Higher education shakeup looms as Purdue acquires for-profit Kaplan University

The higher education industry is overdue for a shakeout.  For decades, it has pushed up tuition at three times the rate of inflation and increasingly relied on students indenturing their futures with huge debts that cannot be discharged in bankruptcy.  Meanwhile, technological change in the form of online education has flourished as a low-cost alternative, and for-profit universities, free from the archaic practices of traditional higher education (including tenure), have grown luxuriantly under what amounts to a price umbrella maintained by traditional universities.

Able to focus on career preparation and free from the academic fashions that inject political correctness into the curriculum, private higher education became such a threat that the Obama administration cracked down on it.  To be sure, the price umbrella has attracted some dodgy operators, and there have been abuses, where students have borrowed the easy money available under federal student loan programs and acquired education of dubious value.  But there have also been many graduates of reputable programs, such as those of Kaplan and DeVry, who have launched careers.

Yesterday, it was revealed that Purdue University, a Big Ten land grant college with a historic focus on engineering, has acquired for-profit Kaplan University, which itself had been years ago acquired by Graham Holdings, an investment vehicle for the family that had owned the Washington Post.  This is an unprecedented move, combining the efficiency, online expertise, and career focus of a private-sector school with the prestige, academic and financial resources, and depth of a highly esteemed public university.

In revealing the acquisition, Purdue's president, former Indiana Governor Mitch Daniels, revealed a strategy at work:

Purdue President Mitch Daniels said the school wanted to stay true to its land grant mission of educating as many people as possible, but he recognized it couldn't build an online presence alone.

"We took a long build-or-buy analysis and came to the honest recognition that we would be very unlikely to succeed building it ourselves," said Mr. Daniels.

The venture highlights the shifting higher-education market as public funding declines, tuitions rise and college students grow older, busier and more indebted. These broad changes come as attaining some sort of post-secondary education grows increasingly critical to earn a middle-class salary. ...

The new university, as yet unnamed, will be a nonprofit, public-benefit corporation, according to a securities filing by Graham Holdings. It will have its own board of trustees, but members will be appointed by Purdue, and will maintain a separate accreditation from the main Purdue system.

If approved, Purdue will pay Kaplan $1 upfront for the transfer of its institutional assets to Purdue, and then Kaplan can earn up to 12.5% of the new school's revenue if certain conditions are met.

Daniels has structured a deal that is favorable for Purdue, essentially acquiring formidable expertise on the come, for a one-eighth or less share of revenue coming in.  Unless there are unknown "toxic assets" (such as liabilities in class action lawsuits), the downside is limited.  But it sounds as if the contract has been rather carefully drawn to protect Purdue:

Under a 30-year contract, Kaplan will continue to provide the new university with technical support, human resources for transferred employees, admissions and financial-aid assistance, marketing and other back-office functions. Purdue can opt out after six years.

Kaplan's service business has a strong incentive to get the new university in the black quickly.

Deal terms dictate that Kaplan won't get any costs reimbursed until the new university has covered all its operating expenses. During each of the new school's first five years, the new school will also be able to get a $10 million priority payment beyond costs, paid out of its revenue. If revenue isn't sufficient for that payout, Kaplan has to advance the money.

The deal also includes bonus payments to the university if it achieves certain cost-savings goals.

Only after all those payments are made will Kaplan receive cost reimbursements and a fee of 12.5% of the university's revenue.

Either side can cancel the deal if the new school generates $25 million in cash operating losses for three consecutive years or aggregate cash operating losses top $75 million at any point in the initial 30-year term.

As president of Purdue, Mitch Daniels has already shown himself to be a serious reformer, having frozen tuition and instituted drastic cost-cutting.  He has shown himself able to challenge the accepted practices that encrusted academia in excess costs and permitted irrelevance and political correctness to flourish, while passing the costs on the student-debtors.

With the Kaplan organization in his portfolio, President Daniels now has formidable bargaining leverage with the Purdue faculty and administration, a factor that can enable further innovation.

There is absolutely no reason, beyond the self-interest of academics, for young adults to be burdened with heavy debt in order to acquire career training.  Mitch Daniels has shown that he is taking concrete steps to undermine the monopoly of prestige and expertise that has been exploited by the professoriate and its administrative allies.

Keep your eyes on Indiana.  This is only the start of something that could finally cause the collapse of the higher education bubble.  "Herbert Stein's Law" holds, "If something cannot go on forever, it will stop."  The endless inflation of tuition clearly is covered by Stein's Law, but it takes the actions of visionaries to see the alternatives and make them happen.

The higher education industry is overdue for a shakeout.  For decades, it has pushed up tuition at three times the rate of inflation and increasingly relied on students indenturing their futures with huge debts that cannot be discharged in bankruptcy.  Meanwhile, technological change in the form of online education has flourished as a low-cost alternative, and for-profit universities, free from the archaic practices of traditional higher education (including tenure), have grown luxuriantly under what amounts to a price umbrella maintained by traditional universities.

Able to focus on career preparation and free from the academic fashions that inject political correctness into the curriculum, private higher education became such a threat that the Obama administration cracked down on it.  To be sure, the price umbrella has attracted some dodgy operators, and there have been abuses, where students have borrowed the easy money available under federal student loan programs and acquired education of dubious value.  But there have also been many graduates of reputable programs, such as those of Kaplan and DeVry, who have launched careers.

Yesterday, it was revealed that Purdue University, a Big Ten land grant college with a historic focus on engineering, has acquired for-profit Kaplan University, which itself had been years ago acquired by Graham Holdings, an investment vehicle for the family that had owned the Washington Post.  This is an unprecedented move, combining the efficiency, online expertise, and career focus of a private-sector school with the prestige, academic and financial resources, and depth of a highly esteemed public university.

In revealing the acquisition, Purdue's president, former Indiana Governor Mitch Daniels, revealed a strategy at work:

Purdue President Mitch Daniels said the school wanted to stay true to its land grant mission of educating as many people as possible, but he recognized it couldn't build an online presence alone.

"We took a long build-or-buy analysis and came to the honest recognition that we would be very unlikely to succeed building it ourselves," said Mr. Daniels.

The venture highlights the shifting higher-education market as public funding declines, tuitions rise and college students grow older, busier and more indebted. These broad changes come as attaining some sort of post-secondary education grows increasingly critical to earn a middle-class salary. ...

The new university, as yet unnamed, will be a nonprofit, public-benefit corporation, according to a securities filing by Graham Holdings. It will have its own board of trustees, but members will be appointed by Purdue, and will maintain a separate accreditation from the main Purdue system.

If approved, Purdue will pay Kaplan $1 upfront for the transfer of its institutional assets to Purdue, and then Kaplan can earn up to 12.5% of the new school's revenue if certain conditions are met.

Daniels has structured a deal that is favorable for Purdue, essentially acquiring formidable expertise on the come, for a one-eighth or less share of revenue coming in.  Unless there are unknown "toxic assets" (such as liabilities in class action lawsuits), the downside is limited.  But it sounds as if the contract has been rather carefully drawn to protect Purdue:

Under a 30-year contract, Kaplan will continue to provide the new university with technical support, human resources for transferred employees, admissions and financial-aid assistance, marketing and other back-office functions. Purdue can opt out after six years.

Kaplan's service business has a strong incentive to get the new university in the black quickly.

Deal terms dictate that Kaplan won't get any costs reimbursed until the new university has covered all its operating expenses. During each of the new school's first five years, the new school will also be able to get a $10 million priority payment beyond costs, paid out of its revenue. If revenue isn't sufficient for that payout, Kaplan has to advance the money.

The deal also includes bonus payments to the university if it achieves certain cost-savings goals.

Only after all those payments are made will Kaplan receive cost reimbursements and a fee of 12.5% of the university's revenue.

Either side can cancel the deal if the new school generates $25 million in cash operating losses for three consecutive years or aggregate cash operating losses top $75 million at any point in the initial 30-year term.

As president of Purdue, Mitch Daniels has already shown himself to be a serious reformer, having frozen tuition and instituted drastic cost-cutting.  He has shown himself able to challenge the accepted practices that encrusted academia in excess costs and permitted irrelevance and political correctness to flourish, while passing the costs on the student-debtors.

With the Kaplan organization in his portfolio, President Daniels now has formidable bargaining leverage with the Purdue faculty and administration, a factor that can enable further innovation.

There is absolutely no reason, beyond the self-interest of academics, for young adults to be burdened with heavy debt in order to acquire career training.  Mitch Daniels has shown that he is taking concrete steps to undermine the monopoly of prestige and expertise that has been exploited by the professoriate and its administrative allies.

Keep your eyes on Indiana.  This is only the start of something that could finally cause the collapse of the higher education bubble.  "Herbert Stein's Law" holds, "If something cannot go on forever, it will stop."  The endless inflation of tuition clearly is covered by Stein's Law, but it takes the actions of visionaries to see the alternatives and make them happen.

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