By Tariq Habash | August 7, 2024
Late last month, 2U, Inc., one of the largest online education technology providers across the American higher education sector, filed for Chapter 11 bankruptcy protection. Over the last 16 years, 2U was one of the fastest-growing ed-tech companies due to its high-profile partnerships with prestigious universities and the acquisitions of major online competitors.
More recently, skyrocketing levels of corporate debt and plummeting revenues led to an historic collapse in market valuation, ultimately leading the company to file for bankruptcy in coordination with its largest creditors. For the moment, 2U remains in operation and has made claims that the bankruptcy process will not disrupt the education programs that students and their university partners rely on…for now.
2U’s problematic history
2U was founded in 2008 as a private company that partnered with federally-accredited universities to provide a range of services, often including marketing, enrollment management, and student retention assistance, as well as course design and instruction. 2U repeatedly promised its students “high-quality digital education” through both degree and “alternative credential” programs to help “propel their careers,” however, the company has faced allegations that it sold students low-quality certificate courses and degrees using deceptive marketing practices, often in partnership with brand-name public and private nonprofit colleges.
For years, 2U executives have been criticized for prioritizing aggressive expansion and profit over the quality of education. 2U has faced substantial and growing financial struggles, which SBPC has repeatedly raised concerns about to federal and state regulators. By acquiring competitors and overleveraging the company with massive debt, 2U created an unsustainable business model. The focus on growth at any cost resulted in educational programs that often fell short of traditional standards set by the institutions 2U partnered with.
Since 2U’s purchase of edX in 2021, the company has seen declining revenues amid over $900 million of corporate debt. Additionally, students often lured by the promise of high-quality online education endorsed and branded by prestigious universities frequently found themselves in programs that did not deliver on their promises. In November 2023, 2U reported declines in enrollment in both its degree programs as well as its institution-affiliated bootcamps, to which the company responded by laying off hundreds of employees in order to reduce future expenses. 2U also replaced its CEO at this time, but despite these efforts to turn the company around, the company continued to see declines in student enrollment and losses of institutional partnerships.
Over the last year, 2U’s stock price fell almost 96 percent, and despite efforts to increase its stock, continued to decline. At market close the evening prior to its July bankruptcy announcement, 2U’s market cap was less than a quarter of a percent of its value three years prior.
The inequity of 2U’s bankruptcy
The stark contrast between the second chances given to corporations and those denied to students is one of the most troubling aspects of 2U’s bankruptcy. 2U and its creditors will get a chance to restructure and a fresh start. Unfortunately, the same opportunity will not be extended to students shouldering high debt burdens incurred from enrolling in 2U’s programs.
This inequity highlights a fundamental flaw in the current system: corporations can rebound from financial missteps, but individual borrowers must suffer the consequences of trusting a broken system.
The Higher Education Act is supposed to provide a safety net as an alternative to bankruptcy—and cancel debt automatically when schools close or fail. Unfortunately, for tens of thousands of 2U students, there is ambiguity about whether these protections apply. Should 2U close, these students could be left to navigate the fallout on their own, saddled with loans for educational programs that may not hold the value they were promised. We have been calling on the U.S. Department of Education to prepare plans to protect students should this occur. The timing has never been more critical.
Bankruptcy may protect 2U’s bottom line, but what does it do for students and borrowers?
2U’s bankruptcy filing shows the company is prioritizing repaying a portion of its nearly $20.8 million in debts owed to university clients in an attempt to preserve “future business and revenue growth.” While 2U pursues Chapter 11 bankruptcy protection, many outstanding questions remain about what the newly private company will look like after bankruptcy.
These questions include, for example:
Will 2U’s current executives be left in charge of the newly private firm?
Will 2U attempt to use this bankruptcy to avoid liability for any past fraud?
Will the newly private company that emerges from bankruptcy still be dependent on its students’ federal student loans for most of its revenue?
Will pressure from 2U’s new owners cause the newly private company to invest even less in instruction, directing resources towards repaying debt or marketing to prospective students?
What comes next?
As the dust continues to settle, it is crucial to reflect on the broader implications of 2U’s bankruptcy. Universities and policymakers must scrutinize these partnerships with third-party online program managers (OPMs) and ensure that educational quality is never compromised for corporate gain. Students, on the other hand, need stronger protections, better oversight, and real recourse to shield them from the fallout of such corporate failures. Regulators should consider some urgent questions as they ensure accountability and enforce the law moving forward:
How are federal and state regulators ensuring that students and student loan borrowers are protected from financial challenges across educational contractors like 2U?
What steps should be taken to protect students’ interests in the event that companies like 2U file for bankruptcy, or potentially close?
How are federal and state regulators tracking these companies and their practices in the context of their relationships with covered entities including institutions of higher education?
What protections do students have during these bankruptcy proceedings where creditors have all the leverage and students have none?
How will federal and state regulators ensure transparency from these companies to increase oversight amid significant financial problems?
How will federal and state regulators take aggressive action to protect students and student loan borrowers, including through investigations, contract reviews, audits, demand letters, etc.?
It is long past time for policymakers to act to protect students.
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Tariq Habash is a senior fellow at the Student Borrower Protection Center. He rejoined SBPC after spending more than three years as a policy advisor at the U.S. Department of Education working on higher education issues. Prior to his government service, Tariq co-founded SBPC and worked as an analyst at the Century Foundation