Dive Brief:
- The U.S. Department of Education is “concerned” about the impact a potential financial failure of 2U and other online program management companies would have on students, an agency spokesperson told Higher Ed Dive in a statement Thursday.
- The statement was in response to an open letter Tuesday from advocacy groups — the Student Borrower Protection Center, Project on Predatory Lending, and Center for American Progress — calling on the department and Consumer Finance Protection Bureau to protect students from what they described as a “looming collapse” of 2U.
- 2U did not comment on the record about the groups’ letter by press time.
Dive Insight:
The online program management sector has increasingly come under financial pressure, and 2U is no exception. After a meteoric rise over the last decade, the company now faces falling annual revenues, long-building losses and looming debt maturities.
Documents filed with the U.S. Securities and Exchange Commission in February and early March included “going concern” warnings, indicating there is “substantial doubt” about 2U’s ability to keep operating if it can’t refinance its debt or raise capital. The March filing noted specifically that 2U might have to file for bankruptcy or liquidate — among other, less dramatic outcomes — if it can’t cover its debt obligations.
As of Dec. 31, the company’s total debt stood at $904.7 million. With a long history of operating losses, 2U has racked up an accumulated deficit of almost $1.5 billion. The company shrank its losses in 2023, but its loss from operations remained steep, at nearly $226 million. Meanwhile revenue declined by about 1.8% for the year to $946 million.
While it struggles financially and aims for a turnaround, 2U disclosed Thursday plans for cash retention bonuses for its top executives in lieu of their typical bonuses and stock awards, including more than $2.3 million for its CEO and $1.2 million for its CFO.
The student borrower advocacy groups pointed to financial stresses, as well as litigation and negative media stories about 2U’s practices, in its letter to regulators.
On Tuesday, the advocacy groups warned of a “sizable impact” on students if 2U fails financially.
“It is critical that your agencies work together to create a plan to support students financially impacted by 2U’s looming collapse,” they wrote in their letter to regulators.
The advocacy groups recommended regulators gather student enrollment and loan data from online programs run with the help of 2U and begin preparations for student relief, such as loan discharges. They also recommended reaching out to students about their options and eligibility for loan relief, among other actions.
The Education Department spokesperson said the agency “is concerned about the impact that a potential failure of any OPM, including 2U, would have on institutions’ continued program delivery for students.”
The spokesperson added: “The Department encourages all institutions contracting with an OPM they use for program delivery that is facing financial challenges to take steps to ensure minimal disruption for students in the event that OPM is unable to provide the services it promised. The Department views institutions as responsible for ensuring students are not harmed by any potential failure of an OPM.”
Despite the financial travails, 2U executives have expressed optimism. For the most recent quarter, revenue increased 8.3% year over year to $255.7 million, a figure that included $54.6 million from “the mutually negotiated exit of certain degree programs.”
“We need to adopt a shrink-to-grow mindset and take the necessary measures to date, to set ourselves up for success long term,” CEO Paul Lalljie told analysts in February. Lalljie took over as 2U’s top executive after co-founder Chip Paucek stepped down from the position in November.
2U CFO Matt Norden, who is also the company’s chief legal officer, addressed the going concern language in February, telling analysts that the company had a “relatively strong liquidity position.” He also said the company had efforts in the works to free up working capital that would give the company a “strong foundation to operate the business going forward” and help it meet the service and quality expectations of the company’s university clients.
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