As 2U teeters, ED needs to publicly get ahead of the risks that business disruption at an OPM could pose for students
By Ben Kaufman | June 15, 2022
Earlier this month, the Department of Education (ED) announced that it would discharge the remaining $5.8 billion owed by 560,000 federal student loan borrowers who had been defrauded by the sham for-profit education provider Corinthian Colleges. Relief for these borrowers came after advocacy and lawsuits spanning three presidential administrations, with ED finally agreeing only after endless prodding to wield its clear authority to cancel the debts of those who have been fleeced by their schools.
But ED’s work is not done. In addition to still needing to ensure that it provides relief to all borrowers who attended schools just as predatory as Corinthian, ED must also address a new and starkly under-discussed area of risk being generated by the latest fly-by-night operators in the education space: online program managers (OPMs). OPMs are private companies that purport to help colleges expand their online course offerings through a range of services that can include filling seats, hosting web content, and more. As we have written before, OPMs have a shocking track record of using glossy, misleading marketing to push students into debilitating debt loads for educational programs that prove to be little more than diploma mills.
Beyond their conduct, however, it is increasingly clear that OPMs also pose risks to students via issues with their corporate solvency. In particular, at least one large OPM may currently be facing serious financial headwinds, creating the possibility of a messy closure or other disruption in the near future that could gravely harm students. If that injury does arrive, ED’s current implementation of existing student loan discharge programs may not be adequate to protect students who borrowed for a program that wasn’t ultimately delivered to them as promised.
ED cannot allow private sector incompetence and malfeasence to imperil federal student loan borrowers’ financial futures. Instead, ED needs to lay the groundwork now to ensure that student loan borrowers have a clear path to relief if an OPM folds or suddenly changes its offerings due to problems at the corporate level—and it needs to make students and the public aware of those plans immediately.
By putting the work in ahead of time—something it failed to do in the cases of Corinthian and other past predator schools—ED can dampen the blow that the implosion of an OPM would likely impose on countless student loan borrowers.
2U “May Go To Zero”
Among the most prominent and scandal-ridden OPMs is 2U, Inc., a Maryland-based firm that offers various credential-based and Title IV-eligible programs in partnership with accredited, brand-name schools. In instances where 2U supports Title IV courses, students take on federal student loans and grants to generate tuition revenue that the company splits with the college. 2U reported in its most recent financial disclosures that 62,609 students were enrolled in the degree programs it facilitates—many times more students than have been involved in past group discharges that ED has had to implement after damning instances of fraud and school closure.
However, 2U appears to be on increasingly precarious financial footing. Revenue growth is flatlining, the company is quickly burning through cash, and its business operations are increasingly unprofitable. The company as a whole lost $275 million on a net basis in the last twelve months, and its losses in the first quarter of 2022 were almost three times larger than those in the same quarter the prior year. The market has noticed this wrong-way trajectory: 2U’s stock is now down about 80 percent from its 52-week high, placing the firm’s market cap at slightly more than $5600 million.
That $600 million figure matters in part because it is roughly $200 million less than the amount 2U paid last November to buy the online course platform edX. In that transaction, 2U took on $475 million in debt and used $325 million of its own cash to buy edX for $800 million. Now, the market judges that the entire combined company—including 2U’s core business, edX, and other properties 2U owns—is worth a quarter less than what 2U paid just for edX hardly seven months ago. Readers need not have a background in finance to see that that’s a bad trade reflective of fumbling leadership.
Underlying all of this are 2U’s massive debt obligations. The company has almost one billion dollars in long-term liabilities, including a $571 million term loan coming due at the end of 2024 and $380 million in convertibles that mature in May 2025. The 2025 convertibles are trading at junk levels and, with rates rising, it’s not obvious how the company intends to roll over its financing. This is in part why some have argued 2U stock “May Go To Zero.”
It is clear that the medium term could involve big changes for 2U with huge consequences for the people enrolled in in the programs the company supports.
Bankruptcy is a possible outcome for the company, but rumors are also circulating that 2U as a whole or its portfolio properties could be targets for a strategic or financial buyer (though it’s not obvious that 2U’s segments or core Title IV business are actually worth enough to put a dent in its debt). And while neither liquidation nor sale are necessarily imminent (2U still has $216 million in cash and cash equivalents on its balance sheet and annual net interest costs in the tens of millions, at least until the $561 million principal payment it faces on its debts in 2024), it is clear that the medium term could involve big changes for 2U with huge consequences for the people enrolled in in the programs the company supports.
Upcoming changes could take many forms, each of which could pose serious harm to students. In a worst case, 2U could abruptly exit the Title IV market without a plan for people currently enrolled in classes, leaving those who have not already completed their programs in the lurch. For example, a student in the University of Southern California’s 2U-backed Master’s in Social Work program could be midway through their first or second year only to find that 2U has gone suddenly bankrupt. If that were true, it could leave USC without the capabilities necessary to deliver the course of study the student had already begun—and had already taken on debt to pursue.
Alternatively, 2U could hand its existing Title IV classes to another company, but such a transfer could involve massive headaches for students that could fundamentally undermine a school’s educational product. Further, it’s possible that any new management taking over existing courses could prove to be inexperienced or otherwise even less able than 2U to deliver students the education they bargained for. It would not be the first time that a change in management or ownership at a for-profit education provider produced outcomes along these lines.
Finally, if 2U were to try to hang on to its Title IV offerings while managing the sale of its other assets such as its non-Title IV bootcamp programs—something that could prove unavoidable if the company does try to even temporarily hang on—it is possible that management could become distracted to a point of the company’s Title IV offerings getting even worse.
Or something entirely different could happen. But regardless of what comes to pass, any corporate tumult is likely to flow through to students’ experiences at 2U-backed Title IV courses, leaving those students with federal student loan burdens for an educational product they weren’t provided.
ED Needs to Do the Work Now to Ensure that Federal Student Loan Borrowers are Safe from OPM Failure
Borrowers are entitled to multiple pathways for federal student loan discharge when they are defrauded or otherwise face disruption in their course of study, but ED has not yet had to apply these expansive borrower protections in the context of failure or other problems at an OPM. As a result, while there should be no doubt that ED can and must deliver borrowers relief in the event of issues tracing to an OPM, there are serious questions that ED will have to answer about which of its various tools is best suited for these circumstances.
History shows that ED is not adept at building the plane while flying it when it comes to developing and applying theories of borrowers’ rights to debt discharge under the law when those borrowers are already bereaved. This pattern is in part why relief for students including the Corinthian borrowers took nearly a decade and required students who had been defrauded and failed to actively fight ED to secure cancellation, and why borrowers who attended other schools continue to languish. ED did not clearly examine and articulate its authorities ahead of these schools’ failures, creating confusion and empowering those within the administrative state who are actively hostile to students to block them from their rights.
ED does not have to and should not be allowed to make this mistake again. Instead, ED should immediately begin developing plans for how it would respond to the sudden closure of an OPM or to a substantive diminishment in the quality of product an OPM delivers students due to business disruption. That exercise should include examining the specific instances in which borrowers would be able to assert a defense to repayment, the cases in which settlement and compromise authority would be more appropriate to offer borrowers relief, and more. ED should aim to have a clear playbook that it can open as soon as an OPM begins to falter, and it should share those plans as soon as possible with borrowers and the public.
The last generation of for-profit colleges left deep financial scars for millions of Americans, but the current class of shape-shifting for-profit OPMs hiding within Title IV schools need not do the same. ED absolutely must read the message that 2U and other OPMs are currently sending about the risk of an implosion, and it should plan accordingly before it’s too late.
Ben Kaufman is the Director of Research & Investigations at the Student Borrower Protection Center. He joined SBPC from the Consumer Financial Protection Bureau where he worked on issues related to student lending.
 Calendarized, based on FY 2021 10-K and Q1 2022 10-Q.
 Note that this marks at least the second acquisition where 2U is generally thought to have overpaid. Equity analysts roundly criticized 2U as having overpaid in its $750 million 2019 acquisition of Trilogy, a company that offers online credential-based coding bootcamps, and which continues to face criticism regarding program quality and job placement.
 To mark his success in presiding over a ~70 percent drop in the value of the company in 2021, 2U CEO Paucek took home $17.4 million for the year, a ~3X increase over 2020. He also blocked me on Twitter.