A decade ago, three companies were launched that some said would revolutionize higher education by making excellent college courses available to anyone, online, through so-called MOOCs, or Massive Open Online Courses. Two for-profit ventures emerged from Stanford: Coursera and Udacity. Meanwhile, Harvard and MIT launched a similar enterprise as a nonprofit joint venture, edX. The hype stoked by the start-ups prompted commentators and policymakers to predict collapsed enrollment at most colleges and universities, as cheap access to lectures from the best professors in the world would make relics of the old in-person model.

The companies, especially Coursera and edX, built good reputations and grew over the next several years, but MOOCs did not turn traditional higher education institutions into dinosaurs. Then came the pandemic, and the MOOC providers saw a second chance for a big payday. Coursera took advantage of the pandemic-induced online education revival by becoming a public company through an IPO in March 2021, raising $520 million. Three months later, Harvard and MIT announced that they would sell their nonprofit edX to a for-profit company, 2U, for $800 million in cash.

Being publicly traded companies, with the drumbeat of earnings and stock-value, has transformed the former MOOC operators. Coursera and edX still provide access to free content on their platforms, but they are now more heavily engaged in recruitment into online degree and certificate programs.

Stock analysts had great expectations for Coursera’s profitability, but the company has more recently disappointed its investors. What does the company need to do to make the market happy? Increase revenue and lower costs. It can do that with an even more aggressive sales operation. Which brings us to the issue of federal regulations.

Coursera and edX have joined the ranks of other online program management companies (OPMs) that contract with public colleges and universities to design, market, and recruit for their online degree and certificate programs. Colleges are attracted to the arrangements because they are able to avoid the upfront investment that would otherwise be required when setting up new online programs. In exchange, institutions “share” their tuition revenue with the OPM for a number of years.

How Has the Current OPM Model Gone Wrong?

Sharing revenue in exchange for student recruitment brings major risks. When OPMs get paid more if they succeed in securing greater enrollments, their operations may focus more heavily on getting the student to enroll, rather than counseling the prospect to the best option for them. The financials of OPM 2U (edX’s new owner) indicate the company spent over half of its revenue on “marketing and sales” over a five-year period

Table 1
Revenue Marketing and Sales Services and Support Technology and Content Development
$2.3 billion $1.2 billion $383 million $414 million
54% of revenue 35% of revenue
Source: TCF analysis of 2U annual reports, 2016-2020, https://www.sec.gov/edgar/search/#/q=2u&dateRange=10y&filter_forms=10-K

When companies profit from larger enrollments and have a responsibility for recruitment, they are incentivized to be aggressive, or even to engage in misleading sales tactics.

Given these dangers, why are institutions allowed to contract with companies under terms that may put students at risk? They are not supposed to be: the OPM business model relies on abusing a loophole in the federal ban on incentive compensation. The loophole was carved out by a piece of guidance issued by the U.S. Department of Education in 2011, which was supposed to allow companies that were mostly involved in providing the tech backbone to online colleges to have a modest role in recruitment despite the general ban. Instead, the companies used the opening to essentially gut the bounty ban. Today there are 2,900 or more OPM-managed programs in the online higher ed market, with the for-profit recruiter taking up to 80 percent of each tuition dollar. Higher education advocates are calling on the Department of Education to rescind the 2011 guidance and fully enforce the federal ban on incentive compensation.

To protect their profit plans, Coursera and other OPMs are arguing that rescinding the guidance will cause the online program ecosystem to collapse. This is patently false. Nothing in the law prohibits colleges from paying companies on a per-student or tuition-sharing basis for using their online course platforms and related technical support. In the early days of online higher education, colleges relied on OPMs for their platforms and technical support to set up programs, but once online learning management systems were universally adopted by colleges—for use by on-campus and online students alike—the need for those services from an OPM diminished. As a result, many OPMs switched to a new model and are now primarily in the business of recruiting new students for their clients. OPMs’ core activities—and what attracts colleges to them—are their marketing, lead generation, and recruitment operations. That colleges no longer need OPMs for creating and placing courses online is proof that the loophole provided by the 2011 guidance is no longer necessary.

OPM companies currently are—falsely—arguing to lawmakers that they would be prohibited from providing technology and services if the guidance is rescinded. For example, in a document Coursera circulated on Capitol Hill, the company conflates its platform—the virtual space where students engage with a course—with the services they provide to schools to recruit new students. In doing so, Coursera obscures the fact that colleges can and have always been able to recruit students on their own and share their tuition with OPMs. In fact, it is not uncommon for institutions to pay providers for access to a platform on a per-student basis. Any change in policy from the feds will not stop nor prevent this practice. Above all, it will not impact access to things like online course hosting and technology. It will, however, prevent schools from paying OPMs per student if the same company is also engaged in recruiting new students.

The reason for this is simple: if you provide recruitment services and also get paid more for successfully recruiting students, your recruitment operations are more likely to morph into fast-paced, pressurized sales tactics, instead of existing to screen and assist prospects through an enrollment process. Running admissions departments like salerooms is risky because degrees aren’t tangible goods—they can’t be returned, and “refunds” for defective degrees are rare. The education industry has stacked the deck when it comes to information available to prospects, so if recruitment is to be outsourced, it should be paid for at a flat rate, not per student.

Looking Ahead

If the Department of Education were to rescind the 2011 guidance tomorrow, OPMs would still be able to provide their services to schools. They would simply need to change to a different payment structure, or remove recruitment from the suite of services provided. But no one is suggesting a sudden elimination of the guidance. The colleges and companies would benefit from some time to adjust their contracts, and the Department of Education should consider whether there is other guidance that should replace the 2011 memo.

The concept of reversing an entrenched custom may seem intimidating, but in this case, it will leave colleges, and students, better off. The opportunity to renegotiate contracts with providers means institutions can apply the lessons learned from over a decade of operating online education programs. The contracts that seemed necessary in 2011 are overpriced and a bad deal for students and schools alike in 2023. The Department of Education’s mission is to promote student achievement, and it must lead with this principle in crafting new policy and guidance.

Editorial note: This commentary was updated January 31, 2023 with editorial clarifications.