A better way to address revenue sharing and online marketing

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The U.S. Department of Education is now considering changes to its guidelines addressing how outside providers bundle the services they offer to colleges and universities and to the regulations that define and govern third-party servicers.

The department helped create the online program manager industry, in part to encourage traditional universities to embrace online learning. The industry has evolved; so too have the OPMs. Whatever updates the department makes should serve to lower the cost of higher ed and increase college completion.

A Quick History

Through the 2000s, online learning was largely the purview of for-profit colleges serving adult learners. Their programs were largely substandard—graduation rates as low as 3 percent—which gave the medium a dubious reputation. The cost, as well as the reputational and financial risk, of building and marketing online programs kept traditional colleges from competing.

The World Has Changed

The online world has changed a lot in the past 12 years since the DCL was published.

First, the cost of building competent online programs has dropped. Multitenant models mean each college or university does not have to build out a tech infrastructure for itself, and many companies are already experimenting with large language models like ChatGPT to see how they can help lower costs further.
Second, the risk profile has changed. In 2011, the risk was that one could not build an online program at the same level of competence as an on-campus one, and that no student would enroll in it, anyway. Now, with a quarter of undergrads and half of grad students studying online, projecting enrollment requires data science, not a Ouija board. The risk is for those with no online presence, or with dated technology, student services, pricing strategies and learning design.
Finally, every other sector of society has moved to a blended solution. Home Depot, for example, doesn’t care whether you buy a hammer at its store or its website, or how it delivers the hammer to you; its marketing, merchandising and management are shared. There’s no reason higher education can’t figure this out and reap the benefits of efficiency and customer satisfaction. Universities need to move beyond pilots and initiatives and commit to plans and infrastructure that support a blended future.

The Model Has Been Abused

Meanwhile, the bundled service provider space has evolved, probing the boundaries of the DCL.

As providers added multiple programs in each discipline, OPMs have found a new way to improve their profit: shifting marketing dollars to their most expensive, least selective clients. Since none of these contracts guaranteed any particular spend, or penalized them financially for missing enrollment targets, this was easy to do.
Meanwhile, the for-profits realized they could lower their marketing costs while avoiding regulation by partnering with state universities at a guaranteed profit, turning themselves into “fauxPMs.” And many OPMs now offer a “bundle” consisting only of marketing and recruiting.
And even without doing anything underhanded, some OPMs and their investors continue to charge universities 30 to 50 percent of tuition for marketing and recruiting—payday loans for A-rated nonprofits.

The Larger Problem

The issues surrounding OPMs are part of a larger problem.

When the Higher Education Act was first written, the cost of marketing and recruiting in higher ed was 1 to 2 percent of tuition—a rounding error in university budgets. Marketing budgets stayed in this range as long as enrollment capacity grew roughly in line with demographics.

Online learning, however, has given colleges and universities unlimited capacity, even as college enrollment has dropped by 10 percent. For-profit colleges jumped first: in 2012, the University of Phoenix spent almost $400,000 per day to bring half a million students through its doors. But now it’s everyone: universities currently spend over $10 billion a year on just Google, Meta and LinkedIn, and that spend is rising by 10 to 15 percent per year. OPMs didn’t create this trend, but they dramatically sped the race to the bottom.

Setting Goals for a Better Model

Informing the new regulations should be a set of core principles. Based on the observations above, and with one eye focused on unintended consequences, here are some suggestions:

Traditional institutions should be able to compete with for-profits and large nonprofits—and with boot camps and other certificate programs not subject to Title IV regulations—on a level playing field.
Marketing for higher ed should be more honest. A Noodle study found that only 6 percent of visitors to lead generation sites know colleges are paying to be listed on these sites. When you search Google for an online program, every listing above the fold is an ad. U.S. News is often criticized for its imperfect college rankings, but social media, search and lead-gen sites have 100 times its reach, and the great majority of their ads promote colleges that are more expensive and less likely to graduate students. Instead, let’s encourage business models for the marketing community that reward them based on their track record of helping students make successful choices.
Colleges should be discouraged from spending excessively on marketing and recruiting. Online programs routinely spend 20 to 40 percent of tuition on marketing. In addition to consumer marketing through Google, Meta and LinkedIn, companies that recruit abroad or through employers take 30 percent of tuition for their efforts. And remember, taxpayers are subsidizing much of it. One future and ongoing analysis of online and blended programs might explore the percentage of expenditures that directly contribute to learning.
To the extent we continue to allow colleges to pay for marketing and recruiting by sharing a percentage of tuition with outside providers, they should know what their providers are spending on their behalf.
We have already reached a point where students want mixed-modality options within a given programmatic experience. Further, and accelerated by the pandemic, faculty are also calling for more agility in terms of how to best deliver instruction and maximize student success and equity. In this blended world, regulations should not encourage contracts that build walls between on-ground and online learners.
Finally, revised third-party servicer (TPS) rules should be simple to comply with and have minimal impact on compliance cost and workload for companies and for colleges.

A Simple Path

With these principles in mind, the solution is relatively straightforward.

Bundled service providers should not be treated as a separate class. The department should revoke the 2011 DCL. If it decides that revenue share is a good idea, it should simply eliminate incentive-compensation regulations; let’s not have a rule (“you can’t share revenue with recruiters”) that includes a 100 percent loophole (“you can share revenue with recruiters as long as they also do marketing”).
Any significant provider of marketing or recruiting services, including big marketing platforms like Google and Meta, lead-gen providers, companies promoting colleges to employers, and international marketers whose students are eligible for Title IV loans, should be considered a TPS. The definition of “significant” should ensure we don’t end up adding to the regulatory burden on small nonprofits; we suggest $250,000 in revenue from any one university or $2 million from all of them.
Some costs outside of marketing and recruiting legitimately scale with the size of the engagement (for instance, counseling or transaction fees). The regulations should continue to allow these services to be offered on an enrollment basis, but not open the door to gamesmanship (e.g., “we market for free but charge 30 percent of tuition for transaction fees”). To increase transparency, we would propose a TPS selling both marketing and a service whose fees scale with enrollment be required to submit an annual statement outlining those fees, with an auditor’s confirmation that they are priced at market. It may make sense to cap such enrollment-based fees at 5 percent of tuition.

Winners & Whiners

Several universities have testified they could not have launched their online programs without revenue share. As discussed, this may have been true at one point, but it is not any longer. For example, Noodle works with several banks to help its clients fund online efforts through traditional low-interest loans. And institutions now have enough information from the last decade of experimentation to make sound short- and long-term investments of their own. Revenue share is no longer the only path to sustainable impact.

Many have argued the proposed TPS regulations would capture thousands of providers. They’re right; the problem is in marketing and recruiting services, and we should limit expanding TPS regulations to solve that issue. Further, we recommend the department move swiftly to issue a request for proposal for a simple electronic application for providers, with a back-end searchable database. This can be easily done by the amended filing deadline.

Finally, some ignore that the current regulations encourage destructive behavior, and argue Adam Smith’s invisible hand: it would be fine if marketing for this subsidized public good reaches 90 percent of tuition while pointing students solely in the direction of programs with the highest tuition and least positive outcomes, because students and colleges are competent to make these decisions for themselves. Behavioral economics aside, we would simply note that all states and the federal government subsidize higher education because it’s critically important to both society and to students. Half of those who drop out do so for financial reasons. It can’t be an error to line up incentives with our shared goals.

Or not. As H. L. Mencken said, “For every complex problem, there is an answer that is clear, simple and wrong.” We are excited about further debate and data and look forward to a thoughtful regulatory process that will make higher ed more transparent, effective and accessible.

James DeVaney is associate vice provost for academic innovation and founding executive director of the Center for Academic Innovation at the University of Michigan. He is a member of Noodle’s strategic advisory board. John Katzman is founder and CEO of Noodle. Before that, he founded and ran the Princeton Review and 2U.