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GAO Report on Online Program Managers Was Only a Start

Congress’s investigative arm accurately diagnosed the problem outside providers play in driving online tuitions higher, but the government needs to act more aggressively, John Katzman argues.

May 11, 2022
 
 
The Government Accountability Office sign at its office in Washington, D.C., with white lettering on a black background.

Last week’s report by the U.S. Government Accountability Office takes appropriate aim at online program management companies, noting several concerns many of us have warned about for years. As the Department of Education considers solutions to these problems, it must act forcefully to address both those problems and, more importantly, the ballooning marketing and recruiting spend for all online degree programs.

The current regulatory environment dates to 2010, when the Department of Education moved to help traditional universities build and scale online programs that could compete with those of for-profits. A Dear Colleague letter created an exception to incentive-compensation regulations, allowing universities to partner with OPMs—companies with the capital and expertise to do this (in 2008, I founded the largest of those companies). The move worked; today, half of adult and graduate school students study online, and the great majority are in programs run by traditional colleges and universities that are far superior to those offered by for-profits.

However, by 2015 it was clear that the model had overstayed its welcome. First, for-profits realized they could circumvent regulations by splitting into two entities: a nonprofit school and a single-client OPM (I call them FauxPMs) that services it in return for most of the revenue. Some of these schools, in turn, have licensed the brands of state universities to gain marketing clout.

Second, the model encouraged an inflexibility and opacity that has served neither students nor schools. Third, as enrollment in online programs continued to replace, and not simply supplement, enrollment on campus, it locked schools into paying 50 to 80 percent of tuition for a decade (even as the cost of going online has dropped), putting those institutions at risk.

Finally, the revenue-share model encouraged OPMs to promote the programs generating the largest profit: the most expensive, least selective ones.

The GAO report is a fine kickoff to the conversation, and the better reporting they recommend would be a good start, but this is the moment when we must address a larger problem: the tremendous growth in marketing and recruiting costs throughout online education.

First, marketing is getting increasingly expensive, utilizing financial resources that would be better spent on teaching, innovation or financial aid. It’s no longer just the for-profits that spend wildly on student acquisition; even nonprofit online colleges generally spend about 25 percent of tuition, and some traditional public universities now spend upward of 35 percent of tuition, for their online programs—more than what they spend on teaching.

Education isn’t the first sector to be sucked down this rabbit hole—big pharma spends three times as much on sales and marketing as it does on R&D—but this is the time to ask ourselves what higher education wants to be.

More importantly, the marketing spend—both by OPMs and by individual schools—actively leads students away from the right schools. Over the years, I’ve taken exception to any number of things about U.S. News & World Report’s college ranking (full disclosure: I created my own quirky rankings at Princeton Review), but the intent there has always been to guide students to schools that serve them best.

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The bulk of ad spend, on the other hand, has been from many of the worst schools in the country, like the now-closed Corinthian. Google isn’t helping here; the results for “online college” are dominated by paid ads, and the organic results (all under the fold) are tied to schools’ search engine optimization skills, not to their quality or student fit.

The OPMs are a significant part of this circus. They make sure their client schools handle SEO competently, and they allow schools that have little expertise in digital marketing to trade a higher spend (many OPMs charge 35 to 40 percent of tuition for marketing and recruiting, keeping half as their profit) for reduced risk and up-front spend. But getting rid of that support system for traditional schools without discouraging others from continuing to spend lavishly on student acquisition merely disarms them in an increasingly existential battle.

Having said all this, I should note that Noodle, which I founded and run, is an OPM of sorts, and therefore part of the problem, too. And though we generally take no revenue share and our model emphasizes transparency and flexibility, our schools have, to date, spent 16 percent of tuition on student acquisition.

What we need to do is discourage everyone—for-profits, nonprofit online schools, traditional universities and the FauxPMs—from making higher ed more expensive and worse via marketing and recruiting.

As a start, we can leverage and improve upon IPEDS, the main federal data source about higher education. Every program should be required to disclose what percentage of tuition goes toward marketing and recruiting (and, for the for-profits, profit). Then we should decide how much of those costs and profits should be subsidized by taxpayers through the Title IV financial aid programs.

Of course, nothing is as simple as that. For example, some believe that Division I universities should count the spend on their football teams as marketing. Others note that new programs need to spend significantly, as they struggle to let people know that they exist. And no one in higher ed wants to make it harder for universities—both traditional and new—to compete with boot camps and other unaccredited schools. This is a complex situation that requires nuance.

Whatever we do, we can be sure that enterprising schools and companies will look to work around it, so we can’t simply address this issue once a decade. This is like cybersecurity; making the market work will require Education Department staff to monitor this situation in real time and tweak regs, perhaps through new Dear Colleague letters, as new attacks arise.

The OPM sector was created for good reason, but as the GAO points out, it’s time to refine it. Doing so thoughtfully, and keeping the overall goal of robust competition with minimal cost of student acquisition, will finally allow technology to work harder to better support higher ed while lowering its costs and, ultimately, tuition.

Bio

John Katzman is founder and chief executive officer of Noodle, which builds online programs with colleges and universities.

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