A decade ago, USC was looking for a way into online education, which promised a gush of new tuition dollars without the expense of additional dorms and classrooms.
Under then-Provost C.L. Max Nikias, USC signed on with an East Coast digital learning start-up, and the university’s well-regarded social work school soon rolled out an online master’s program.
Enrollment exploded. The student body grew from about 900 in 2010 to 3,500 in 2016, and the social work school became the largest in the world.
That rapid growth, designed to assure a stable future, has instead left the school reeling. As The Times reported in May, USC’s Suzanne Dworak-Peck School of Social Work is facing a budget crisis so severe that nearly half of the staff may lose their jobs.
Though USC has yet to detail the full scope and causes of the fiscal emergency, some things are clear: Hiring teachers and administrators for the online program proved costly. Fees for the company that runs the digital learning platform ate up more than half of the online tuition revenue. Other, less costly programs came on the market. And the push to fill online classes led to the admission of less qualified students, a decision many on the faculty say damaged the learning experience and the school’s reputation.
Efforts are underway to restore admissions standards, but stricter criteria mean fewer students and less tuition money for the school.
The emerging problems at USC have reverberated all the way to Wall Street, where the start-up the university partnered with years ago has grown into a publicly traded company valued at more than $2 billion. Maryland-based corporation 2U Inc. now services universities around the country and abroad, but it relies on USC for about a fifth of its revenue.
Industry analysts have pressed 2U executives repeatedly about the unfolding situation at the social work school, and the company lowered revenue forecasts last fall, citing in part instability at the Los Angeles university.
“We will continue to work with the school to drive the best results possible,” said 2U Chief Executive Chip Paucek in a February earnings call. “We have to be patient here.”
The company said it did not contribute to the social work school’s financial problems, saying in a statement to The Times, “2U has consistently met our financial contribution targets for the school.”
The university, which has contracted with the company through 2030, said the factors that led to the school’s budget crunch were “much broader” than its relationship with 2U.
“Generally, this partner relationship has been positive,” the university said in a statement.
The severity of the social work school’s problems is evident in the steps that are being considered to shore up its fiscal footing. Part-time teaching positions are being largely eliminated and professors required to shoulder significantly heavier course loads. A university committee has recommended laying off up to 45% of the non-teaching staff. A USC spokeswoman said in a statement that “all administrative expenses” are being examined for savings and that the human resources department “is continuing to work through what the staff impact will look like.”
As the social work school struggles, there is growing scrutiny on campus about the relationship with 2U.
2U takes a 60% cut of online tuition from the social work program, and the contract carries onerous penalties if USC breaks the arrangement. People familiar with the agreement told The Times it contains a so-called poison tail that requires the university to continue handing over its revenue share for two years after canceling.
Paucek, the CEO, has described the company’s agreements with universities as essentially “non-cancelable.” In a statement, the company said the provisions, which it termed “teach out” clauses, are justified based on 2U’s upfront investment of up to $10 million in new degree programs. The provisions also ensure students 2U helped recruit and enroll get services they were promised, the company said. Its statement noted that since it was founded in 2008, “the company has not had a client fail to renew a graduate degree program contract.”
Ahead of commencement last month, the school gave faculty and administrators talking points that anticipated some in attendance would have concerns about 2U. If a parent or student raises the issue, the handout said, they should respond that there were no plans to end the partnership “at this time.”
2U, initially known as 2tor, started pitching USC shortly after its founding. It lacked a track record with universities but had a compelling vision. The founders, alumni of the Princeton Review and Hooked on Phonics, said they were committed to removing barriers to education. Its motto is “No back row.”
With 2U, students attend live online classes in which about a dozen students and a professor can see and talk to one another in a setup some compare to the game show “Hollywood Squares.” The experience is designed to be of higher quality than other programs on the market that offer recorded lectures, tutoring by email and, for some, a sense of isolation.
Nikias, who served as president from 2010 until last year, feared virtual learning would diminish undergrads’ distinct experience studying at the University Park campus, so he focused USC’s online efforts instead on graduate students. Many of those were working professionals who would benefit from the flexibility of off-campus programs.
USC’s Rossier School of Education launched a master’s in teaching through 2U in 2009. The social work school followed in 2010.
Marilyn Flynn, former dean of the social work school, told the Huffington Post in April that Nikias made it clear he wanted her and her peers to embrace online degree programs.
“Our merit reviews would reflect our ability to do this,” said Flynn, who left USC last year following a criminal inquiry into a donation she handled from a local politician.
Asked whether Nikias pressured his deans, a university spokeswoman said that although USC’s leaders supported online learning, the decision was left to individual deans.
Many professors and future social workers were pleased with 2U’s execution.
“Everything about it was perfect,” said Shona Shaw, 29, a single mom in Atlanta who worked full time and took classes in the evening while her child slept. The first time she stepped foot on USC’s campus as a student was in May, when she accepted her diploma.
“I had no idea how many students there were until I got to graduation,” Shaw said.
Flynn was so impressed with the technology that in 2015 she recorded a message for Wall Street analysts praising the company as “the gold standard in online education.” She said the partnership had left her with a “positive revenue flow.”
“I’m the best person in the United States to talk about this company. And what you’ve heard from me is something I think you can rely on,” Flynn said.
The company seemed equally smitten. “You can argue that 2U wouldn’t exist without USC,” Paucek, the CEO, told corporate analysts in 2017.
As part of a contract renegotiation, the company donated $2.5 million to the social work school to endow Flynn’s academic chair and made a separate donation to a $6-billion capital campaign spearheaded by Nikias. Paucek’s wife, Gabrielle, enrolled in USC’s online master’s in teaching in 2012 and later that year recorded a promotional video extolling it as “the best program there is.”
A company spokeswoman said Gabrielle Paucek was not compensated for the appearance.
USC has introduced more than half a dozen online degrees through 2U, including physical therapy, public policy, design and school counseling.
Trojan money poured into the company’s coffers. When 2U went public in 2014, about 70% of its revenues were coming from just two USC programs: the master’s degrees in teaching and social work. Tax records show that by last year, USC had paid at least $166 million to 2U. As of last year, more than 20% of company revenue came from the university.
The connection between 2U and USC was so close, Paucek once told an industry conference that the provost, Michael Quick, called him out of the blue and invited company executives to dream up a new graduate degree for the university to offer.
“Now, by the way, that’s a good day,” Paucek told the group. 2U, he said, chose the online master’s degree in nursing that debuted at the social work school in 2016.
Asked about Paucek’s account, the USC spokeswoman did not dispute it but said in a statement, “Ultimately, it is for the deans and the faculty of a particular school to decide what online programs, if any, are offered.”
Meanwhile, 2U was courting other universities and eventually inked deals to offer social work degrees at Simmons College in Boston, Fordham University in New York, the University of Denver and Baylor University in Texas.
2U’s new social work programs and others established at rival universities were significantly cheaper than a master’s of social work from USC, which runs up to $116,000 for the two-year degree, and those less costly competitors cut into the university’s applicant pool.
2U had an aggressive marketing arm that used social media to target prospects and employed a team of digital journalists to produce articles that raised the profile of its degree programs.
Even with these efforts, USC was struggling to attract enough students. The school had long required a 3.0 grade-point average, but over time, the university made more and more exceptions to fill the online classes. In recent years, about 40% of entering students were so-called conditional admits, meaning they lacked the requisite minimum GPA or failed to meet other stated requirements. In U.S. News & World Report’s ranking, USC’s social work school dropped from the top 10 a decade ago to 25th last year.
Faculty noticed many new students had difficulty doing graduate-level work. The school provided extra tutoring and counseling programs, but problems persisted. Faculty grumbled among themselves and, ultimately, to Quick and other administrators.
Flynn stepped down from her post as dean in June 2018. She departed the university entirely last fall after federal prosecutors started looking into her handling of a donation to the social work school from a county supervisor that ended up in the coffers of a nonprofit controlled by the politician’s son. No charges have been filed in the investigation.
After her exit, school officials reviewed financial records. The records and a subsequent outside review showed the school had operated at a loss for at least two years and had become financially dependent on the admission of students who fell below the normal academic criteria, faculty were informed.
The school is tightening admissions standards gradually, so as to avoid a catastrophic drop in enrollment and revenue. Asked about the size of the incoming class this fall, a spokeswoman said it was “too early to report.” She said “generally” the school enrolls about 3,200 students across all programs, which is 300 fewer than the number USC cited three years ago.
In a statement provided last month, Flynn’s lawyer blamed the applicant decline “as a result of rising USC tuition” and said the former dean agreed with her professors that it was necessary to shrink the size of the school “to improve quality and satisfaction with learning outcomes.”