At the outset of 2021, the future looked bright for 2U.
The year before had disrupted higher education, and the entire world, with a global pandemic. As colleges scrambled to continue educating students, the online program manager was able to capitalize on a sudden shift to virtual learning the world over.
Over the course of 2020, the company’s revenue grew by more than a third, reaching $774.5 million. And by February 2021 its market cap hit $4 billion, solidifying its place as a leader in the OPM market.
“We understand that as a disruptor the burden of proof is on us to demonstrate the business we built is sustainable,” 2U co-founder and then-CEO Chip Paucek told investors at the time. “We never doubted it and that chapter should be closed for the rest of you as well.”
2U would go on in 2021 to acquire edX, a MOOC platform, with the aim of widely expanding its offerings of alternative credentials and cross-marketing its programs. The fast-growing 2U paid $800 million for the deal.
The year turned out to be a high-water mark, rather than the dawn of a new era.
The company filed for bankruptcy Thursday, just three years after Paucek triumphantly proclaimed the company’s sustainability. The filing underscores that 2U in fact wasn’t sustainable at the time, not at that size — after years of ambitious growth — and not in an ever-changing higher ed landscape.
Growth of an industry
2U launched its first program, a master’s degree in teaching, in 2009 in partnership with University of Southern California’s education school. Between 2009 and 2013, it introduced eight graduate programs. In the three years following its initial public offering in 2014, it started another 15 graduate degree programs.
Its university clients over those years, growing to more than a dozen, included some of the most recognizable names in higher education: Syracuse University, New York University and University of California, Berkeley, to name a few. Today, 2U has more than 40 university clients in its degree program business.
2U helps universities quickly develop and develop programs in the fast-growing online market. It can put up capital to create programs, and it takes on the technology side of things, along with services such as marketing, data analytics and even curriculum design for its partners. In return, 2U historically has taken around a 60% share of program revenue. As it neared the end of the last decade, 2U started expanding more in shorter-term and alternative credential programs.
Over 60,000 students have graduated from 2U-supported graduate degree programs, while another 85,000 have finished its boot camps and 300,000-plus have completed its executive education courses, according to the July 25 Chapter 11 filing by Matt Norden, 2U’s chief legal and financial officer. He also noted a 72% graduation rate for its degree programs in 2023.
Demand increased for 2U’s services during the pandemic, but the widespread shift to online learning turned out not to be as permanent as OPM players might have hoped.
As Norden explained, 2U’s market went through another transformation after the early pandemic era — which began just after the company closed on the massive edX purchase.
For one thing, students began returning to classrooms when vaccines made COVID-19 less deadly and fearsome.
And as the broader world reopened , e-commerce and other digital services contracted by varying degrees.
That led tech companies to shed jobs, Norden noted in the filing. This meant less demand for the tech education credentials that 2U made money on. At the same time, the uptake of artificial intelligence happened more quickly than 2U expected, reducing demand for coding camps.
Reputational hits
Not all of the speed bumps to 2U’s growth were market-based.
In late 2022, a group of former USC students filed a class-action lawsuit against 2U and the university. In their complaint, the students alleged that the OPM and university used doctored rankings to entice students to enroll in the institution’s online education programs. A federal judge dismissed the allegations against 2U earlier this year.
Shortly after, in spring 2023, USC was hit with another lawsuit, this time by former students who had enrolled in the university’s online social work master’s program developed with 2U. They alleged the university billed its online program as “exactly the same” as its in-person program, even though “substantial aspects” of the online version were outsourced to 2U.
Later that year, 2U and USC agreed to wind down their partnership on most of USC’s online programs built with the company’s help. The parties didn’t offer a reason for the split in their announcement. The said only that the decision came after “much thoughtful consideration.” They maintained that their collaboration was “characterized by innovation, commitment, and a shared vision for quality education.”
The company’s practices have come under scrutiny in the media as well, including with a 2022 investigation from The Chronicle of Higher Education. A former Arcadia University professor who worked on a hybrid physicians assistant degree program developed with 2U told the publication that the company “was basically trying to turn our PA program into a cash cow.
“They made it obvious that they didn’t care about the quality of the program,” the professor said.
Other universities have ended their partnerships with 2U, and some others, including University of North Carolina at Chapel Hill, are reportedly considering pulling back.
Along with reputational risks for universities working with 2U, more colleges might be opting to take on the work of developing online coursework themselves as these programs become even more commonplace.
According to Kevin Carey, vice president of education and work at left-leaning think tank New America, institutions are essentially asking themselves, “‘Hey, do we really need these people anymore? Can’t we just do it ourselves?’”
Money problems
For fiscal 2024, the company projects $733 million in revenue — tens of millions of dollars less than what it made four years ago.
The combination of falling revenue and more than $900 million in debt became a massive financial headache for the company.
While 2U has cut costs, launched new programs and ended others in an effort to become profitable, it has still struggled to generate cash under its debt burden. With a long history of operating losses, 2U has racked up an accumulated deficit of almost $1.6 billion.
Facing potential default and liquidity problems, the company issued in its security filings earlier this year “going concern” warnings, accounting language that indicates a company is at risk of becoming insolvent or failing to finance its operations. It had also been negotiating with debt-holders around a potential restructuring to keep it afloat.
Although the company noted in filings prior to bankruptcy that absent a deal with lenders or an injection of capital, it might have to liquidate, it maintained in public statements that that option was not on the table.
Tim Hynes, global head of credit research at Debtwire, said in an interview earlier this year that the company’s debt-holders would likely prefer restructuring over liquidation, for the simple reason that — as a tech company and service provider — 2U doesn’t have that many assets to liquidate.
“It isn’t like they have a factory or some special trade secrets that you could resell,” Hynes said in April.
Of the company’s roughly $1.4 billion in assets, more than $1 billion are intangible. That includes $650 million in what are called goodwill assets — which are based on the premium it paid for past acquisitions, including edX, for things like brand recognition — and another $357.1 million in other assorted intangible assets, according to 2U’s latest quarterly financials.
When it filed for bankruptcy Thursday, 2U had cut a deal with lenders and bondholders representing about 87% of its outstanding debt that would provide about $110 million of new capital and more than halve its debt to $459 million.
The agreement, which needs court approval, would also take the company private again, with bondholders taking shares in the company in return for forgiving debt.
2U says that not only will it continue doing business without interruption to students’ programs through bankruptcy, but also that the Chapter 11 restructuring — which it plans to complete in September — will position it for innovation and growth ahead.
The restructuring plan “should allow the company to move forward in a more productive manner now that it doesn’t have to worry about liquidity constraints and upcoming maturities,” Debtwire’s Hynes said Thursday. “It can focus on driving profitable business operations.”
‘We are concerned’
2U’s restructuring deal is designed to keep the company operating into the future. But questions over 2U and the OPM market linger. Among the largest of those is: Just what exactly would happen were an OPM to fail?
“We don’t really know what would happen, but we certainly are concerned,” New America’s Carey said. “There’s a huge number of students enrolled in these courses. And we have heard very little from any of the colleges that have these partnerships talking about what might happen if one were to fold.”
He added that the U.S. Department of Education has left that question to the colleges to figure out.
In April, a spokesperson for the Education Department told Higher Ed Dive that the agency was “concerned” about the potential impact of an OPM’s financial failure. In the same statement, the spokesperson said the agency “views institutions as responsible for ensuring students are not harmed by any potential failure of an OPM.”
Carey noted that carve-outs in federal regulations allowing revenue sharing deals between universities and companies like 2U gave rise to the OPM market — guidance that the Education Department said in early 2023 that it would review.
The guidance allows colleges to share revenue with companies that provide recruiting help as part of a larger bundle of services, as 2U does. The department said it would issue revised guidance late this year at the earliest.
“But it doesn’t say anything about what happens” if an OPM shuts down, the way many colleges have, Carey said. “And so I think it just underscores the need for the department to act on this now.”
Others also called on the Education Department to tighten oversight of OPMs in the wake of 2U’s bankruptcy.
“This lack of oversight puts students at significant risk — as we’ve seen today — and the Department of Education needs to act immediately to reduce further harm,” Stephanie Hall, senior director for higher education policy at the liberal Center for American Progress, said in a statement Thursday.
Eileen Connor, president and director of the Project on Predatory Student Lending, which is helping to represent students in the class-action suit against USC, issued a similar statement Thursday. The department had a “responsibility to put better oversight policies in place to protect students from predatory arrangements that schools enter into with for-profit companies like 2U,” Connor said.
Asked about the 2U bankruptcy and calls for more OPM oversight, an Education Department spokesperson told Higher Ed Dive in a statement Thursday that the agency has been “closely watching” 2U’s financial situation for the last several months, “with our particular focus on ensuring that students do not see any disruption in their educational programs.”
“We encourage 2U to ensure there will be no negative effects for students, and we hope this process results in greater investments to improve the quality of their services,” the spokesperson added.
