Program Innovation

California Dreamin’? New Regulations for OPMs and For-Profit Schools

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California Assemblyman Kevin McCarty has a long record of advocating for improvements in public education, criminal justice reform, and improved access to health care. He has also become an important actor in a new drama designed to introduce new regulations for OPMs and for-profit schools that operate in California.

Could the old adage "as California goes, so goes the nation" apply here? Whether or not you live, work, or study in the country's most populous state, new regulations for OPMs and for-profit schools, including McCarty's Assembly Bill 1345, merit further context and inquiry.

It has been an eventful summer for higher education in California. For starters, the Department of Education (ED) threatened to eliminate federal aid for California students enrolled in online courses provided by any out-of-state provider, unless the state established a new way to investigate student complaints. This came amid allegations that senior ED officials may have attempted to shield the California-based Dream Center from federal regulation of recently-acquired for-profit schools.

But since early 2019--well before these revelations emerged--OPMs and their critics alike have been closely watching one of the regulatory California bills. Assembly Bill 1345 focuses on whether California schools should be able to incentivize their students, employees, and third-party vendors to boost enrollment. Currently, the Assembly is in recess, but AB 1345 still could prevent schools from sharing tuition revenue with any third-party service provider, i.e., an OPM.

This, of course, would strike at the heart of how many OPM service providers operate.

OPM Business Model 101: Incentives, Carve-outs, and Exemptions

Under the Obama Administration, the ED embarked on an aggressive campaign to rein in predatory enrollment practices, particularly among for-profit schools. In 2010, as part of this effort, the ED restricted the payment of incentives by a school to students, employees, or vendors, involved in recruiting and enrolling students.

In 2011, however, in what has come to be known as the “bundled services carve-out,” ED exempted third-party service providers from this ban if they provided a bundle of services beyond recruitment and enrollment management. This allowed OPM companies to be paid through shares of tuition revenue. This exemption enabled these providers to write long-term revenue share contracts with college and university clients, accelerating their growth.

In response to lobbying efforts—for now—AB 1345 will not nullify the bundled services exemption in California and disrupt the OPM industry. Although AB 1345 received near-unanimous support early on, language has been added that would limit its impact to for-profit schools operating under the jurisdiction of California’s Bureau of Private Postsecondary Education (BPPE). The largest OPM clients, such as the University of Southern California (USC) and several University of California (UC) campuses, will be exempt from a blanket ban on incentive compensation.

A California Bellwether?

What does AB 1345 signal for both California and the nation? For starters, it’s always worth noting what happens in a state that enrolls more than 14% of all post-secondary students nationally. Even as amended, AB 1345 could impact more than 650 schools operating in California with a combined 12-month, unduplicated enrollment of close to 300,000 students.

AB 1345 may also provide a compelling rationale for more for-profit schools to convert to non-profit status. As enrollment in four-year for-profit schools declined 20% nationally in just the past year, at least 18 for-profit schools have begun converting to non-profit status. Figure 1 suggests that several of these schools may have paid close attention to the potential impact of AB 1345.

California Dreamin’? New Regulations for OPMs and For-Profit Schools - Top 10 “For-Profit” Schools - California 2019 - Eduventures Research Wake-Up CallFigure 1.

Northcentral University has recently converted to non-profit status, while enrollment leader Ashford University will soon be operating as a non-profit institution. (Notably, Ashford will be receiving OPM services from Zovio, formerly known as Bridgepoint Education and Ashford’s prior owner.)

It’s also important to note that Ashford’s effort to convert its tax status pre-dates this recent wave of regulatory legislation. As a newly minted non-profit, it will be subject to additional oversight by California’s BPPE.

While AB 1345 may not override the Federal “bundled services carve-out”--allowing OPM service providers operating in California to continue to offer both revenue share and fee-for-service agreements --it has reopened the question of how third-party vendors should be incentivized when growing online enrollment for their clients.

Eduventures Research has identified at least 24 active OPM contracts with public and private non-profit schools in California. These include engagements with leading OPM service providers, such as 2U, Noodle Partners, Pearson, and Wiley/Learning House. Smaller service providers, such as edX, Coursera, Comcourse, and Everspring are also active in the state. Combined, these programs enroll more than 30,000 students, and are generating considerable revenue for both these providers and their client schools.

With for-profit enrollment on the decline, AB 1345 is symbolic of a larger pattern. Restrictions on incentive compensation rules for online schools have been under review in New York, Oregon, and Washington. As the ED backtracks on its regulatory positions, debates over incentive compensation will increasingly be played out in state legislatures and courtrooms, rather than in Washington, D.C.  

The Bottom Line

The driving force behind incentive compensation regulations has always been consumer protection. If higher education enrollment becomes completely commoditized, so goes the argument, there will be no accountable stewardship of federal aid and students will suffer. Public trust in the ability of governments, both nationally and locally, to fund and manage higher education would be severely eroded.

In effect, a greater good demands vigilance, regulation, and oversight. Most would agree that these sentiments are well-founded and are likely at the heart of the California Assembly’s effort to regulate for-profit schools and their OPM providers.

At the same time, however, many third-party service providers, including OPMS, contend that their successes in expanding student access and improving achievement has been wildly misunderstood. When third-party providers offer a service, as their argument goes, they should be duly compensated. The bundled-services exemption has enabled many OPM providers to deliver services, such as recruitment, enrollment, and course development, to help schools build robust businesses.

Therein lies the dilemma: ?

Despite the limits of AB 1345, the debate over incentive compensation is not over. This issue, and the question of profit and higher education may be coming to a legislature near you.

Thursday August 29, 2019 at 2PM ET/1PM CT

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