The Humbling of a Would-Be Disruptor

This was the year that Altius Education was supposed to hit big—the year Paul Freedman’s young company to help adults to earn associate degrees and move on to four-year colleges would start turning serious profits and begin to prove that creative private models could solve some of higher education’s biggest challenges.

It would have been a triumphant second act for the smart, unassuming 35-year-old, who had already made millions building and selling one higher-education company but wanted to make a more meaningful impact on an industry wrestling with rising costs and faltering completion rates.

“Where it’s failing most is with the students who have the least access to resources,” says Mr. Freedman.

Thousands of students, many of them single moms and poor, were educated at the institution that Altius helped to create, Ivy Bridge College of Tiffin University, in Ohio. Students graduated or transferred at rates that were, by one count, twice the national average. And the venture, backed by $35-million from blue-chip investment funds, finally turned a small profit last year.

But Mr. Freedman isn’t planning for an IPO, nor has he become the toast of the higher-ed innovation circuit, at least not in the way he had hoped.

Instead, this fall he would come to work here in a cavernous office space now filled mostly with empty desks. His task: find some kind of a future for the learning platform Altius had created and the student-support systems it had developed. They were pretty much the only things of value left.

Altius had been in the vanguard of an influx of investors and businesspeople looking to profit by putting new kinds of colleges and educational ventures, like Ameritas College, the Minerva Project, and Udacity on the map. Many regard this changing landscape with suspicion, but Mr. Freedman, who embedded technology and learning science into Altius, was seen by industry observers as “one of the good guys.”

Now people are wondering, says Josh Jarrett, formerly a top education-grants officer at the Bill & Melinda Gates Foundation, “if it happens to him, to someone who seemed sincere and authentic about serving a hard-to-serve population, what does that mean for the field as a whole?”

And with what Mr. Freedman calls “the humility of experience,” he now acknowledges that he built Altius with “some arrogance” about what it could achieve.

In July, Tiffin’s accreditor ordered it to sever its ties with Altius, halt enrollment of new students, and close Ivy Bridge at the October 20 conclusion of its fall term. The accreditor said it was concerned about the college’s academic quality and low retention. It also said the arrangement with Altius was tantamount to Tiffin’s selling its accreditation to an outside party for financial gain.

Weeks later, Mr. Freedman, Altius, Tiffin, and four others associated with Ivy Bridge were told they were being investigated by the U.S. Department of Justice under the False Claims Act for matters related to the college’s recruiting and handling of millions in federal student-aid funds. More than 90 percent of Ivy Bridge’s revenue came from Pell Grants and subsidized student loans, a level that would have made it ineligible for student aid had it been a purely for-profit college.

Tiffin and Altius say the accreditor, the Higher Learning Commission of the North Central Association of Colleges and Schools, treated them unfairly. They also say they’ve done nothing wrong that would justify a federal probe.

Publicly and frequently, Mr. Freedman blames an accrediting mind-set that he says “vigorously enforces the best practices of 30 years ago” for most of Altius’s troubles. The argument has been echoed in op-ed essays and columns by others. Never mind that Tiffin’s accreditor recently approved Northern Arizona University’s plans for degrees based on competencies rather than traditional credit hours, and did so, says Sylvia Manning, the accrediting commission’s president, while the university’s corporate partner in the arrangement, Pearson, “is all over it, and in it.”

More than a few lawyers and accreditation critics have approached Mr. Freedman about suing the commission, hoping the case might put the traditional accreditation system’s relevancy on trial. He says he still might.

Plenty of smart observers, however, say that the problem with Altius was its overreach, and that the system worked.

Last month Mr. Freedman sold Altius’s name and most of its assets to an enrollment-marketing company called Datamark, for an undisclosed price. The purchase included Altius’s student-services operations and Helix, a well-regarded learning platform that Altius spent some $5-million developing. Datamark had no interest in Mr. Freedman’s transfer-college idea. It says it probably won’t even use the Altius name.

In his 2008 business plan, Mr. Freedman projected that Altius could now be worth as much as $57-million. He reportedly sold it to Datamark for a price well below that.

The venture also proved to be a mixed experience for Altius’s 20-percent partner in Ivy Bridge, Tiffin. Over the course of the partnership, the university netted about $1.8-million in overhead and licensing fees, gained a pipeline of transfer students, and learned more about supporting students in online programs. But any windfall it might have hoped to receive, once Ivy Bridge became independently valuable as its own accredited institution, is now history.

For Paul Freedman, the college experience was always a part of his life. His parents lived in Stanford University graduate-student housing when he was born, he attended grade school at the University of Chicago Lab Schools, and he spent his high-school years hanging around the University of California at Berkeley, where his mother, Joyce Freedman, oversaw grants, and his dad, Stuart Jay Freedman, was a world-renowned physicist.

Dinner conversations were “either about physics or about university politics,” Mr. Freedman recalls on a sun-splashed fall morning, sitting in the shadow of Berkeley’s Campanile tower and his father’s old office, a few miles from where he lives now with his wife and two young children. “It’s the only thing I ever knew.”

Mr. Freedman started his first company, Academic Engine, while in his senior year at the University of Chicago, in 1999. Backed with an investment from his parents, its initial product, an early version of an Internet search service called Hey Smarty, evolved into a tool to help college admissions offices automate answers to applicants. He sold the company in 2004 to Hobsons, an enrollment-management company, for a reported $15-million.

Relocated to Cincinnati, where Hobsons is based, Mr. Freedman “got really into the research on retention,” he says, in particular the data on the high numbers of community-college students who say they intend to transfer to a four-year college and the low numbers who actually do. He was also reading report after report on the growing importance of a college education to succeed in American society. “Between the two pieces of information,” he says, “there existed a big hole.”

From that, Altius was born. He knows the exact date—August 20, 2006—because he woke up in the middle of the night, too excited to sleep, and wrote an e-mail to his mother. He still has it.

“Basically it seems to me that kids are getting tricked into going to a Capella or Phoenix because they offer more flexible options, and they market their services more aggressively, but these degrees aren’t nearly as valuable as going to a traditional college.” he wrote in the e-mail. “A better option would be to ‘Bridge the Gap’ and get these kids into a one- or two-year program that introduces them to higher education at the same time as it improves their academic abilities. This is basically the intent of community colleges, but as we both know, the U.S. system of community colleges is completely dysfunctional.”

It was heady time for education companies. Enrollments (though not completion rates) were going gangbusters at University of Phoenix. Consultants were predicting that online education would account for one in 10 enrollments by 2008. And a nonprofit institution in New York City, Touro University, was making headlines with the sale of its online division to private-equity firm for a jaw-dropping $190-million.

It was also around then that a financially ailing nonprofit college in Cleveland, Myers University, was putting itself up for sale. Approached by investors, Mr. Freedman considered bidding. But he says the idea of buying a college for its accreditation struck him as wrong: “I just walked away. It felt kind of dirty to me.”

Myers was ultimately bought by an investor group headed by a sometimes-controversial advocate of for-profit education, Michael Clifford. (Subsequently renamed Chancellor University, it closed this year.) Not long after, in mid-2008, Ms. Manning took over at the Higher Learning Commission, and it began toughening its rules for deals that had allowed colleges to be bought for their accreditation, and for arrangements that allowed companies and joint ventures to create separate operations under the umbrella of a university’s accreditation.

Mr. Freedman, meanwhile, was pursuing his transfer-college idea, inspired in part by what he knew about California’s Master Plan and its idea of using community colleges as a steppingstone to four-year institutions. From his work at Hobsons, he knew about nearby Tiffin, then a traditional 2,000-student college that had recently shifted into a more entrepreneurial posture, adding branch campuses, graduate programs, and online degrees. From the beginning, his plan was to use the relationship with Tiffin as an incubator to create what his 2008 business plan promised would provide “unparalleled mentoring and academic support and direct access to first-rate, four-year institutions.”

The transfer piece was key, he recalls, walking down the hill from his father’s old office toward Berkeley’s landmark Sather Gate, past wave after wave of students streaming by.

“They’re just tremendously lucky,” he says of Berkeley’s students. “And I was lucky.”

He pauses to take in the scene. “The people who get this experience get to live a different life than the people who don’t.” That’s what he hoped Altius would do for the students at Ivy Bridge, he says. “I wanted to get people into Berkeley. That was the dream.”

Michelle Ulrich didn’t aim for Berkeley. The 25-year old from Fostoria, Ohio, is now nine classes away from completing her bachelor’s in accounting from the City University of Seattle, and says she has Ivy Bridge to thank for that.

She had tried a traditional college right out of high school, in 2006, but spent more time partying than studying. Four years ago she had a daughter, and soon she began thinking about going back to school. She found Ivy Bridge on the third page of her Google search for online colleges. “I didn’t want to attend any that I had seen TV commercials for,” she says.

Even though she never struggled academically, Ms. Ulrich says, once-a-week calls with Ivy Bridge “success coaches,” hired for their experience in education or training, kept her focused. “At no time did I feel like I was on my own, like I expected to,” she says.

She is still in touch with one of the coaches, who comes over from Toledo and proctors her online exams for City University. Ms. Ulrich keeps her framed associate degree from Ivy Bridge in her bedroom. She graduated in June 2012 with a 4.0. Altius says the average GPA for students who earned credit was 2.0.

At its height, the coaching staff numbered 35. (By fall, all of the coaches had been laid off by Altius.) They worked out of an office in Toledo, tracking students who were classified into green, yellow, or red zones, based on data about their grades and how often they opened e-mails or logged onto their course platforms. The coaches were expected to touch base with 90 to 150 students at least once every two weeks.

Some did more. Kim Lawson, a former coach, says she even did a mock interview with one of her advisees who was applying for a job at the YMCA. His mother had died suddenly while he was in college, and she helped him cope and make it through, she says. “After that he said he wanted to do this for his mom.”

Altius had forged some 150 standing agreements with four-year colleges to ease students’ path to transfer. Ivy Bridge graduates transferred to Arizona State, Ohio Christian, and Pepperdine Universities, and some 240 others, But Mr. Freedman says its results weren’t what he had hoped.

“Having students be successful is a really tough task,” he says.

Altius spent more money than it planned to, in part because recruiting students who could stick was harder than expected. It was also less profitable than projected, largely because of the spending on the staff of full-time professional tutors whom Ivy Bridge brought on board midstream, in addition to the success coaches, to help raise poor retention rates.

There was a reason, Mr. Freedman came to realize, that two-year-colleges struggle with completion rates. Adults who are poor or who are juggling children and jobs, many with weak high-school preparation and challenging personal situations, are not an easy population to serve. He has more respect now, he says, “for all the people who have worked with this problem for their whole lives.”

Ivy Bridge had other troubles, particularly at the beginning, when, according to several Tiffin officials, it seemed more about enrollment growth than academic quality. The indiscriminate Internet marketing and other recruiting tactics that Ivy Bridge used—similar to those employed by some for-profit colleges—drew many students who weren’t suited to college-level work, and the low retention rates set off alarms.

Altius was also hit by fraudsters known as “Pell runners,” groups who sign up for online classes and then drop out after getting their federal-aid checks. Mr. Freedman says Ivy Bridge took steps to catch them.

Jason Slone, Ivy Bridge dean from mid-2010 to 2012, says Altius not only brought in 12 full-time professional tutors not long after he became dean (it had been using an outside tutoring service before that), but also footed the bill for the team of instructional designers who were asked to revamp several of the courses.

But Mr. Slone says Altius never tried to water down the courses. It even pushed to add languages and lab sciences, the latter a special interest of Mr. Freedman, who recalls his late father saying that you weren’t learning anything if you didn’t take physics. (The senior Mr. Freedman helped run Altius before he died suddenly, last November.)

Altius also helped Tiffin introduce a new entry-level course for Ivy Bridge students, built around learning theories developed by the Stanford University professor Carol Dweck in the book Mindset. It teaches students to think of their brains as muscles that can be developed. (Mr. Freedman remains a fan; a worn copy of the paperback sat prominently on his desk in September, right on top of the letter about the investigation from the Department of Justice.)

By 2012, Ivy Bridge accounted for 41 percent of Tiffin’s 6,900 students. And while Tiffin had a faculty of 70 full-time professors, 18 adjunct professors, and 100 to 125 part-time adjunct instructors, Ivy Bridge was operating with 125 to 175 part-time adjuncts and just 11 full-time faculty members.

That growth and the structure of the new entity unnerved some of the university’s traditional faculty. “Tiffin has been a small, sleepy, traditional university in rural Ohio. This thing was fast and tech-driven, and I think it was really outside their comfort zone,” says Mr. Slone.

Mr. Freedman says he wishes Ivy Bridge had been even more disruptive. His vision included a competency-based teaching format that would have allowed it to charge only $5,000 a year (rather than $8,500) and a “21st century” general-education curriculum that substituted statistics for calculus and emphasized personal finance, law, and government. Up against the realities of an existing institution and faculty, he says, those ideas never got beyond the dream stage.

Mr. Freedman and several Tiffin officials say the university, not Altius, always had final word on academic matters. Tiffin department chairs oversaw the hiring of the professors and instructors, and any change in curriculum went through faculty committees, they say.

The university has asked employees not to speak publicly about Ivy Bridge, but it did have fans. One Tiffin official says: “The program was strong. The faculty was strong. The students were extremely well served.”

That wasn’t how the accreditor saw it.

The Higher Learning Commission had praised Ivy Bridge when Tiffin was reaccredited, in 2010, but it took renewed interest in the venture in early 2012. Tiffin’s president, Paul Marion, had told the commission that Ivy Bridge intended to change its name to Altius University and seek its own accreditation from the Western Association of Schools and Colleges. It would be based in the San Francisco Bay Area.

Someone had also sent the commission a copy of a six-page June 2011 “Confidential Nonbinding Memorandum of Understanding,” which suggested Tiffin was taking steps to transfer Ivy Bridge academic operations to Altius.

The commission’s Ms. Manning wrote back to Mr. Marion letting him know that any planned transfer of Tiffin operations to Altius would require the accreditor’s approval. The letter, citing commission policies adopted in 2010, also raised serious questions about the validity of what was already in operation.

The accrediting team that would visit Tiffin in 2013 to evaluate Ivy Bridge came down harshly. It called Ivy Bridge’s 25-percent retention rate for new students from fall to fall “extremely poor,” and said Tiffin had shown little evidence of efforts to fix it. It called Tiffin’s decision to license to Ivy Bridge, for $1-million, the exclusive right to offer some of its bachelor’s and master’s degree programs a “compromising” of Tiffin’s autonomy. And it highlighted Altius’s 80-percent ownership of the venture and its majority control over the board that oversaw Ivy Bridge as signs of Tiffin’s inability to assert control.

“Tiffin has not been candid or consistent in describing the details of this relationship,” a commission team wrote in May, and “was not behaving with the integrity expected of an accredited institution.”

Tiffin responded with a thick document of point-by-point rebuttals. But commission staff had written in May that they expected the board to deny Tiffin’s application for approval for a “change of control, structure, or organization.”

Two weeks later, Tiffin told the commission that it was withdrawing its application, setting in motion the commission’s order to shut down Ivy Bridge.

Tiffin considered an alternative relationship with Altius, but after a late-June telephone call between a commission staff member and Tiffin’s chief academic officer, Charles Christensen, the university dropped that idea. From what Mr. Christensen could tell, a memo he wrote shows, the consequences for Tiffin of trying to continue with Altius would have been another visit from the commission in September to impose penalties, and possible action by the U.S. Department of Education and the Ohio Board of Regents.

Mr. Freedman says the commission’s report on Ivy Bridge was “intellectually dishonest,” particularly its comparisons of Ivy Bridge faculty numbers to Tiffin’s residential faculty rather than its distance-education operation, and its findings on retention. “They didn’t look at transfer,” he says, “and we’re a transfer college.”

By Altius’s count, of the 11,023 students who had enrolled even for one seven-week term at Ivy Bridge since it opened, in the fall of 2008, more than 2,800 had graduated or transferred in good academic standing. About 5,100 were still enrolled or eligible to return as of July, when enrollments were halted. Nearly 3,100 students were dismissed for academic reasons, but even about a half of them later enrolled at another college.

That record is quite good. In fact, under a formula developed by Complete College America, the rate of student success for Ivy Bridge, 64.6 percent, is more than twice the national average of 27.8 percent.

A skeptical expert from Columbia University’s Community College Research Center, Davis Jenkins, says a 64-percent success rate would be “miraculously high” for an online college, but notes that he had no direct information about Ivy Bridge. Mr. Freedman says the numbers are accurate.

Ms. Manning, of the accrediting commission, says Tiffin never showed it those numbers. “If they already achieved 64 percent, maybe they should have told us that at the time,” she says. “If they had that to offer, they should have never truncated the process.”

In early September, Mr. Freedman flew to New York for the annual BMO Capital Markets’ Back to School Education Conference, an event that draws hundreds of investors, for-profit-college executives, and higher-education leaders for a day of presentations, deal-making, and hallway schmoozing. He spoke on a panel about making higher education more affordable, declaring that the education models with the best chance of changing things “are right now relegated to the margins.”

The message was warmly received. So was he. One of his business associates even greeted him in the hotel lobby lounge by saying: “I feel like I should be sending you flowers or something.”

The support was gratifying, Mr. Freedman says. But after weeks of laying off success coaches and wondering if there was any future at all for Altius, it was not all that satisfying.

“Half the people here gave me a hug and say, ‘You should sue,’” he says. “Everybody wants somebody to do it. They just don’t want to do it themselves.”

Back when Altius was still riding high, Mr. Freedman could often be found at conferences talking up the new learning platform it was developing. Called Helix, it was a tool that would present course materials in a context that fit with students’ interests or majors, was adaptive to competency-based teaching, gave real-time data feedback to instructors on students’ progress, and provided students one-click access to peers, tutors, and FAQs. It would be, he proclaimed, “the flying car of higher education.”

Helix got only a few test runs at Ivy Bridge. This fall, except for the nine students now using the platform in an inaugural informatics-degree program at Harrisburg University of Science and Technology, the most use it got was here at the quiet Altius headquarters, where Mr. Freedman and a colleague would eagerly demo it for visitors.

In his negotiations with Datamark, Mr. Freedman had tried to avoid selling off Helix. But he says he wanted to save as many jobs as he could, and to do that he needed to include Helix in the package.

Eric Darr, Harrisburg’s president, says he admires what Altius did with Helix and welcomes the chance to help contribute to its continuing development. His relationship with Altius gained attention when Ivy Bridge’s closing hit the news. The reaction from his own accreditor, the Middle States Association of Colleges and Schools, surprised him. “Not more than 24 hours later, I got a call,” he says. “And the Middle States guy had gotten a call from the Department of Ed.”

“Obviously that suggests a certain sensitivity,” Mr. Darr says, He is also quick to note that Harrisburg’s deal with Altius, now transferred to Datamark, is a traditional service-provider relationship.

Mr. Darr says what happened to Altius “makes all of us that are accredited institutions more wary of doing things with partners.” He worries that it could also mean “less investing and less innovation,” which will leave fewer choices for colleges, a problem for less-established institutions like his, which count on outside companies for creative ways to better serve students.

He’s not alone. “It puts in sharp relief to people how many barriers there might be to improving the system,” says Michael B. Horn, a co-founder of the Clayton Christensen Institute for Disruptive Innovation, an education think tank.

When he let himself dream big, Mr. Freedman used to imagine as many as a million students signing up for his vision of an independently accredited Altius. He still believes that the immensity of the educational challenge facing needy students demands that kind of ambition. “In higher ed, people are very afraid of scale,” he says. But if you’re doing something right, “at some level there is a moral obligation to scale.”

People across higher education continue to debate the reasons for Altius’s downfall: Tiffin’s inattention to its accreditor? A shifting regulatory climate? Altius’s impatience to go out on its own? Perhaps bad luck and bad timing, too. As one longtime education-industry insider who has followed Altius and Mr. Freedman for years put it, “Sometimes history just screws you.”

Mr. Freedman knows that suspicion still hangs over him. “People aren’t sure if there is a smoking gun out there,” he says. And he offers that there are plenty of easier ways to make money than as an education entrepreneur.

But Academic Engine, his first company, “didn’t impact the world,” he says, and with Altius “I wasn’t able to make the kind of impact I wanted to make.”

Ivy Bridge’s last term ended on October 20. That same week, Mr. Freedman could be found in his office, looking out at employees who no longer worked for him, and pondering the itch of what he says “feels like unfinished business.”

He sounds every bit like a man incapable of sitting out the next act.