Purdue and Kaplan: What’s ahead

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May 30, 2017

The Purdue/Kaplan deal, if successful, would neatly solve challenges for both institutions. Purdue University president Mitch Daniels, the former governor of Indiana, needs to find a way to insure Purdue against the rise of online learning and its potential to disrupt the brick-and-mortar higher education market. A tie-up with Kaplan is likely his best shot. Kaplan University is facing declining enrollment and increased regulation along with the rest of the for-profit sector. The deal with Purdue represents an opportunity to shed the baggage that comes with for-profit status, stabilize the business, and provide Kaplan with steady margins.

But the deal’s potential won’t be realized overnight. First, the deal must pass a series of obstacles for receiving regulatory approval before it can get off the ground. Once those hurdles are cleared, Purdue and Kaplan will have to partner in unprecedented ways to create an operationally and financially viable university.

Will regulators approve?

We are optimistic that regulators will focus on the potential of the deal to benefit students and quickly approve it, but there could be bumps in the road.

The arrangement between Purdue and Kaplan must first win the blessings of the Department of Education and the Higher Learning Commission (HLC), which is the accreditor for both institutions. The Department of Education and HLC have both taken a tough line on for-profit institutions in the past, but the deal’s potential to help students, as well as the reputation of both Purdue University and its president, should help the deal sail through the regulatory process.

The Department of Education could take the view that Kaplan is interested in the deal because it will allow the institution to convert its assets to nonprofit status—and likely benefit financially from doing so. Given the current administration, that’s less of a risk. But the Department of Education and the HLC could place conditions on the deal, as the Obama administration did last year when for-profit University of Phoenix transitioned from being publicly traded to privately held.

Moving to nonprofit status will help Kaplan avoid regulation targeting for-profits — including the 90-10 and gainful employment rules. Kaplan earned 77 percent of its 2016 revenue from Title IV programs, putting it well in compliance with the 90-10 rule. But it has run up against some issues under gainful employment regulations, with 12 inactive programs falling in the warning zone—as well as four active programs representing $51.1 million of revenue. It wouldn’t be surprising to see the Department of Education approve the deal but continue to apply gainful employment rules to Kaplan for some period of time afterward.

Both institutions are currently accredited, but that’s no guarantee that HLC will rubber-stamp the transaction. HLC has a record of pushing back against deals that blur the lines between for-profit and nonprofit entities. Last year, it blocked Grand Canyon University’s attempt to transition from a for-profit to a nonprofit. It has also resisted partnerships between for-profit and nonprofit entities—such as Ivy Bridge College, the joint venture between Tiffin University and Altius Education. But the partnership between Purdue and Kaplan puts control of the academic program squarely in Purdue’s court. This is a big advantage moving into the HLC’s review process. One big risk is if the HLC puts serious weight on Purdue faculty’s attestations that the deal breached the school’s governance process.

Building a successful partnership

The tie-up between Kaplan and Purdue is more of a conscious coupling than a traditional acquisition; it is most comparable to an OPM (online program manager) arrangement. Under the terms of the deal, Kaplan will transfer its higher education business into a new entity managed by Purdue, and in return, it will receive 12.5 percent of the new entity’s revenues over the next 30 years. Kaplan won’t receive cash up front—unless you count the one dollar that Purdue will fork over initially. Kaplan will also continue to provide services to the new entity, and while those services aren’t precisely spelled out, it’s likely that they are similar to what an OPM would do.

Kaplan’s 12.5 percent fee is far lower than what an OPM would typically charge—but Kaplan has no track record doing OPM work. Kaplan knows how to run an online university, but it doesn’t have a lot of experience as a service provider. Running an online university while giving up control over how it’s managed will be a new, and possibly challenging, arrangement for Kaplan. Purdue, on the other hand, doesn’t have much experience managing huge, complex partnerships. Both Kaplan and Purdue will have to hammer out the nuts and bolts of how their partnership will work day-to-day. Plus, they are under pressure to establish new processes without the benefit of downtime—Kaplan students will convert to New U students as soon as the deal closes, without any break in university operations.

Making that transition successful will be critical in turning the enrollment tide. If students see a breakdown in services or support, then they could easily join the ranks of those who left Kaplan last year, which would compound recruitment challenges. But the brand name of Purdue may well be enough to convince students to take a bet on New U, especially if Purdue can translate its capabilities in teaching and learning to the new entity.

Purdue is taking bold strides to address disruption in higher ed and has been smart about structuring its new online university as an autonomous unit. We are hopeful that it will be able to build a successful new partnership and university, thus setting the tone for other higher education institutions to follow. The Purdue/Kaplan deal could be life changing for students who are looking for ways to complete their degree online, starting with hundreds of thousands of potential students in Indiana and, in the future, millions of Americans.

Alana leads the Institute’s higher education research and works to find solutions for a more affordable system that better serves both students and employers. In this role, Alana analyzes disruptive forces changing the higher education landscape.