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
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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