What’s the impact of the current federal higher ed. regulation regime on online education?
That’s the question I addressed in my conversation with education technology consultant and industry analyst Phil Hill. We discussed the current administration’s effort to gut inter-state accreditation reciprocity agreements and its impacts on online universities serving students across state lines. We also discuss the Department’s third-party servicer regulations, gainful employment measures, and the importance of finding a bipartisan path forward. This is the first of two conversations exploring the impact of the current regulations and policy proposals in higher education. Don’t miss my conversation with
next week.
Michael Horn:
Welcome to the Future of Education where we are dedicated to creating a world in which all individuals can build their passions, fulfill their potential, and live a life of purpose. To help us think through that today, we have a terrific guest, Phil Hill. For those of you that tune into my other podcast Future U., you will know Phil because he's been a guest before, but he is an education technology consultant. He's an industry analyst extraordinaire at Phil Hill and Associates. He writes the terrific newsletter and blog “On Ed Tech.” That's the name. It's “On Ed Tech.” Please subscribe. It is an absolute must-read to understand not just the major trends in Ed Tech, but also higher education more generally. I learn so much every time I read it and every time I talk to him. Phil, thank you so much for being here. I really appreciate it. I can't wait to learn from you this time.
Phil Hill :
Well, thank you very much, and with that intro, I think we should wrap up the show. Just leave it at that.
Michael Horn:
It's all downhill for you from here, right?
Phil Hill:
Yeah, I appreciate it.
Is the Department of Ed. Targeting Online Education?
Michael Horn:
No, in all seriousness though, I think we're going to learn a lot. And obviously for those that know you were on our Future U. show. You anchored our 101 deep dive on OPMs—online program management companies—and the impact that they're having on higher education more generally. Now we're in a moment where OPMs are perhaps struggling and we may get more into that. You've argued persuasively, I think that revenue sharing and OPMs are perhaps not dead. Even more provocatively, and where I want to go right now, you and your colleague, Glenda Morgan have written that this current Department of Education under the Biden administration is trying to target online education more generally. In other words, this isn't just about OPMs. This isn't even just about for-profit universities. This is about online learning period. That's striking because roughly 54% of students, as of fall of 2022, 54% of students are taking at least one online course. And that's to say nothing of the broader world outside of accredited higher ed, where adults tune in regularly to learn from YouTube, LinkedIn Learning, Coursera, Udemy, Pluralsight, you name it. So, I would love to know just what's behind this assertion that this Department of Education is targeting online education?
Phil Hill:
Sure. Before I do that, I will say it's sort of amusing starting out with this framing because Morgan, she goes by her last name. She wrote a post recently, two months ago called Online is the Target that encapsulated this idea. At the time she wrote it, there was a little bit of me saying, okay, so you're finally catching up and realizing some basics. But you're a great writer, so let's see what you come up with. So I initially had sort of a dismissive tone to it, but then she put out the article and it's called Online is the Target. You'll see it if you search it online. And it was profound. Sometimes I get so deep in the weeds and finding out what's happening that her post really helped me step back and say, wow, this really is completely obvious that the regulatory activity is not just saying online education at nonprofit institutions getting hit as unintended consequences, but it actually is the target itself.
And what we're seeing this year is making it crystal clear. So I love talking about that because I think it's so significant. It affects so much more than the OPM market. It obviously goes well past the for-profit industry. But I mean, I guess just to get started, what's being apparent, what's apparent now and was a parent of Oregon a couple months ago is the fact that if you look at the regulatory activity last year, so much of it was around gainful employment, which targets mostly for-profit schools, but also certificates seeking programs at nonprofits, TPS, guidance expansion, third party servicer and bundled services, things that were explicitly going after for-profits or OPMs. If you look at what's happening today, now you're getting into things such as we want to gut the state authorization reciprocity agreement, and let's just go into that for a little bit of detail and help explain it.
Think of it as a driver's license that imagine if you had to drive across country and you needed to make sure that if you're going the route that I'm about to go, by the way, I need to get, yeah, I have a driver's license from Arizona, but I also have to have permission to drive in Nebraska and Kentucky and elsewhere. Well, it would be very painful and it would really prevent mobility and the ability to actually drive around the country freely. So we have reciprocity with driver's licenses so that my Arizona license goes anywhere in the us. This is happening for online education through a reciprocity agreement. The Obama administration said, you have to get authorized in each state where your students reside even if you're online. Well, that is chaotic, particularly for schools with a smaller online presence. The reciprocity agreement was an agreement between states that made it realistic for online programs to actually do that.
Like Southern New Hampshire that has hundreds of thousands of students, trust me, they have an army of compliance officers. They're getting authorized, they're following it. But your everyday university that has a few online things, they're the ones who really need reciprocity. Well, we have an agreement and it's really helping in the market, the current set of negotiated rulemaking that's happening right now. The Department of Ed very clearly wants to gut the reciprocity agreement and say, no, you have to go back to the way we were before and actually get authorized in every single state. Well, now if you have a small program, that means there's a lot of online stuff that you're either going to not do the online program or you're going to say, we can't enroll students from these states. We just can't. It's unrealistic. And the primary institutions that are going to get hit are going to be nonprofit institutions with smaller online programs. So that's one specific example that really flavors what we're seeing and why. The argument is it's online education itself that's being targeted as a problematic practice or something deserving of much more scrutiny than campus based education. So I don't know if I directly answered your question.
Impact of Regulations on Small Colleges
Michael Horn:
It's really interesting around state reciprocity and the regulatory burden that we'll create for colleges and universities. And look, you're right, obviously like a Southern New Hampshire University, 250,000 students are so unenrolled, they've got lots of money, lots of people that they can throw at this to make sure that they are registered properly in each and every state and make sure students can continue to enroll and so forth. But you mentioned the private college, and I'd just love to pick at that for a moment to understand it better because we know that for the most part, most students who enroll online, they're doing so 50 to 75 miles from where they live. So for that small college that has an online program, how many students are they really enrolling out of state? Isn't that more of those national players, the Arizona states, the Western governors universities, the Southern New Hampshires? Aren't those the ones that are really enrolling students from state to state and therefore can handle this? Or is this going to impact small colleges for other reasons?
Phil Hill:
Sure. And just to clarify, I don't think it's just small colleges. I think it's even large colleges and universities with small online programs. And I mean, you're bringing up a great point. The majority of students reside within 50 to 75 miles of their online program. So what's likely to happen is they will for the first time, certainly naturally, really for the first time, they're going to have to pay attention to it. So they're going to have to figure out what's going to happen. They're going to have to say, well, where do you reside and can we register in this state and get authorized in this state? And so what's most likely going to happen is they will have to say, if I'm in Illinois and I have a smaller program, Illinois, we're here, we're authorized. I'm only going to allow students from Wisconsin and Indiana and Iowa, Iowa commonly known as Western Chicago to be within this program. And outside of that, we cannot allow students to come in. So I think that's going to inhibit their growth. That's going to reduce choices for students, and it's probably also going to add costs. You have bureaucratic burden, so it'll be more difficult to create new online programs. That's my guess of what the impact will be.
Third-Party Servicer Regulations
Michael Horn:
No, that's really helpful. Thank you. And it's interesting, obviously because that increases regulatory burden on colleges and universities. And then there's been this other provision that the department has done through third party servicer regulations, and you were really the one that raised the alarm bell on this, but to remind folks, the Department of Education was expected to regulate revenue sharing agreements to really go after OPMs, and they instead went much farther. Essentially, they took a reg that had applied to vendors that were handling financial aid money and so forth and said, now we're going to ask colleges to make sure that any vendor you're working with in instruction and student support and information systems and on and on, we're going to make sure that they have audits, that they're put through a whole host of restrictions and so forth. Big expansion of federal power, big expansion of bureaucracy and regulation. And as I said, you raised the alarm on this, the administration stepped back from it, and now you said you don't expect something further until April of ‘24. So shortly after this comes out. I'm just curious, is this still your point of view and what do you expect them to do?
Phil Hill:
Well, I've changed my mind on the projections of where it is, but just to step back, one thing I would say that's a little bit different there, there was a clear target in that case that was very much crafted as a mechanism for the Department of Ed to regulate the OPM companies particularly, or mostly those who do rev share agreements. And it just happened to have unintended consequences across the market,
Michael Horn:
Collateral damage. And they didn't care.
Phil Hill:
Well, yeah, they didn't care. But how deliberate was that? Because when you say regulatory burden, it's not just like, okay, we have regulations. You have to go through a lot of pain. There's a power dynamic going involved. There's a thing of we want to be the arbiters of what's allowable and what's not allowable across the board. So there's a deliberate, we want to shift the power from states to the federal government that I think has some deliberate things. I think what was unintended were the negative consequences were people haven't thought it through. The big through line, I would say between all of these is the Department of Education and the activists, most of them funded or partially funded by the Arnold Ventures Foundation. It's a consumer protection mindset. Their fundamental axiomatic belief is that most bad things that are happening are because of bad actors and therefore to help students, we need to find those bad actors and reign them in. And so everything is seen through that lens, that's through line, that's going throughout there. And so at the time with TPS, it was, well, if we're noble because we're reigning in rev share the fact that we have a little collateral damage, oh, no big deal. I don't think they realized how big the collateral damage was until there was such a public outcry on, do you realize what's happening? I really don't think they understood that fully.
Michael Horn:
That's super interesting.
Phil Hill:
But it's always that there's a consumer protection mindset. And then as I said, the big changes this year, it's become so much more apparent that part of the definition of bad actor includes not all online programs, but online programs are so susceptible to bad actors that we need to target that area because that's where most bad things happen. So that's the true line is the consumer protection mindset.
Michael Horn:
And so the assumptions seems to be, if I'm following you correctly, that if you're online, you're probably doing something predatory, right? You've got a bad actor here, and so you need a set of, in essence regulations that's going to in effect get in the way before we hurt students, right? It's going to block, and we're not doing this by looking at outcomes or looking at the programs. We're really looking to regulate the inner workings of how you register with states, how you enter into your contracts with different private providers, all the sort of micromanaging and effect of how you actually set up the operations themselves.
Phil Hill:
Yes, and I would add to that, go back to the reciprocity. What the effect of gutting reciprocity does is it enables individual state and the attorneys general in those states to take legal action to help do this. So that's another very big side of how this administration handles regulation. It's sort of a multi-front campaign, and so they want to enable states to take action such as the state of California taking action on Ashford University. And so that's what they want to maximize is the opportunity not just for the federal government, but for the states to actually take action. There's part I didn't answer before. Back in the fall, I was predicting that they pulled back TPS guidance, as you said, I was predicting at the time that they wouldn't do it this year because of the election because it's so unpopular. I was wrong. They are pretty much going for broke on so many new regulations. They're not taking a let's be cautious during an election year approach. So the soonest we'll get new TPS guidance will be April, and that's based on court documents where they had to state to a judge where their plans were. Of course, it's possible they'll keep kicking the can down the road and it won't actually come out, but it could come out as soon as April or May of this year, a revised set of TPS guidance.
Michael Horn:
Maybe you don't know, but do you expect that it's going to be more narrowly confined find to focus on the OPMs through the third party service regulations, or might they walk back completely and say, Hey, we're going to go after the dear colleague bundled services 2011 letter that really made rev share legal, if you will. Obviously OPMs had been around before then, but this in effect gave them safe harbor. What's your expectation of what they'll actually do here?
Phil Hill:
Well, first of all, to their credit, they pulled back on some of the things that were ridiculous, such as if you follow make everybody, most of EdTech follow third party servicer guidelines. You have the auditing, which you mentioned, but you also have the thing of no foreign companies, no non-US companies.
Michael Horn:
Which seemed to violate treaties.
Phil Hill:
Oh yeah. Yes. And so they pulled back on that. So it's not going to have that type of arrangement. It's going to be they explicitly wrote stuff that would make the LMS companies be liable for this. I expect that if they get new guidance, it will target not just OPM, anybody who's doing revshare and who's doing marketing and student recruitment support of a school, I think that's going to be the scope of what they come out with if they do it. Now, the bundled services exception, which enables rev share OPMs, that's tied to it, but it won't be directly addressed by the guidance where it's tied, is politically, and I realize I got to be careful how I'm saying this, but it's consistent with what I'm seeing, but there's a little bit of a coordinated campaign. There needs to be an answer because at this point, they have not added regulations against OPMs.
They tried it with TPS guidance, they had to pull it back. Bundled services exception. They keep talking about it, but they haven't released it. Well, if I'm on Senator Warren's staff, I've been pressuring the Department of Ed take action on OPMs. You have to say, as of today, they haven't. And so I think that one or the other is going to have to be done just for the political pressure reasons this year. And so part of the forecasting, it's figuring out which is more likely or both. I think it would be difficult for the Department of Ed to just do what I originally predicted back in November, which is kick the can until after the election. I don't think they could do that. So the tie in is political, not regulatory, really.
Gainful Employment Measures
Michael Horn:
These politics are so interesting because as you said, you would expect them to not do something in a presidential election year, but because of senators in their own party, the pressure from them, there's more interest in them doing something and so forth. And that consumer protection mindset, I get it. It's to sort of catch the bad actors by micromanaging in some sense inputs. But then they've got this other element that they've done that feels more outcome oriented, at least on the surface. And that's gainful employment, which has actually gone through this is like its fourth revision I think in the last 12 or so years. And now the department has added two elements. In essence as I understand it. The first is this earning premium. Basically our graduated students, are they earning more than high school graduates in a particular state? And then they have the FVT, the financial value transparency, which again, as I understand it applies to all programs regardless of tax status or type and basically would create a disclosure for programs that are failing gainful employment regs. I would love to know what's going on here In your mind, you've been critical of these regulations as I understand that as well. So why,
Phil Hill:
And I'll try to explain, at least start out with sort of what I think they're trying to achieve and sort of the rationale behind it. So gainful employment was much narrower back during the Obama administration. They had two rounds for different reasons. Court cases drove them to do it, but that only said it was for-profit, any degree program or certificate program or certificate programs, career programs at nonprofit schools. When they added that got defeated and in a lawsuit. And then by 2019 it was rescinded, it got reintroduced with the two scope items you just mentioned the earnings premium and the FVT. To their credit, one of the big complaints about gainful employment is why are you attacking just for profits? That's not fair. If we're going to hold people accountable, why don't we do it across the board? Financial value transparency applies to, well, it applies to every degree seeking program in the us, whatever school you are, if your program in any way accepts federal financial aid, you have to report the data and it's going to be publicized.
So that's why they call it transparency. And it's across the board, it's equal opportunity now. It's got a provision in there about if you fail it after two years, you have to force students to sign an acknowledgement that, Hey, I'm signing up for a failing program before they get awarded any financial aid. So that's going to harm enrollment. So I think the rationale there is pretty clear we need to hold everybody accountable. So on the surface, that's a very good argument. I think the biggest problem with that is the people behind it assume the data is much further along and much more accurate and consistent than it actually is, and they're not taking into account edge cases, poor data and stuff like that. And so we're going to have a lot of unintended consequence. The earnings premium, and I just saw the Department of Ed official describe this on a recent webinar with the Association of Institutional Researchers, sorry, and the department ed guy described it.
He said, we realize there are programs that where students come out with low debt, but we think they're still poorly performing programs because the earnings of students coming out is not that high. So we want to also go after them even if they have low debt for students coming out. That's the impetus behind the earnings premium expansion, the core gainable employment that's closer to what it was back in the Obama administration. But these two new pieces, I think that's the, well, I've heard it come from the department that's the rationale for them to do both of those expansions.
Michael Horn:
I just love you to double click on that because so is the real issue that the data is not what you expect to see and sort of what's the problem with that?
Phil Hill:
Let me describe the concern. Overusing bad data assumptions first, the concern is, and the reason that I care about this and so many people I know care about it, is if you trace the logic through and whether you believe that there's systematic discrimination in the US or not between male and female, let's go with that. Females on average make lower wages than males. That's in the data. So forget your politics, it's data. Well, if you aggregate your comparison of here's what a typical high school graduate would make and you ignore some simple demographics such as race area of the state and stuff like that, then you end up making it more difficult in this case for females because their baseline doesn't account for the fact that they tend to make less than males. So you might have a female where their earnings would be higher by taking this program, but they get penalized because that's not accounted for in the way they define the data for the rules.
And there's a myriad examples of that, the net effect, and I've heard people say this in conferences. You know what the safest play is? Just admit white males. That is the safest way to stay clean with the new regulations. Now we know that's not what the Department of Education wants, but as you trace it through, that's going to be the impact. And Morgan wrote about this with law schools and it was a similar type thing. A lot of those, because law schools tend to have very high tuition and debt, a lot of them will fail these regulations and force students to sign this acknowledgement. You're going to a failing program, and we've talked to numerous people, there's going to be pressure to play it safe, which means it's going to harm disadvantaged groups. So that's what I mean. And there are many different examples in there on where the, but it's almost not just poor data, but poor assumptions about that data and what it can do. That's the reason that I and many other people have been critical of what's happening.
Finding Bipartisan Middleground
Michael Horn:
It's really interesting. So your standpoint in essence isn't that we don't need measures focused on outcomes over inputs, but really that what would be your approach forward?
Phil Hill:
Well, I mean there's a little bit of a leading question there. Outcomes is obviously a key thing. Don't just say what theoretically might happen. Actually find out where students are getting harmed and that's where you focus your regulations and then don't make up things saying, well, they have low debt, but let me add somebody else something else just so I can catch something. I think that I would be cautious, I would be less aggressive in how far you advance regulations at each stage so that you can get the data and then you get buy-in and then you can move it forward. Here's the ironic thing. Most people I know, and most people such as myself who are very critical of what the Department of Ed is doing, we actually share the same goals. We would like to see student debt reduced. We would like to see opportunities for multiple students, whether it's schools or whoever.
If there is bad behavior, we would like to see that address by regulation and not just let it slip through the cracks. So there's actually a lot of agreement on goals, and I think there's a possibility to get there. Now, here's an ironic mark. It just came out I think today, if not yesterday. There was an OP-ed by one of the executives from Arnold Ventures, who's one of the main sources behind these moves recommending calling. I think it was a real clear politics that was published Kelly Ree. But she was saying, here's the opportunity for the Biden administration to work across the aisle, find the areas where we agree and actually make things happen. And so they called out. So for example, here's an interesting fact. The save act, which is being advanced by Republicans in the house, there is some interesting commonality. They believe in collecting data on programs and making it public and holding colleges accountable for it.
Well, there's a huge amount of overlap between that and what we're doing with financial value transparency. So if I were in charge of the Department of Ed, I would actually follow what Kelly Re's op-Ed said today, and I would say, Hey, let's find the overlap of what you're pushing with financial value, transparency. We're not going to, neither side's going to get both things, but let's advance the ball and do it in a way that listens to feedback. When people say watch out, there's unintended consequences. So I would be boring. I would be more cautious of my approach.
Michael Horn:
I gotcha. So it's more of a let's take measured steps forward, get the research, get the data, iterate, learn, move forward. There's some room for bipartisanship there and sort of this incremental approach as opposed to big foul strokes that may have unintended consequences.
Phil Hill:
And I agree, they're definitely a poster child or I call them a bellwether if you want to see what's going to hit other companies look at 2U, good and bad. One thing to clarify, their current pain is very much driven by the financial markets. The end of effectively zero interest rates that mark the 2010s, and they amassed way too much debt without the ability to pay for it. I actually have been doing deeper research. I haven't written my next post, but here's the key. They are saying we have enough liquidity to make it through this crisis. It's not a liquidity problem. They have cash, they're operating, it's fine. It's a maturity problem. Their debt matures in January of 2025, and they could not pay for that without refinancing. So the nature of the crisis is the status quo leads to bankruptcy. Now, bankruptcy doesn't mean out of business.
We can't support programs. We saw this with Cengage a decade ago when they went bankrupts longer than that, bankruptcy means we're going to restructure, we're going to have to work with debt holders, see how much they get. It's going to be a multi-year legal process, and it's part of a turnaround. Now, what 2U wants to do is say, no, we want to actually refinance that debt fairly soon so that the crisis is over. The problem is it's a very difficult market to do that in because of interest rates and multiple reasons. So they're attempting a turnaround. So what I expect over the next year is either they are able to find a way to refinance their debt, and you'll read all about it. They'll make it very public. They'll pull a rabbit out of the hat, or they'll do an excellent job depending on how you want to describe it, or they're going to go bankrupt.
And if they're going to go bankrupt, they will be still operating, but they're going to be restructuring the company in that. Now, I suspect strongly, and I've said in my articles, one of the ways to do this is you sell parts off. And I don't think they can sell the edX. It's too integrated into their strategy of lowering marketing costs as a platform. Yeah, boot camps, what they bought with trilogy boot camps are facing some really hard times, which might mean you can't get much money if you sold that off, but it also means, well, let's stop losing money from them. I don't know. If I were running things, that's the part I would look at, but you are likely to see part of restructuring. It's not just layoffs. It will be, let's sell this part of the business and focus. And so I think that's part of what you're going to see moving forward.
But you've got to watch it because if it's going to get dangerous, if they get into the fall time and haven't refinanced yet, because even if they're able to, now schools only have a couple months runway until their partner might go bankrupt, doesn't mean they're going out of business, but there's a risk management and a risk profile that institutions can take. So that's the thing to watch this year, refinance or bankruptcy. And then the big question either way, how does that impact how well they are working with schools? And so the question then wouldn't be for me, it would be go to their university partners and ask them, how's your program doing? Are you getting service? That's going to be the key question this year. Now what's going? But I think it's crucial to note it's that financial market that's driving this chaos, this financial crisis that they're in right now. So there's so much happening in higher ed changing it, and that's another element that's out there. It's not all regulation, it's not all enrollment. It's also the financial markets as well.
Thoughts on OPMs
Michael Horn:
Alright, well before we wrap up here, we have just a couple more minutes. I think let's just finish with some thoughts on OPMs because you've written a lot about 2U and the challenges that they are currently facing. Talk to me about what's going on there with 2U and what do you expect to happen to them?
Phil Hill:
Yeah, absolutely. Yeah, so there are multiple that gets back to where this company, for better or worse, so often is the poster child or the bellwether. So they might be going through it in a public way this year, and it's interesting to watch, but part of the reason it's interesting to watch is it tells us a lot about what other ed tech companies are going through. So you is so much a bellwether showing how there are multiple mega trends that are impacting higher education right now. It's regulation, it's enrollment, it's financial markets, it's the loss of confidence in higher ed and the real challenges, higher ed universities, colleges, but also the ed tech ecosystem. They've got to deal with all that. So the changes that we're seeing right now, those are sort of the macro trends or mega trends that are driving so much of it. So it keeps your job and my job interesting this year.
Michael Horn:
Well, Phil, if 2U is a bellwether for OPMs and maybe online education more generally, I think you can be our bellwether for all of this, helping us navigate and figure out these times. So just really appreciate you joining us on the future of education to help us think through a lot of important issues impacting what higher education is going to look like in the future.
Phil Hill:
Well, thank you. I really enjoyed our talk as usual.
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