The scholarship partnership that Starbucks announced last week with Arizona State University was notable for many reasons: It was a remarkable marketing and PR coup for the company and ASU; it will allow ASU Online to study some techniques for improving college completion; and it might even set a new bar for what companies provide as employee benefits to part-time workers.
It has also opened a new window on the economics of online education, one that shows just how much “profit margin” there can be in a distance-education operation.
Every upper-division student who enrolls via Starbucks will receive a College Achievement Plan scholarship from ASU worth 42 percent off the tuition price, regardless of the student’s financial need. In other words, ASU is discounting the tuition by 42 percent. (Lower-division students will receive CAP scholarships equal to a 21-percent discount.) According to its contract with Starbucks, ASU will also take an amount equal to 17 percent of the sticker price for the courses and use that to provide need-based financial aid on top of the 42 percent—after Pell Grants and other federal aid are applied.
In practice, that means for the cohort of upper-division students enrolling via Starbucks, ASU will be forgoing 59 percent of what it would receive if the students were paying full freight.
That it can afford to do that and still not operate at a loss—which it won’t be doing, according to Michael M. Crow, Arizona State’s president—suggests just how much institutions like ASU ordinarily subsidize their overall operations with revenue from distance education.
“A discount like this shows it’s probably not nearly as expensive to deliver as what it’s priced at,” says Burck Smith, chief executive and founder of StraighterLine, who has been vocal in questioning the pricing models that traditional colleges use in online learning. StraighterLine sells a service that lets students earn college credits at their own pace under a subscription model that averages out to a price of $150 per course. (At full price, a three-credit ASU Online course runs from $1,440 to $1,629, depending on the subject. Students at ASU Online, including those from Starbucks, can receive Pell Grants and need-based financial aid from the university.)
Under the Starbucks program, the out-of-pocket expenses that students would have to pay after deducting the amount of the CAP scholarship, Pell Grants or other federal aid, and ASU need-based aid would be reimbursed by the company. The students can get reimbursed only after each set of 21 credits they earn. For students with high financial need, the share covered by Pell Grants could be four times the amount coming from Starbucks, according to estimates ASU shared with The Chronicle. On a barista’s salary, most would qualify for full Pell Grants, roughly the amount that ASU estimated for a high-need student. ASU says it expects most of the Starbucks participants will be upper-division students.
‘The Efficiency Potential’
The gross profit margins revealed through the ASU-Starbucks arrangement shouldn’t be all that surprising, says Mr. Smith. “All colleges generate profits from online learning, whether they know it or not,” he says, because not all of them carefully track the overhead and other indirect costs of operating online courses. (Experts say too few track such costs generally, either.)
More so than most other institutions, ASU probably does know what its margins are, according to Richard Garrett, director of data and analytics for i-graduate North America, a consulting firm. The university is one of the few in the nonprofit sector, he says, that has standardized its distance-education operation to the point where it operates economically. Others he puts in that category include Liberty and Southern New Hampshire Universities. “I don’t think that most schools have done much to squeeze the efficiency potential out of online in a real way,” says Mr. Garrett.
Mr. Crow has said that the Starbucks arrangement is affordable because it saves the university money in other ways. For example, ASU won’t incur marketing costs to recruit the students. Mr. Garrett and Mr. Smith agree there is a cost savings in that, but Mr. Garrett estimates that, even at the high end, such activities account for no more than 30 percent of the costs of a distance-education program.
Mr. Crow says the design of the courses themselves, some of them developed with interactive and adaptive-learning features that allow them to be offered with very little in the way of faculty time, also makes the program cost-efficient. He says ASU developed courses only in majors that make sense to be carried out online. The university has not said how many additional instructors it will hire to handle what it hopes will be thousands of new students via the Starbucks arrangement or whether they will be professors, teaching-focused faculty members known as “lecturers” at ASU, adjuncts (which ASU calls “faculty associates”), or graduate teaching assistants. Mr. Crow says that, at ASU Online, “there is a responsible professor” for each course.
Paul J. LeBlanc, president of Southern New Hampshire, notes that using full-time faculty members would be “impossible to do at those margins.” ASU’s implied margins are akin to what many for-profit colleges were achieving “in the heyday” for that sector, he says. (Today, with increasing competition and image issues, for-profit colleges are having to discount more to attract students.)
Like Arizona State, Southern New Hampshire uses the “profits” from its online program to subsidize operations on its physical campus, but Mr. LeBlanc says his margins are “well less than that 40-percent number.” It also relies heavily on adjuncts to teach its courses, although for the coming year, it will be adding more full-time professors to teach in its online program.
Southern New Hampshire, which offers courses at a sticker price of $320 per credit, was initially in the running to be the Starbucks partner, but in March, as a team from the university was preparing to head to Seattle to make its final pitch, Mr. LeBlanc says, the word came that Southern New Hampshire was off the list.
Mr. Smith, of StraighterLine, says the cross-subsidies made possible through online education deserve more attention. “Is it right,” he asks, “to overcharge students"—particularly online students, who don’t get any of the benefits of a campus?
“It’s just profit moving from one set of students to another,” says Mr. Smith. And it’s not ASU-specific. “This is a question for all of higher ed.”