Education Department Launches Review of the University of Phoenix

While the analysis of the nation’s largest student financial aid recipient is standard practice, it comes at a time of increased scrutiny for the for-profit college sector.

Students study with their laptop computers in the Pedagogical Library at the Freie Universitaet university on September 20, 2011 in Berlin, Germany.
National Journal
Janell Ross
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Janell Ross
Aug. 11, 2014, 11:01 a.m.

Last week, the U.S. Edu­ca­tion De­part­ment began a reg­u­larly sched­uled re­view of the Apollo Edu­ca­tion Group, the pub­licly traded com­pany that owns and op­er­ates the Uni­versity of Phoenix. Fed­er­al au­thor­it­ies began ex­amin­ing how Apollo dis­trib­uted fed­er­al stu­dent-aid dol­lars, wheth­er it re­turned funds as­so­ci­ated with stu­dents no longer en­rolled, and how it re­por­ted on-cam­pus crimes dur­ing the 2012-13 and 2013-14 school years.

While the re­view is a stand­ard prac­tice — the agency con­duc­ted more than 300 sim­il­ar re­views last year — it comes at a time of in­creased scru­tiny and reg­u­lat­ory activ­ity dir­ec­ted at the for-profit col­lege sec­tor. The volume of fin­an­cial aid col­lec­ted by Apollo and the role that fin­an­cial-aid funds play in the com­pany’s bal­ance sheet also sig­ni­fic­antly raise the stakes of this re­view.

Pub­lic in­terest in the for-profit in­dustry has grown as more Amer­ic­ans have pur­sued non­tra­di­tion­al paths to a col­lege edu­ca­tion. As en­roll­ment has grown, state and fed­er­al in­vest­ig­at­ors have ex­amined re­cruit­ing and mar­ket­ing prac­tices as well as aca­dem­ic activ­it­ies at a num­ber of for-profit schools. In 2012, a U.S. Sen­ate in­vest­ig­a­tion found wide­spread evid­ence that for-profit schools of­ten ap­pear to pri­or­it­ize busi­ness con­cerns over edu­ca­tion­al qual­ity or stu­dent pro­gress, with most pro­du­cing low gradu­ation rates but double-di­git profit mar­gins for pub­licly traded com­pan­ies.

The cor­por­a­tions be­hind for-profit col­leges to­geth­er reaped 86 per­cent of their rev­en­ue from fed­er­al stu­dent-aid pro­grams, the Sen­ate in­vest­ig­a­tion found, but they have not faced con­gres­sion­al reg­u­la­tion or con­sist­ent over­sight that might pro­tect the in­terests of stu­dents and tax­pay­ers. In fact, dur­ing the 2008-09 school year, half the stu­dents at­tend­ing for-profit col­leges left school without a de­gree, ac­cord­ing to the Sen­ate re­port. Many of these stu­dents were drawn to the schools by mul­ti­mil­lion-dol­lar ad cam­paigns and high-stakes re­cruit­ing prac­tices and then left school with life-al­ter­ing amounts of debt, the Sen­ate re­port found.

The in­dustry has of­ten countered cri­ti­cisms with claims that for-profit col­leges provide edu­ca­tion­al ser­vices to work­ing adults and low-in­come and minor­ity stu­dents — pop­u­la­tions they say tra­di­tion­al non­profit col­leges and uni­versit­ies have long neg­lected or un­der­served. And of­fi­cials at Apollo de­scribe their schools as in­sti­tu­tions that bol­ster the coun­try and its most im­port­ant eco­nom­ic goals.

“A few years ago, the pres­id­ent said he wanted to have a 2020 goal of get­ting ad­di­tion­al people in­to and through col­lege,” Mark Bren­ner, Apollo’s chief of staff, told Na­tion­al Journ­al re­cently. “To do that through the com­munity col­lege sys­tem alone, an ad­di­tion­al $13.1 mil­lion [people] would need to gradu­ate. So we know that the Uni­versity of Phoenix has a role to play in that big goal for the coun­try and for our stu­dents.”

Bren­ner also stressed that the Uni­versity of Phoenix net­work, while an in­dustry lead­er, is not syn­onym­ous with the en­tire for-profit col­lege sec­tor. The Uni­versity of Phoenix has made ef­forts to im­prove the ser­vices provided to stu­dents — changes that Bren­ner said will ul­ti­mately boost gradu­ation and loan-re­pay­ment rates.

Still, Apollo — which op­er­ates for-profit schools un­der a vari­ety of names in the United States, United King­dom, Mex­ico, In­dia, Aus­tralia, and South Africa — and its Uni­versity of Phoenix di­vi­sion have re­mained the sub­ject of par­tic­u­lar pub­lic at­ten­tion. The in­vest­ig­at­ors be­hind the 2012 Sen­ate probe used poin­ted lan­guage to de­scribe Apollo’s op­er­a­tions:

Apollo Group, Inc. has the po­ten­tial to be the in­dustry lead­er in stu­dent suc­cess. In­stead the in­vest­ig­a­tion demon­strates that, at least dur­ing the peri­od ex­amined, the com­pany in­ves­ted re­l­at­ively little in stu­dents and struggled to re­tain As­so­ci­ate de­gree stu­dents. While the com­pany has star­ted to take pos­it­ive steps in the right dir­ec­tion, more re­mains to be done.

The Sen­ate re­port also con­cluded that un­der its former cor­por­ate lead­er­ship, Apollo was a com­pany fix­ated on in­creas­ing profits and share prices.

At the time, Apollo of­fi­cials in­clud­ing Bren­ner re­spon­ded to the Sen­ate in­vest­ig­a­tion by de­scrib­ing the changes the Uni­versity of Phoenix had already made in meth­ods used to re­cruit and re­tain stu­dents. Bren­ner also denied that the com­pany em­ployed “high pres­sure” sales tac­tics, and de­scribed re­cruit­er com­pens­a­tion as “reg­u­lated.”

In 2009, the com­pany did agree to pay a $67.5 mil­lion set­tle­ment to the fed­er­al gov­ern­ment and an­oth­er $11 mil­lion in leg­al fees after former em­ploy­ees filed a suit al­leging that the com­pany tied re­cruit­er pay to the num­ber of stu­dents re­cruited or en­rolled, a vi­ol­a­tion of fed­er­al law. Un­der the terms of the set­tle­ment the com­pany ad­mit­ted no wrong­do­ing. “Apollo Group is com­mit­ted to rig­or­ous reg­u­lat­ory and com­pli­ance sys­tems to serve and pro­tect the aca­dem­ic in­nov­a­tions for which we are known,” Gregory Cap­pelli, then co-chief ex­ec­ut­ive of­ficer of Apollo Group, said in a state­ment is­sued by the com­pany. Cap­pelli, who is now the com­pany’s sole CEO, made more than $25 mil­lion in 2011. 

Apollo had also pre­vi­ously paid a $9.8 mil­lion set­tle­ment after Edu­ca­tion De­part­ment of­fi­cials found evid­ence in 2004 that the com­pany vi­ol­ated fed­er­al rules re­gard­ing the role that stu­dent en­roll­ment can play in re­cruit­er pay. In that case, the com­pany denied any wrong­do­ing as well.

At­tor­neys gen­er­al in Mas­sachu­setts and Flor­ida con­tin­ue to in­vest­ig­ate the com­pany, ac­cord­ing to Apollo’s most re­cent quarterly re­port to the Se­cur­it­ies and Ex­change Com­mis­sion. And in March, the com­pany re­ceived a sub­poena from the Edu­ca­tion De­part­ment’s Of­fice of the In­spect­or Gen­er­al re­lated to a range of activ­it­ies in­clud­ing “mar­ket­ing, re­cruit­ment, en­roll­ment, fin­an­cial aid pro­cessing, fraud pre­ven­tion, stu­dent re­ten­tion, per­son­nel train­ing, at­tend­ance, aca­dem­ic grad­ing and oth­er mat­ters,” ac­cord­ing to the same quarterly re­port.

The Uni­versity of Phoenix faces ad­di­tion­al scru­tiny from its aca­dem­ic ac­cred­it­ing agency, the High­er Learn­ing Com­mis­sion of the North Cent­ral As­so­ci­ation of Col­leges and Schools. In 2013, the or­gan­iz­a­tion reac­cred­ited the col­lege net­work for 10 years but placed it on a two-year no­tice plan due to con­cerns “re­gard­ing gov­ernance, stu­dent as­sess­ment and fac­ulty schol­ar­ship/re­search for doc­tor­al pro­grams,” ac­cord­ing to Apollo’s most re­cent an­nu­al re­port. A school is put on no­tice status when it ap­pears that without changes the in­sti­tu­tion will fall out of com­pli­ance with the ac­cred­it­ing agency’s stand­ards.

Adding to the pres­sure faced by the Uni­versity of Phoenix and the en­tire for-profit col­lege in­dustry is a pro­posed Edu­ca­tion De­part­ment rule that could leave schools that have low levels of alumni em­ploy­ment or in­come levels and high stu­dent de­fault rates un­able to ac­cess the fed­er­al aid pro­gram. Fed­er­al data in­dic­ate that the me­di­an in­come of for-profit col­lege gradu­ates who were work­ing and not in school in 2012 was $54,000, more than the $47,500 earned by gradu­ates of private non­profits and $45,000 for pub­lic non­profit alumni. However, for-profit col­lege gradu­ates typ­ic­ally emerge with far more stu­dent-loan debt than stu­dents who at­tend non­profit schools, ac­cord­ing to a 2012 Pro­ject on Stu­dent Debt ana­lys­is.

Con­tin­ued ac­cess to fed­er­al fin­an­cial-aid dol­lars has already proven crit­ic­al for some of Apollo’s com­pet­it­ors. In late June, Cor­inthi­an Col­leges — the na­tion’s second-largest for-profit edu­ca­tion pro­vider — an­nounced that it would soon enter bank­ruptcy, sell 85 of its cam­puses, and close at least 12 oth­er cam­puses op­er­at­ing in 26 states. Like the Uni­versity of Phoenix, the vast ma­jor­ity of Cor­inthi­an’s rev­en­ue came from tax­pay­er-fin­anced stu­dent fin­an­cial aid. When a series of fed­er­al and state probes in­to Cor­inthi­an led the Edu­ca­tion De­part­ment to with­hold fed­er­al stu­dent-aid funds, the com­pany’s op­er­a­tions be­came un­sus­tain­able, Cor­inthi­an of­fi­cials said.

In re­sponse to con­cerns raised by fed­er­al reg­u­lat­ors and the High­er Learn­ing Com­mis­sion, as well as the com­pany’s edu­ca­tion­al goals, the Uni­versity of Phoenix has hired more full-time fac­ulty, re­shaped the se­quence of courses that stu­dents must com­plete, in­ves­ted in a new on­line learn­ing plat­form, and cre­ated a free, multi-week ori­ent­a­tion peri­od that aims to help stu­dents bet­ter un­der­stand and nav­ig­ate the uni­versity, Bren­ner said.

In April, the Uni­versity of Phoenix also hired Timothy P. Slot­tow, a former ex­ec­ut­ive vice pres­id­ent and chief fin­an­cial of­ficer at the Uni­versity of Michigan, to serve as the school’s pres­id­ent. Apollo’s most re­cent an­nu­al and quarterly re­ports to the SEC de­scribe a com­pany that has cut staff mem­bers, but is mov­ing to align its aca­dem­ic pro­grams with em­ploy­er needs to help en­sure that gradu­ates find work with good pay. The com­pany is also al­ter­ing its stu­dent-body mix by re­cruit­ing more vet­er­ans and those seek­ing bach­el­or’s or gradu­ate de­grees. 

Fin­an­cial aid dol­lars made avail­able to vet­er­ans are not sub­ject to the rule re­strict­ing the por­tion of a com­pany’s rev­en­ue that can come from fed­er­al fin­an­cial aid. Stu­dents seek­ing bach­el­or’s and ad­vanced de­grees are more likely to gradu­ate, ac­cord­ing to Apollo’s an­nu­al re­port.

The en­tire suite of changes are ex­pec­ted to boost stu­dent gradu­ation rates, Bren­ner said. Such a change could be good for the school, its stu­dents, and tax­pay­ers be­cause stu­dents who com­plete their de­grees or cer­ti­fic­ate pro­grams are far less likely than oth­ers to de­fault on stu­dent loans.

Apollo con­tin­ues to gen­er­ate the vast ma­jor­ity of its op­er­at­ing rev­en­ue from the Uni­versity of Phoenix, ac­cord­ing to its 2013 an­nu­al re­port. And a large slice of the Uni­versity of Phoenix’s rev­en­ue — 83 per­cent — comes from fed­er­al fin­an­cial aid. To re­main eli­gible to par­ti­cip­ate in the fed­er­al fin­an­cial-aid pro­grams avail­able to most stu­dents, for-profit col­leges can not de­rive more than 90 per­cent of their rev­en­ue from these pro­grams. 

While the Uni­versity of Phoenix op­er­ates be­low that lim­it, it re­mains the na­tion’s single largest re­cip­i­ent of pub­licly fin­anced fed­er­al stu­dent-aid dol­lars, ac­cord­ing to fed­er­al edu­ca­tion data. In fact, Apollo took in $3.4 bil­lion in fed­er­al stu­dent loans and grants dur­ing the 2012-13 school year, the most re­cent fed­er­al data avail­able. The na­tion’s second-largest re­cip­i­ent, the Edu­ca­tion Man­age­ment Cor­por­a­tion, took in $2 bil­lion dur­ing that same peri­od. Edu­ca­tion Man­age­ment op­er­ates the Art In­sti­tutes and oth­er for-profit col­leges in states across the coun­try.

Today, the Uni­versity of Phoenix’s for-profit col­lege net­work con­tin­ues to be the largest op­er­a­tion of its kind in the coun­try, serving 269,000 stu­dents in Decem­ber 2013 des­pite sev­er­al years of de­clin­ing en­roll­ment. Bren­ner told Na­tion­al Journ­al that the school has topped the list of schools with large stu­dent bod­ies for sev­er­al years. And while the Uni­versity of Phoenix re­ceives sub­stan­tial rev­en­ue via tax­pay­er-fun­ded fin­an­cial aid, non­profit pub­lic col­leges and uni­versit­ies do the same while also de­pend­ing on state gov­ern­ments for an­nu­al fund­ing. Both private and pub­lic non­profit col­leges also typ­ic­ally do not pay prop­erty taxes to state or loc­al gov­ern­ments, Bren­ner said.

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