Even the partnerships that are undertaken with noble intentions never truly put the student first.”

Critics of Carey’s piece said his concerns are overblown. But the article drew attention to an issue that has largely flown under the radar of the public and politicians -- universities increasingly rely on for-profit companies to deliver online programs.

Robert Shireman, senior fellow at the Century Foundation, and a former Education Department official during the Obama administration, helped to craft the language in the seven California bills. If enacted, the legislation would give the state the nation's strongest for-profit accountability measures, he said.

"There have been for the past year or so various legislators that have seen reports about the Trump administration rolling back oversight of higher education generally, and especially efforts to address predatory for-profit colleges," said Shireman.

Several ideas didn’t make the final cut of seven bills, Shireman said, including a cap on how much institutions could spend on advertising. Instead, a suggested quota for spending on instruction was included in AB 1343, which is designed to “close the 90-10 loophole” that allows for-profit institutions to claim up to 90 percent of their revenue from federal financial aid, he said.

The bill's requirement to cap taxpayer-funded revenue at 85 percent or to spend at least 50 percent of revenue on instruction would cause around 130 institutions in the state to close down, estimated the California Association of Private Postsecondary Schools (CAPPS), which mostly represents for-profit institutions and is actively opposing the bills. Shireman said the intent is not to close schools down. Institutions will have “plenty of time and options for complying,” he said.

Tests of whether nonprofit institutions are legitimate nonprofits will “become stricter” if the bills are enacted, said Shireman. For example, it will be more difficult for former for-profits to claim exemption from BPPE oversight. If such an institution is required to register with BPPE, then it will be prohibited from entering tuition-sharing deals with OPMs.

“Most of the schools that we’ve identified as covert for-profits nationally would have difficulty claiming the exemption in California,” said Shireman. He said affected universities would include Stevens-Henager College's Independence University, Grand Canyon University and, potentially, Ashford.

The legislation is not intended to stop institutions from being entrepreneurial, said Shireman. The nonprofit Southern New Hampshire University and Western Governors University are entrepreneurial, he said, but they feed profits back into their operations. “The control of that money is in the hands of people who are not extracting it from the institution.”

Bad Incentives?

Tuition-sharing agreements like those many institutions have with OPMs create an incentive structure that encourages predatory recruitment practices, said Shireman. By prohibiting revenue sharing, one of the proposed bills seeks to prevent students from being pressured into enrolling in a program that may not be a good fit for them.

OPM companies appear to not have objected loudly to the California legislation, and several industry representatives declined to comment for this article. Shireman said this is partially because the companies don’t want to draw attention to their business practices. And he said the OPM industry, which is worth billions of dollars, is not built on solid models.

In 2011 the Education Department issued a Dear Colleague letter outlining a “bundled services exception” that allowed institutions to enter tuition-sharing arrangements if the third party provides services that are distinct from recruiting services. The proposed bill would effectively eliminate this exception for certain California schools.

“The exception that OPMs are currently claiming is just a letter, it’s just guidance from the department from 2011,” said Shireman. “It puts them in a vulnerable position if they try to claim too strongly that they have an exception from federal law -- it could be pushed back that maybe they don’t, and maybe what they’re doing right now is not actually OK under federal law.”

The bundled services exception has “moved pretty far beyond” what the department probably imagined it would be used for at the time, Carey said in an interview. “Guidance can be rescinded and new guidance can be issued.”

“I think we have a problem,” said Shireman of colleges working with OPMs. “I think traditional institutions have been too quick to hand over the keys … They’re doing this on extraneous programs that they don’t really care about so that they can make money for the rest of the university, and that’s a good cause. But they’re contracting with for-profit entities that have an incentive to be quite aggressive in their recruiting and are capable of charging a lot of money just because there’s federal aid there.”

Aside from worries about predatory recruitment practices, Carey is concerned that some OPMs are taking too much academic control, which would violate federal rules. “If you look at some early OPM contracts, they talk very explicitly about the curriculum. When you look at later contracts, that language is removed because they know they’re crossing a line they’re not supposed to cross -- I certainly have questions about that.”

For-profit colleges often have fallen afoul of incentive compensation rules, which prohibit employees who are involved in recruiting from receiving compensation based on the number of students they enroll, said Shireman. “Paying this kind of bounty is very effective in getting your sales force to enroll people -- it’s really important that it’s prohibited because it works, but it works in ways that could be very damaging to students.”

Tuition-sharing deals with OPM companies create a similar scenario, said Shireman, who referenced proposed bills in other states that also are aimed at for-profits. “The state legislation in New York, Maryland, California and elsewhere are prompting conversations that feed into the federal level. It’s been constructive to look at the OPM issue -- to think about what the boundaries should be and whether you should prohibit a tuition-sharing approach completely.”

Trace Urdan, managing director at Tyton Partners, said concerns about predatory enrollment practices in OPM partnerships are exaggerated. “I’m not aware of any situations where any parties -- schools or partners -- have been accused of being overly aggressive,” he said.

“In most OPM situations, it is the schools rather than the private partner that are pushing for growth. Because the private partners are responsible for the cost of the leads, they tend to be the more conservative parties. It is not ever purely revenue share -- there are also costs involved,” he said. “So to believe that the fact of revenue share drives aggressive practices is just faulty logic.”

John Katzman is a veteran of the OPM industry who founded 2U and is now founding CEO of Noodle Partners, an OPM company that offers fee-for-service and hybrid deals that offer a temporary revenue share option; Noodle invests upfront capital in exchange for a share of tuition but reverts to a fee-based model once the initial investment has been recouped. Katzman said the California bills are the "first volley" of a push by states, and potentially the feds, at how OPM companies operate.

"It's not surprising there were some unintended consequences of the bundling exception, and California should be applauded for addressing them instead of waiting for them to become impossibly large," he said.

Katzman said OPM companies have encouraged universities to spend more on marketing, which in turn helps keep costs high for students. It’s typical for an online program to spend over 20 percent of tuition on marketing, said Katzman, but “revenue-share OPMs exacerbate the problem by reducing transparency and risk.”

“We can make online higher ed more transparent, less expensive and better,” he said. “Noodle’s doing that through competition, but good legislation can help as well.”

Debbie Cochrane, executive vice president of the Institute for College Access and Success, supports the California legislation.

“They’re looking for ways they can protect their residents,” she said. “I would expect other states to see if there’s a road map for them to follow.”

The final bills or resulting legislation may be worded differently than the bills Shireman helped shepherd. But Cochrane said the “goal is to get the bills to the governor’s desk in a form that will still have the intended effects -- reining in predatory practices that harm students.”