The under-the-radar companies making a killing on the student debt crisis

How online college courses saddle students with mediocre classes and massive debt

Iola Favell wanted to go back to school to get her master's degree in teaching.

Favell is a first-generation college student from California, and according to documents filed in a recent lawsuit, she felt it was important to earn her degree from a prestigious school. When she reviewed US News & World Report's "2021 Best Education Schools" list, one program caught her eye — the University of Southern California's Rossier School of Education. It seemed like the perfect fit: USC was in her home state, its online option offered the flexibility of remote learning, and it was ranked No. 12 on the list.

She applied and was accepted to the online program in 2020. But when she graduated in May 2021, Favell took home more than just a degree — she was also stuck with a $100,000 student-debt load. Just over a year after she got her degree, Favell and two other students who attended Rossier filed a lawsuit against USC with the help of the borrower-protection group Student Defense. They accused the program of providing misleading information that pushed them into paying for a program that wasn't what it had been made out to be.

"Ms. Favell incurred significant debt and out-of-pocket expense in reliance on USC Rossier's position in the US News ranking," the lawsuit said. "She regrets her decision to attend USC Rossier because of the false rankings information. She would not have attended had USC Rossier been ranked in a lower position given the high price tag of the school and/or would not have paid nearly as much." USC denied the claims in the lawsuit.

The crux of the issue was USC Rossier's partnership with an online-program-management company. OPMs partner with schools to build out online classes, providing everything from technical support and software to, in some instances, a curriculum that would typically be taught by university faculty. In exchange for expanding course offerings and recruiting students, OPMs receive a big chunk of the tuition revenue from the online programs, which usually cost the same as in-person schooling. The OPM model was a great deal for schools as online learning surged earlier in the pandemic: Fewer students wanted to take classes in person, and OPMs were there to do all the legwork to boost enrollment in virtual course offerings, which helped generate much-needed tuition revenue.

The OPM model may seem like an easy win for colleges, but for many students, the courses are more of a raw deal. The companies' aggressive recruitment tactics suck in as many students as possible by promising convenience and a well-paying job after graduation. Instead, many students find themselves shouldering a huge debt load from a program that was a pale imitation of the in-person learning experience. While it's not always the case, many experts and grads told me that OPMs were offering online students a worse education for a sky-high price.

"These programs can increase access to higher ed," Eric Rothschild, Student Defense's litigation director, said in a statement. "But too many students have been defrauded by the misleading marketing of companies whose profits depend on enrolling as many students as possible at all costs."

The root of the problem

John Katzman has been deep in the OPM trenches for years. In 2008, he cofounded the OPM company 2U and eventually grew it into one of the biggest online-course providers in the country. Katzman told me that in its early years, he felt confident that the company was having a positive influence on the higher-education industry. When he started creating partnerships, Katzman said his goal was to bring in "really well-qualified students" and ensure they would succeed in the programs. "I'm going to go find USC or Georgetown, or any of our early partners, the best students I could," he said. A third-party provider to those schools, 2U signs a contract to offer services such as recruiting and technology to boost online enrollment.

The landscape for OPMs changed in 2011 when the Education Department upended the industry with an under-the-radar tweak to the rules governing OPMs. In 1992, the government barred college recruiters from making profits and receiving bonuses based on the number of students they succeeded in enrolling — they instead were paid a flat fee no matter how many people they signed up. The new guidance, however, created a loophole that allowed colleges to use OPMs for "bundled services" that included recruiting, marketing, and course development. Since recruiting was only a piece of what OPMs were offering, schools were now allowed to share a percentage of their tuition revenue. The change distorted the motivations of many OPMs: Since they got a cut of every tuition dollar, it made more sense to sign up as many students as possible to increase enrollment — and their profits. Clare McCann, a former senior policy advisor with the Education Department and a higher-education fellow at Arnold Ventures, told me that because the online programs were so new, it was "not widely understood what kinds of problems this would bring." But as the OPM industry exploded, the issues became clear.

"The schools see it as a way to not have to put up capital up front," McCann said. "The OPM basically fronts the money to start the program and then takes a cut of the tuition revenue. But because they're outsourcing those recruitment activities to the OPM, there is a strong incentive for the OPM to engage in aggressive recruitment."

"There are schools spending 10 times as much on marketing and recruiting as they spend on teaching and learning."

It proved quite the incentive: OPMs generated $5.7 billion in revenue in 2020, up from $1.3 billion in 2015. Some industry analysts estimate that by 2025, schools will fork over $13.3 billion annually to OPMs. But as the industry grew and the incentives changed, Katzman said, the quality of the programs began to suffer. OPMs started aggressively recruiting students by emailing and calling them multiple times a week — according to the Government Accountability Office, the most common service colleges used OPMs for was marketing online programs. OPMs put more of their money toward programs that weren't as selective because it allowed them to cast a wider net, recruit more students, and make more money. And a lot of OPMs started to offer "high-cost and high-risk" courses that set students up for uncertain job prospects, like Favell said she experienced, but brought in big profits for the providers.

"Their feeling was: 'Which program generates the largest profit? Because that's where we should put our marketing dollar,'" Katzman told me.

He became disillusioned in 2012 when 2U went public. In 2013, he stepped down as CEO and left the company. But even without one of its founders, 2U continued to grow along with the rest of the industry — the company now has a market capitalization of roughly $300 million. "The company and the industry took a left turn at that point in ways that were not in the interest of students or universities," Katzman told me. "I left in 2013 with a feeling that we could do better as an industry."

A raw deal for students

As the industry grew, scandals surged right along with it. Beyond Favell's lawsuit, USC's online social-work and teaching programs have long been ensnared in a legal mess. The Los Angeles Times reported in 2019 the university was looking for a way to boost enrollment — and revenue — without investing in more on-campus housing and in-person resources. So it turned to OPMs. After it hired 2U, enrollment in the social-work program surged from 900 in 2010 to 3,500 in 2016. Under the contract, 2U would get 60% of the program's tuition revenue in exchange for developing the course curriculum, marketing it to prospective students, and operating the online infrastructure. Thanks to the perverse incentives of the industry, former students of the online programs told The Wall Street Journal that 2U recruited far more students than it was equipped to give a quality education to, charging over $100,000 for a program that the students said did not pay off. A 2U spokesperson told me that USC maintains "exclusive control" over the program, including setting tuition and administering financial aid.

Favell's lawsuit also claims that USC misrepresented its partnership with 2U and that the OPM "intentionally" targeted people of color, forcing them into massive student-debt loads they could not afford to pay off. The suit also claims that USC's use of the US News report to recruit students into the online teaching program was misleading because the ranking was based on in-person offerings only. The OPM said following the lawsuit's filing, "we categorically deny the baseless and frivolous allegations made against our company in the lawsuit, and we will defend ourselves vigorously against these unfounded claims." USC said that it disagreed with the claims brought up in the lawsuit, and the case is pending.

Grand Canyon University also made headlines in 2019 when a former student sued the school after enrolling in the school's online doctoral program — managed by Grand Canyon Education — accusing it of misrepresenting degree requirements and breaching their contract. The university denied the claims, and while a federal judge dismissed the case in 2019, the 11th US Circuit Court of Appeals reversed part of the ruling in January, saying the student demonstrated a failure on the school to fulfill some of its contractual promises. But beyond scandals, the everyday business of OPMs is leaving many online students with exorbitant bills, despite how cheap it is to administer the courses.

"The university is agreeing to charge, at a minimum, the same amount for the online students as they are for on-the-ground students, even though the online program costs a fraction of what it is to offer the ground students," Aaron Ament, the president of Student Defense and a former special counsel at the Education Department under President Barack Obama, told me. That's led to dramatically inflated tuition for online courses — and a ton of student debt for those who enroll.

And along with inflated costs, there can be a significant disparity between the quality of programs offered online and in person. A 2019 report from the Century Foundation that analyzed 79 contracts between schools and OPMs found that with 68% of contracts, OPMs were tasked with developing curriculum, which could mean they contributed to differences between on-campus and online learning.

A recent lawsuit former USC social-work students filed against the school alleged that the online program was advertised as being the same as the one offered in person while the curriculum was different and even out of date in some cases.

"Borrowers have really struggled for decades to try and manage that debt, despite not having earned high-value credentials," McCann said.

Katzman now runs a new OPM company, Noodle, which is trying to distinguish itself from the rest of the industry by being more transparent about its offerings. Noodle puts more money into the actual classes, rather than marketing, and collects 37% of a program's revenue on average, compared with the up to 65% a traditional OPM might take.

"There are schools spending 10 times as much on marketing and recruiting as they spend on teaching and learning," Katzman said. "If you're spending 30% or 40% on marketing and recruiting, there's only so much you can spend on teaching and still keep your doors open."

To be sure, some schools have thrived off OPM partnerships. Helen Drinan, the interim president at Cabrini University — a private college in Pennsylvania — and previously the president of Simmons University in Massachusetts, told me that her partnership with 2U at both universities helped facilitate programs that "really, really worked out." Drinan said 2U was instrumental in helping the school with marketing and technology support and that she could not have grown the schools she led in a competitive marketplace without the help of an OPM.

"If we want to be in bigger markets, we cannot do it by ourselves," Drinan said. "And I think it really scares me that someone would tinker with the OPM model, not understanding there are many institutions like ours that will never be able to afford to build in all these services, that will be closed out of market opportunities if the OPM model is tampered with significantly."

'The new predators in higher education'

The growing influence of OPMs isn't raising alarm just among students and advocacy groups; lawmakers have also begun to look into some of the more exploitative parts of the industry. In January 2022, Democratic Sens. Elizabeth Warren, Tina Smith, and Sherrod Brown sent a letter to the CEOs of the eight biggest OPMs seeking updated data about the contracts they served and the outcomes of their programs. "We continue to have concerns about the impact of OPM partnerships on rising student debt loads," they wrote to the CEOs.

In a response to the lawmakers that 2U shared with me, the company defended its practices and said its "contracts don't have incentives for our partners to charge higher tuition" and that "lower tuition prices benefit both students and 2U." Pearson, another OPM that received the letter, said at the time that it "welcomes the opportunity to engage with policymakers and officials about the benefits of online degree programs." The OPM Academic Partnerships similarly said it would "continue our differentiated strategy focused on regional public universities across the country and continue our open dialog with all stakeholders."

There's a lot of risk to students and a lot of risks to taxpayers with these kinds of programs Rep. Rosa DeLauro

A few months after the lawmakers sent their letter, the Government Accountability Office published a report on the rise of OPMs. Its conclusion: The government needs to be regulating them a lot more. The GAO said that despite the Education Department expecting independent auditors to review arrangements between OPMs and schools, the oversight investigations often overlooked the money spent on recruiting and marketing to students — a critical piece of the industry.

The Education Department agreed with the GAO's recommendations to clarify the information colleges needed to provide to auditors about OPM arrangements. In February, it announced it would be asking for public feedback on whether to change the 2011 guidance that led to the OPM free-for-all, but so far, efforts have been stymied by the slow wheels of bureaucracy, pushback from the industry, and opposition from Republican lawmakers.

GOP Rep. Virginia Foxx, the chair of the House education committee, argued in a recent opinion piece that changing the OPM rules would hurt students and raise costs. Universities large and small leverage outside providers to improve their overhead efficiency, she wrote. "But as written, the new guidance will increase regulatory burdens, stifle innovation, balloon administrative compliance costs and reduce access to education, particularly for nontraditional learners."

Despite the resistance, advocates maintain that reforms are long overdue. Student Borrower Protection Center said the Education Department had been "asleep at the wheel" when it came to regulating OPMs, and it called on the Consumer Financial Protection Bureau to step in and prevent students from taking on massive debt loads for low-value programs.

Democratic Rep. Rosa DeLauro said in a recent opinion piece that OPMs were "the new predators in higher education." And without bolstered regulation, they won't go away — especially as remote learning persists. "There's a lot of risk to students and a lot of risks to taxpayers with these kinds of programs," she added.

If OPMs' revenue wasn't so strongly linked to the number of students who enrolled, the predatory behavior would likely see a steep decline, advocates such as Ament and McCann say.

"What the 2011 guidance has done is let this industry grow really big, really fast," McCann said. "Schools have not had to put a lot of thought into how they are establishing their programs. They can outsource them pretty quickly, pretty cheaply. They can let another company take care of it. And there just hasn't been as much consideration given to what the long-term consequences of doing that are."

Ayelet Sheffey is a senior economic policy reporter covering student debt on Insider's economy team.