Commentary

There’s a Reason the Purdue-Kaplan Deal Sounds Too Good to Be True

April 30, 2017

In November 2010, Bloomberg News told the story of Iraq veteran Keith Melvin, who, after responding to a website ad, was contacted by the online, for-profit Kaplan University. The recruiters told him he could trust Kaplan because of its affiliation with the prestigious Washington Post Company, which at the time owned the school. "With Kaplan having its credentials backed by The Washington Post, I thought, ‘How can this go wrong?’" Melvin is quoted saying. "It sounded too good to be true, and it was."

Kaplan’s sales operation trained recruiters to steer prospects away from comparing Kaplan’s programs to other options by using a "fear, uncertainty and doubt" strategy aimed at getting prospects to enroll right away. A U.S. Senate committee investigation revealed that Kaplan in 2009 allocated more money to marketing and profit than to actually teaching students. The recruitment process was designed to get students to sign enrollment contracts — complete with clauses denying them the ability to go to court if there was a dispute — before they even spoke to financial-aid counselors about the details of financing the degree.

Far from the death of a for-profit college, the Purdue-Kaplan agreement looks more like a long-term marriage between a public university and a firm answerable to Wall Street investors.

As the newspaper business was collapsing, the Washington Post Company relied on the tuition revenue from its higher-education division to stay afloat. Kaplan tripled its enrollment between 2003 and 2010, mostly by signing up older students who would qualify for the maximum amount of federal student loans. In an industry already known for poor student outcomes, Kaplan’s tactics gave it among the worst withdrawal rates and loan-default rates of the 30 companies investigated by the Senate committee. In several majors at Kaplan, far more former students ended up defaulting on their loans than earned degrees.

Abuses by for-profit colleges hit the media in 2009 and 2010, but coverage by The Washington Post was scant. In 2011, the Post broke its uncomfortable silence in a feature headlined, "The Trials of Kaplan Higher Ed and the education of The Washington Post Co." The publisher, Don Graham, is quoted in the piece saying, "Shame on us. We shouldn’t have been recruiting students that way." To his credit, the 2012 Senate committee investigation found that, while Kaplan’s problems had been severe, it was implementing "the most significant reforms of any company examined." In 2013, Graham sold The Washington Post to Jeff Bezos, the chief executive of Amazon, but kept the higher-education business in a company called Graham Holdings.

Now Purdue University’s president, Mitch Daniels, says Purdue will acquire the 32,000-student online Kaplan University from Graham Holdings. Daniels told the Purdue faculty that for-profit skeptics "should be happy. There’s one less out there, as of today." But is this transaction really the death of a for-profit college? The slides that Daniels presented to the Purdue trustees make it seem so. But the Purdue-Kaplan agreement provided to shareholders and approved by the trustees reveals something different: a dangerous, long-term marriage between a public university and a firm answerable to Wall Street investors.

Kaplan’s role with Purdue going forward will be akin to that of an online program management company, or OPM, but on steroids. Margaret Mattes and I at the Century Foundation have examined several hundred OPM contracts that we received from 76 public universities through freedom-of-information requests. Not one of those contracts grants the for-profit company the scope, governance rights, brand use, and guaranteed stability that Purdue is giving Kaplan in this deal.

The list of responsibilities on the Kaplan side of this partnership is unusually long, including (Section 2.4): editorial services, marketing and advertising; front-end student advising; admissions support services; international student recruitment; test preparation; technology support; business office; financial aid and student finance; human resources; facilities and property management; finance and accounting; and general administrative functions.

The agreement tasks the Purdue side with responsibility for academic functions like admissions and student progress standards, degree requirements, curriculum, and the management of the faculty. But academic quality is inextricably tied to the resources that the university commits to teaching and student support, and that budget must be approved by Kaplan (Section 3.2). Kaplan’s veto power over the academic budget might not matter if Purdue could easily end the relationship. But the deal lasts for 30 years, and the cost of buying out the contract is prohibitive (Section 14.2).

Further, the value of this contract is substantially enhanced for Kaplan in ways that could seriously undermine Purdue’s brand. The contract has no limitations on Kaplan’s use of prospects’ names and contact information in further marketing. Prospects, who trust that Purdue (like The Washington Post) would not steer them wrong, can be led by Kaplan to any other college that Kaplan might seek to do business with, or to a college that Kaplan might itself purchase. How much are those prospects’ names worth? One OPM company is paying the University of California at Berkeley $4.2 million over 14 years to share contact information for prospects from just one program with another school.

The value of this contract is substantially enhanced for Kaplan in ways that could seriously undermine Purdue's brand.

Millions of dollars to use prospects from one program! Kaplan will be able to use Purdue as a lead generator for scores of programs, selling to potentially hundreds of less-prestigious future Kaplan clients — a gold mine for Kaplan.

Could Purdue’s owners — the people of Indiana — end up being liable for what happens? Quite possibly. For-profit executives engage in shady money-making behavior because they know that corporate liability laws limit the downside cost, while the potential upside is huge. There is no such downside protection for public institutions, however. Because they are backed by the full faith and credit of the state, Indiana taxpayers could end up footing the bill for misdeeds by Purdue’s business partner.

President Daniels’s slide show to his trustees was compelling. Purdue, which has been a laggard in online education, would catapult itself into contention and bring in needed revenue in what he advertised as a deal with "virtually no financial risk." The price would be a contract for "back-office support" by a company with a reputation "viewed positively for ethics, academics, regulatory and legal compliance."

To borrow from the Iraq veteran recruited by Kaplan: It sounds too good to be true, and it is.

Robert Shireman is a senior fellow at the Century Foundation and a former U.S. under secretary of education.