The potential for the November elections to shift the balance of power in the legislative and executive branches makes this year important for operators of for-profit colleges.
Already, 2020 has seen the continuation of the sector's years-long shift into new business models, at least partly in response to stricter oversight from the Obama administration. One way is by selling their colleges or spinning them off as nonprofit entities and then moving on to function as an ed tech services provider — in some cases for their former institutions.
Zovio, formerly known as Bridgepoint Education, announced this month that it is aiming to separate Ashford University by June 1. That follows the U.S. Department of Education's preliminary review of the proposed change last year, in which it stated that Zovio would need to put up $103 million in collateral. The company plans to provide ed tech services to the online university, which is seeking nonprofit status with the department.
The outcomes of the 2020 elections are, of course, anything but decided. Some may have expected the year to be characterized by a rush to seek cover from Obama-era rules targeting for-profit colleges while they're still under the purview of an administration that has sought, with some success, to roll them back.
That window is closing, analysts say, and the department's decision this fall to deny Grand Canyon University's (GCU) request to be considered as a nonprofit for Title IV purposes suggests there is a high bar to clear for colleges seeking nonprofit conversions and other complex changes of control.
"You are kind of at the wire now if you want the Department of Education that is operated by the Trump administration to be the one that decides whether or not you can be allowed to do the thing you want to do," said Trace Urdan, managing director with education consulting and investment banking firm Tyton Partners.
But with the Grand Canyon decision, he added, "it's not at all clear that it's some kind of slam dunk to get the Trump administration to go along with your plans."
Ed Dept weighs in on nonprofit conversions
In November, the department formally responded to Grand Canyon University's (GCU) request for a review of its proposed separation from its publicly traded parent company of the same name. The IRS, its accreditor and state regulators had already signed off on the arrangement. The department approved the change in control but not the nonprofit status.
Specifically, it took issue with shared leadership between Grand Canyon Education (GCE) and the university, and argued that the transaction was primarily done to benefit GCE's shareholders. It also criticized that the agreement made GCE the university's exclusive provider of several ed tech and administrative services in exchange for a roughly 60% cut of its revenue from tuition and other sources.
In an email to Education Dive, GCU spokesperson Bob Romantic said the new arrangement "has been very beneficial for GCU and its students, which is in contrast to the narrative being depicted by some that the transaction was done solely for the benefit of GCE."
Among those benefits, he said, are that the university was able to freeze tuition for students at its Phoenix campus for the 12th-straight year, and that it has invested $195.4 million into the school's educational infrastructure in the 18 months since the separation.
Further, he said, the university "believes it will be able to self-fund all of its future capital expenditures, which are expected to total $500 million over the next five years."
Romantic added that the university disagrees with the decision and "will initiate appropriate measures" to challenge it if necessary. He declined to comment on what that could entail.
The department's decision is a "useful analysis and a good signal of what (it) is going to continue to do," said Robert Shireman, a senior fellow at The Century Foundation and a former Ed Department official under the Obama administration. "There is reason to expect that they will try to be consistent in their analysis of these types of arrangements."
However, he noted, it will likely "give significant pause" to companies planning a "less-than-straightforward" conversion. For-profits that don't plan to have a relationship with a school after they sell it off will likely have an easier go of it, he added.
The Grand Canyon decision reflects the department's approach to other similar requests.
In 2016, it denied a bid by the Center for Excellence in Higher Education to convert its schools to nonprofit status; the operator dropped its resulting lawsuit in 2018. When Purdue University sought to buy Kaplan University to create the online Purdue University Global, the department required Purdue itself to be responsible for the for-profit's liabilities. And it said Zovio must post collateral equal to roughly one-quarter of its 2018 Title IV funding in order to separate Ashford.
Where the growth is
The changes for-profits are seeking aren't just meant to shake off regulations, said Jeff Silber, managing director at BMO Capital Markets. "What these companies are trying to do is broaden their services offerings," he said. "There's more growth providing services to other universities than just running one or two colleges."
Last year, Bridgepoint Education took the name Zovio as part of a larger effort to remake itself as an educational technology services company. It brought on new leadership and added boot camps and other capabilities through acquisitions. Now, the company says it is in the final phases of separating Ashford.
New branding can also help signal to potential customers and Wall Street that the company has shifted focus, said Corey Greendale, managing director at First Analysis, a venture capital investment firm.
"If you're going to be in the business of serving other universities as well, it makes sense to have kind of a fresh start," he said, placing the trend in part within the broader workforce development push underway across higher ed.
Career Education Corp. will continue to run the for-profit American InterContinental and Colorado Technical Universities, but with a new name. It entered the year as Perdoceo Education Corp., a moniker intended to signal its "evolution as an education company" as it moves to offer its programs mostly online, officials said in a press release.
Whether rebranding is enough to distance those companies, and others that have made similar changes, from their reputations is unclear. In 2017, California's attorney general sued Zovio, then operating as Bridgepoint, claiming it misled students. The company denies the allegations.
Early last year, Career Education settled with 49 state attorneys general to end a five-year investigation into complaints that it used deceptive marketing tactics. Denying the allegations, the company agreed to pay $5 million and forgo collecting on nearly $500 million in student loans.
"I don't think that any of their prospective (online program management) partners are fooled for a second by thinking that this is somehow not a company that is associated with a for-profit university," Urdan said of for-profit college operators rebranding as education services providers.
Silber said he "wouldn't be shocked" if trying to shed the association with such lawsuits is an underlying reason for the changes.
More resistance ahead?
Education services providers won't be free of scrutiny, however. And it's heating up. Two Democratic senators recently wrote letters to five online program management (OPM) companies asking for details of their contracts with colleges. The inquiry follows — and heavily cites — recent work from The Century Foundation and others pointing out potential problems with those deals.
The letters focus on the services OPMs provide and how they are compensated. The lawmakers say revenue-share agreements — in which OPMs get as much as 60% of tuition revenue in exchange for the capital and expertise to help the college stand up an online program — could violate a federal law that prevents schools from paying commissions for assistance recruiting students.
Supporters of revenue-share agreements say they let colleges respond swiftly to demand for online programs, but the contracts have become a lightning rod for criticism.
Getting schools to talk publicly about them could be critical for these companies. In September, 2U, a publicly traded OPM that uses revenue-shares, called on its peers to disclose more information about who they work with, the details of their contracts and their outcomes.
For a story late last year, Education Dive sent emails to 12 institutions listed as partners on 2U's website asking for their comment on the company's transparency push. Five responded, and just one offered a comment. Helen Drinan, president of Simmons University, in Boston, said the idea of opening up about contract terms would be "a huge cultural change" for higher ed, which is used to having longer periods of time to address issues than a public company that must review its progress quarterly.
Those optics could be part of the reason why Zovio opted for a relatively low revenue share of 19.5% with Ashford, Urdan said. The company will also be reimbursed for the cost of the services it provides. However, Silber noted, such an approach "doesn't always work out as advantageous as you might think."
Zovio CEO Andrew Clark said the company is intentionally modeling the arrangement on the Purdue-Kaplan deal, which includes a 12.5% revenue share. That's a much smaller take than between GCE and GCU.
"It's really a question of how will the market perceive this," Urdan said of Zovio's decision, adding that the company had the chance to observe reactions to the Purdue-Kaplan and Grand Canyon transactions. With a smaller revenue share, he added, "the perception is that the institution is less burdened or more independent."
According to Vickie Schray, Zovio's chief external affairs officer, the company "took into consideration the regulatory and political environment, the future of higher education and work, and models such as Purdue/Kaplan," she wrote in an email to Education Dive. She added that they believe the 19.5% revenue share allows Zovio and Ashford "to fulfill their respective missions."