Purdue's Kaplan Purchase: Shoring Up the '21st-Century Land-Grant Mission'

• By Dian Schaffhauser
• 05/01/17

Indiana's Purdue University has continually broken with tradition. The land-grant university, which began as an "industrial college" with an emphasis on science, technology and agriculture, was the first public institution in the country to open its own airport. During the 1960s the university teamed up with Indiana U to merge the two schools' extension programs, forming the Indiana University-Purdue University Indianapolis (IUPUI) campus. Last year its innovative competency-based polytechnic institute received accreditation.

Is it any wonder then that the university is trying its next grand experiment — to take over a for-profit college as an effort to extend its reach among non-traditional students, jumpstart its online profile and transform its role in higher education?

Purdue on Thursday announced an agreement to accept the transfer of 32,000 students, 3,000 employees and additional assets of Kaplan University. Kaplan is a for-profit operation owned by Kaplan Higher Education LLC and Iowa College Acquisition LLC, both subsidiaries of Graham Holdings Company, formerly known as the Washington Post Company.

"To be a 21st-century land-grant school, to meet the obligation, really, the great opportunity, the noble opportunity that we have always embraced here at Purdue, we must be active in online education in a way we are not now," said Purdue President Mitch Daniels in a prepared statement. Currently, Purdue encompasses a main campus in West Lafayette and two regional campuses, Purdue Fort Wayne and Purdue Northwest.

The deal has drawn support from one unique quarter: Arne Duncan, who, as secretary for the U.S. Department of Education, drew the wrath of for-profit schools for his continual efforts to reign them in. "I'm excited by this opportunity for a world-class university to expand its reach and help educate adult learners by acquiring a strong for-profit college," said Duncan in a prepared statement. "This is a first, and if successful, could help create a new model for what it means to be a land-grant institution."

Purdue Playing Catch-up

According to university leaders, the latest deal began five months ago as a stealth operation under the code moniker the "Morrill project," named after the U.S. federal statutes promoted by President Lincoln to create land-grant agricultural colleges throughout the country.

But the groundwork was laid earlier in 2015, when Indiana's Commission for Higher Education adopted a goal of having 60 percent of working-age adults obtain a postsecondary degree or credential by 2020. The "Return and Complete Initiative" called upon public institutions to "increase completion rates dramatically." It also promoted the idea of getting "200,000 of the 737,000 Hoosiers with some college but no degree to come back and finish their degree." Alongside that goal, the state launched a website to help prospective students find a good match for their degree completion efforts and pushed its institutions to ramp up their online and night-and-weekend course offerings.

Purdue had some definite catching up to do, lagging behind other universities among the "Big Ten," coming in 10th for the number of online programs it offered. According to a slideshow for the Kaplan announcement, Purdue's leaders had concluded, "We don't know the full dimension, but online will be a larger phenomenon in the future, and we are not equipped for that future." After multiple feasibility studies, the university realized it wasn't equipped to "build" online capacity itself; therefore, to be a "21st-century land grant," Purdue decided to "acquire the capabilities for online excellence."

Introducing New U

"Purdue New University" (originally called "Morrill U") could expect to award 12,000 degrees each year with an average cost of $34,000, potentially generating $408 million each year. Almost all of those degrees and certificates would go to non-traditional students: working people who would attend school part-time and primarily online. That population would include a sizeable proportion of military veterans, members of minority groups and lower-income students. More than eight students in 10 would have some prior college education. The average age would be 34, compared to Purdue's average age of 22.5. And almost three-quarters (74 percent) would be female, compared to Purdue's 42 percent.

Kaplan appears to have a satisfied set of customers. Since 2008, the university has been surveying final-term students to gauge their experience in school. In 2015-2016, 91 percent reported that they believe what they learned at Kaplan U would help them reach their personal and career goals. In every measure scored as part of an "adult learner inventory," Kaplan's average satisfaction exceeds that of national averages. For example, in the area of technology use, on a scale of 1 to 7 Kaplan's mean satisfaction rate was 6.0, whereas the national mean was about 5.7. In the area of student support services, Kaplan's sat score was 5.7; the national average was 5.4.

Betty Vandenbosch, Kaplan U's current president, will become chancellor of the new university. New U will be governed by a board of trustees appointed by Purdue. Accreditation will exist separate from Purdue, as will the university's faculty and administrative operations.

But first, the agreement faces numerous approvals, including from the Indiana Commission for Higher Education; the U.S. Department of Education; and the Higher Learning Commission, which is the regional accreditor of both universities. The two parties don't expect the deal to be finalized until the last three months of 2017, probably in November. If it's not approved by April 30, 2018, either school could cancel the transfer agreement.

How the Deal is Structured

The assets of Kaplan U, consisting of seven schools and colleges, will be transferred to New U. The university currently delivers 100 diploma, certificate, associate, bachelor, masters and doctoral degree programs and runs 15 campuses and learning centers. The deal doesn't include anything pertaining to Kaplan's test preparation operations or the Kaplan University School of Professional and Continuing Education (KU-PACE), an organization that does professional training and exam prep.

The accounting is a bit tricky. First, there will be no state funding involved. New U will rely on tuition and fundraising to cover its operating expenses. Second, Purdue leadership has warned that during the first several years, expenses and revenue will be about equal, but eventually Purdue expects to turn a "large profit."

For its part, Kaplan isn't leaving the business completely. Purdue has signed a terms of service agreement (TOSA) under which Kaplan will provide what it calls "operations support activities" to New U, according to a form 8-K filed by Graham Holdings. The work is broad, including technology support, help desk functions, human resources support for transferred faculty and employees, admissions support, financial aid administration, marketing and advertising, back office business functions, international student recruiting and "certain test preparation services."

On its face, this arrangement sounds similar to the contracts many institutions sign with third-party companies such as 2U, Helix Education, Academic Partnerships, Pearson Embanet and Wiley Education Services to launch new online degree programs, handling the support and marketing services while the university or college focuses on the academic side. One difference, however, is that Kaplan won't necessarily be making money from the start.

According to the 8-K, Kaplan won't receive any of its costs for delivering those services until New U has covered its operating costs. During New U's first five years, the new institution will be first in line to receive a "priority payment" of $10 million a year beyond costs from its own revenue. If it can't make that payment from the money it generates, Kaplan is required to make up the difference. Also, if New U achieves unspecified "cost savings" in its budgeted operating costs, then the school may be entitled to a payment equal to 20 percent of the savings. After that is added up, if there's still revenue on the table, Kaplan will be paid back for its costs in providing the support functions and will receive a fee equal to 12.5 percent of New U's revenue.

After the sixth year, New U can end the agreement and acquire assets used by Kaplan to deliver its support functions by paying a fee equal to 1.25 times its revenue for the preceding 12 months. At the end of the 30-year deal, New U doesn't have to renew the service agreement. But it will have to make a final payment of six times the fee paid during the previous year.

Either party can cancel the service agreement if New U generates operating losses of $25 million for three consecutive years. If that happens, New U gets to keep its assets from the original transfer.

The Pajamas Test and Other Questions

While the leaders of both universities express optimism regarding the prospect of approval, many of the details still need to be worked out. For example, while the concept was first introduced to the deans at both universities at the end of January, the wider faculty at Purdue was only informed days ago. According to a description of the initial hour-long "heads up" meeting, President Daniels outlined the arrangement to the assembled group and then asked for questions. Not a single hand went up.

Purdue doesn't expect the silence to last. It has set up a special e-mail address, [email protected], and reached out to faculty for input on ideas for enhancing the academic programming of New U, what prospects they see for "new research and engagement opportunities" and suggestions for what the new university should be officially named.

David Sanders, Purdue's Senate chairman, offered a start at his own and others' questions: Will New U faculty become part of Purdue's, even without the same level of credentialing? How will overlap between degrees that have the same composition at both schools be handled? Will credits be transferable between the schools? And will the two institutions share the same academic freedom and free speech policies?

It may be that faculty — and others on campus — aren't really surprised at all with this latest shake-up in their university. In 2014, a year after Daniels joined the campus following his term as the state's governor, he issued an "open letter to the people of Purdue," in which he proposed the "pajamas test" formulation: "Why, in 10 or 15 years, will students still find it wise to pay lots of money to go and live somewhere for four or more years, when a host of competitors are offering to bring them excellent teachers and instruction in the inexpensive comfort of their own homes?"

As he went on to explain, "The doomsday predictions may well be misguided or premature, but history is littered with extinct institutions, businesses, or entire industries that dallied in arrogant denial as the bases of their past success were undermined and washed away."

New U is, apparently, Daniels' latest strategy for shoring up Purdue in a time of institutional upheaval.