In a surprise move last week, Purdue University announced its intention to acquire for-profit Kaplan University. If approved, Purdue will become a major player in online education. Its president, former Indiana Governor Mitch Daniels, described the takeover as a “third dimension” to Purdue, adding Kaplan to its research flagship and regional campuses.
Mr. Daniels argued that before the acquisition Purdue had little presence in online education and had “basically been a spectator to this growth.” Kaplan University has 32,000 registered students, but enrollment has been falling for several years. Kaplan’s students are heavily skewed toward military veterans, lower-income students, and members of minority groups, including first generation college students. Their average age is 34, a sharp contrast with the 20-year old average age at Purdue.
Purdue University photo/John Underwood
The deal has a number of parts. For Kaplan the deal offers a profitable way out of a battered reputation and declining enrollments.
Deal Could Be Game Changer for Purdue
For Purdue, the deal may be a game changer if the right puzzle pieces fall into place. Purdue’s total enrollment will grow from 30,000 to 70,000, with 30,000 registered online. The new online initiative will receive no state funds and rely solely on tuition and donations for support.
Under the terms of the deal, which would create a new public university, Kaplan students, academic programs, 15 campuses and learning centers, and academic staff of about 3,000 will become part of Purdue. Kaplan, Inc., the parent company (a part of Graham Holdings that for decades owned the Washington Post), will continue to provide the technology, marketing, admissions, and financial aid, as well as other back-office operations. In return, Purdue will pay Kaplan 12.5 percent of the online program’s revenue, but only after Purdue and Kaplan have both recovered their direct costs.
The deal could stretch 30 years. Purdue will also be guaranteed a minimum of $10 million annually by Kaplan before Kaplan is reimbursed for its direct costs or receives 12.5% of any additional revenue. Kaplan will no longer be subject to the “gainful employment regulation,” that scrutinizes career-focused programs that load debt on to students relative to the income that they will earn.
Proposed Deal Has Critics and Supporters Alike
Many independent analysts suggest that the deal makes sense, although the move also has its critics. For Purdue, the structured deal permits the University to move quickly and efficiently into online education without developing the technology, staffing, marketing, and enrollment start-up costs that it would otherwise incur. It will now compete at a scale and in the same market as other large non-profit online education programs like Penn State. The deal will also improve the national and global reach of a major research university that is best known for its highly regarded science and engineering programs.
Purdue will need to undergo a series of regulatory, accreditation, and internal administrative hoops before the new arrangement takes hold. Mr. Daniels estimates that this process might take several months.
The move by Purdue will be watched carefully across higher education. It represents a startling realignment of the for-profit and non-profit community, in which one of the lead players has an established reputation, but is weighted down by the baggage attached to the highly public criticism of large for-profit educational providers. On the other side, Purdue’s president is perceived as a maverick change agent whose approach may not be received well by Purdue’s faculty who were not part of the acquisition discussions.
Is Purdue-Kaplan Deal the Higher Ed Partnership of the Future?
Beyond the internal dynamics, there are a series of important policy questions to address. If we accept the premise that higher education will evolve at a faster pace because of the accumulated pressures – especially on revenue – that its institutions face, is it likely that the Purdue/Kaplan arrangement is an outlier or instead a prediction of the kind of tectonic changes higher education is likely to face?
In this respect, Purdue provides an interesting case study. What is most intriguing about Mr. Daniel’s approach is that he understands that sustainable growth in the University’s future could not be built off tuition, state appropriations, and debt. Purdue is a research university but also a state institution committed to educating Indiana’s citizens. It must think strategically in a league in which other large research universities play.
A Follow-the-Money Moment for Purdue
As such, this is a follow-the-money moment in which the Purdue brand goes global and the financial underpinnings of what Kaplan will provide pay for the move to online education. Done correctly, the new arrangement will likely improve Purdue’s competitive standing among its peers. If the test fails, then Purdue will become the poster child for why non-profits and for-profits can’t mix.
Despite the uncertainty, Purdue earns an “A” for the effort it has made to move strategically by searching for new resources under new terms and through new arrangements to meet its strategic goals. It left the old understandings and financial foundation for the flagship and branch campuses untouched. Now, we’ll watch to see if big chess moves can match ambition to reality.
Writing in the New York Times last month, Laura Pappano offered a thoughtful analysis of the efforts by public colleges – principally public flagship universities – to find new sources of revenue, diversify their student bodies, and expand their national reputations. It’s an interesting trend that should be watched closely.
America’s colleges and universities have different funding sources. Historically, public systems relied most heavily upon direct state support. Drawing upon the research of Thomas Mortenson, senior scholar at the Pell Institute for the Study of Opportunity in Higher Education, Ms. Pappano notes: “Nearly thirty years ago, legislative appropriations provided 59 percent of core revenues at public four-year colleges. In 2013, the latest year available, states covered 27 percent on average.” Absent historic state support, America’s public colleges and universities have turned increasingly to alternative funding sources, tuition, fees, room, board, additional auxiliary enterprises, public private partnerships, endowment drawdown, and debt.
Out-of-State Recruitment Brings Revenue
As the article suggests, one approach is to think big and move recruitment goals beyond the state’s borders. Ms. Pappano profiled a number of public colleges and universities, including the University of Alabama, University of South Carolina, Miami University of Ohio, Rutgers University, Arizona State University, and the College of William and Mary, to demonstrate how these institutions used various recruiting strategies to expand their base of out-of-state students. The results speak for themselves. From 2010-2015, freshman applications at Arizona State rose 42%, at the University of South Carolina by 39%, and at Miami University of Ohio by 62%.
On the surface, the tactic seems like a good way to balance a university’s budget and replace a dwindling source of revenue from the state. And in fairness, public colleges and universities should not be blamed for seeking such a solution. In fact, it precisely mirrors the tactics used by private colleges and universities with regional and national reputations. It is an entrepreneurial and creative approach. Indeed, for the profiled institutions, expanded recruitment appears to be paying a handsome dividend.
We can set aside, for example, some of the approaches taken by flagship public universities to recruit out-of-state like using merit awards to crack into ZIP codes that in later years might produce additional students, many of these full pay. It’s not so much the tactic but the policy that comes into question. The policy reflects the new realities that public universities now face.
Regional Public Universities Have Less Recruiting Power
First, there is a growing disconnect between flagship publics and the regional public sector institutions. The latter do not have the reputation, alumni base, facilities, breadth of programs, personnel, and resources to mimic the public flagship’s admission recruiting beyond state boundaries.
In an era of stagnant or declining enrollment of traditional age students, the failure to make investments in the rest of the public system will only exacerbate the chasm between the public flagship research university and the other public colleges in the state.
The recent efforts by the University of Wisconsin to separate itself from the Wisconsin system suggest the level of acrimonious warfare that might break out.
Second, changing financial fortunes call into question the historic mission of public colleges and universities. There are at least two ways to think about this issue.
On the one hand, America established public colleges and universities as the “people’s schools,” training students for a variety of occupations – many of them critical to the economic wellbeing of the state. They consciously subsidized the tuition charged, thereby making it possible for generations of first-time college bound youth, including immigrants, to receive a college degree. On the other hand, flagship research universities also provide a public good by serving as powerful economic engines that can drive a state and even regional economy. This mandates that they acquire and retain the best talent that they can attract to the state.
Third, every action has a reaction. As the stronger public universities expand their admission recruiting efforts beyond state boundaries, the burden of educating a state’s workforce will fall increasingly on other colleges and universities, notably non-research public colleges, private colleges and universities, community colleges, for-profit institutions, and online educational providers.
Is the effect of out-of-state recruiting effectively to “flip” how a state educates it students, relying on groups like small, regional private colleges to meet the state’s workforce needs?
Finally, what is the cost of out-of-state recruitment? Should public tax dollars be used as merit grants to attract an out-of-state student? To maintain a quality flagship research operation, should public research universities put additional money into expanded programs and expensive research facilities to compete on a national level? If so, is the solution more debt, public-private partnership investment, or a new operating model built to sustain an evolving mission?
Sometimes short-term solutions can cause long-term headaches in higher education. One concern to watch is that public flagship universities might adopt a private higher education operating model that focuses on higher tuition, deep financial aid discounts, and growing debt to fund “turf” war academic and residential life facilities. It may mean in the end that they can win the battle but lose the war.