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FOR PROFIT OR NOT?

Public universities are buying the for-profit schools their professors criticize

University of Arizona's campus.
University of Arizona
University of Arizona’s campus.
  • Michelle Cheng
By Michelle Cheng

Reporter based in New York

Published Last updated This article is more than 2 years old.

Some public universities in the US are starting to think like private businesses.

In early August, the University of Arizona announced it will acquire Ashford University, a for-profit online university with roughly 35,000 students, for $1 from Zovio, a publicly traded education company. The deal gives the land-grant public institution a stronger presence in online education that it says will allow it to reach more students.

Under the terms of the deal, University of Arizona will create a non-profit entity called University of Arizona Global Campus that will maintain its own accreditation, faculty, and academic programs. Zovio will provide education technology services and receive 19.5% of the tuition revenue.

The purchase of a for-profit school by a public institution is unusual—it is also not the first. Purdue University bought Kaplan University three years ago. In June, the University of Massachusetts announced a “strategic partnership” with Brandman University, a nonprofit spin off from Chapman University that is mostly online and specializes in adult learners. These arrangements reflect the growing interest from traditional schools to scale online programs fast in an increasingly competitive online education market.

The acquisitions haven’t been well received by all university stakeholders, however. For-profit universities have been accused of deceptive marketing and defrauding students, and faculty, students, and alumni of public universities have publicly questioned the wisdom of taking on the schools and their baggage.

University of Arizona professors who criticized the Ashford deal are concerned it will tarnish the school’s reputation—echoing the pushback Purdue received when it first announced the arrangement. Zovio, formerly known as Bridgepoint Education, is also being sued by the California attorney general for making false promises to students.

“It is a big deal for a public university to sell their faculty on the idea of acquiring something that has been in the past pretty controversial,” says Trace Urdan, managing director at Tyton Partners, an investment bank that works with education companies.

The deal will help University of Arizona play catch-up in the growing online education market, which has become a thriving industry within the state.

While University of Arizona now has about 5,000 online students, its cross-state rival Arizona State University was an early leader in the sector and has amassed tens of thousands of online students. Also located in Arizona are the University of Phoenix, a for-profit online juggernaut which once had nearly half a million students; Grand Canyon University, a mostly online for-profit institution; and the operations center of Southern New Hampshire University, a non-profit with a huge online enrollment.

It is also a way for universities facing financial distress due to a possible drop in enrollment and state budget cuts—which have been exacerbated by Covid-19—to diversify their revenue streams. That would mean catering to the working adult population that has been largely left out of traditional higher education and capitalized on by for-profit institutions.

While a majority of schools may prefer building out their online offerings, not all schools necessarily have the resources or time to do so, says Jeff Silber, managing director at BMO Capital Markets. In addition, going online requires a set of business decisions that traditional schools are not familiar with and requires marketing to students in different ways, says Urdan.

Controversial baggage

For-profit schools also have a lot to gain from being acquired by a public institution. Enrollment at for-profit schools peaked in 2010 and then fell from 1.7 million to 739,000 students between 2010 and 2018 after the Obama administration added new regulations and oversight to provide more accountability of these schools, leading to the bankruptcies of Corinthian Colleges and ITT Technical Institutes.

They have also posted dismal outcomes. The six-year graduate rate was 60% at public institutions versus 21% at private for-profit institutions, according to the National Center of Educational Statistics. One study found that students at for-profit schools are roughly three times as likely to default as students at traditional schools, and the companies are known to spend more on marketing than on teaching students.

One way to avoid regulatory pressure—particularly with an upcoming election that could change the regulatory environment—is to shed the for-profit label, says Silber. By branding the schools under their name, universities are “trying to avoid some of the negativity that may have been part of the for-profit deals,” he said.

There is the concern of the resurgence of more predatory behavior of these programs, says Robert Shireman, senior fellow at the progressive think-tank Century Foundation and a former Education Department official during the Obama administration.

Universities have long sought way to boost budgets from college sports to research partnerships, he says. The big difference now is that online models could “corrupt the core of the institution,” Shireman said.

Analysts say there will likely be more deals along the lines of Purdue-Kaplan and Arizona-Ashford in the future, and that it will be especially attractive for schools with a recognizable brand name but not a strong online presence. Those universities could potentially target online schools like University of Phoenix, American Military University, Colorado Technical University, and DeVry University.

Purdue Global may be a model for others to follow. When Purdue bought Kaplan University in 2017, it acquired the university’s 32,000 online students, 3,000 employees, and 15 brick-and-mortar campuses, from Graham Holdings Co. In exchange, Kaplan would earn up to 12.5% of the new school’s revenue and provide the new university with technical support, marketing, admission, and financial aid, among other services.

Frank Dooley, who became Purdue Global’s chancellor this May and was formerly Purdue’s senior vice provost for teaching and learning, says the biggest difference is that Purdue Global now has a public responsibility. That is seen in the educational offerings, he says: The school rolled out a contact tracing course in May, with 20,000 students signing up that month, and, following George Floyd’s death, made changes to the criminal justice curriculum that would focus on law enforcement’s role in society and societal change for its 1,500 students.

“A public institution would take on an offering like this as part of your public mission, whereas the for-profits probably aren’t going to do something like this,” says Dooley.

Still, Purdue Global has lackluster graduation rates of 26%. Dooley says he would like to see the rate increase to 60% to 70%. He adds that he is still “grappling” with how to best measure the completion rate for Purdue Global university students, and says the US Department of Education’s six-year graduation rate, which is calculated for first-time, full-time undergraduate students, does not best measure returning adult learners.

Purdue Global also continues to accrue losses. The online university’s net operating loss jumped from $38.4 million to $133.4 million, according to the university’s financial report, suggesting that buying a big online program will not necessarily produce immediate returns. In an interview last year, Purdue’s president Mitch Daniels admitted “we’re not achieving the growth that we thought we might have.”

Dooley says that online education can be done very well or very poorly—and that the same could be the same about face-to-face education. “All of a sudden, virtually all of higher ed has had to take a closer look at what does it mean to teach online?” he says. “And a number of people are learning how you can do it effectively. So I think it’s going to lead to a greater acceptance that online education can be legitimate if it’s done well.”