Responsive Document - CREW: Department of Education: Regarding For-Profit Education: 8/16/2011 11-00026-F (Ginns Redactions2) (PART 1)

(b)(5)
Georgia Yuan
Deputy General Counsel
Postsecondaty and Regulatory SeiVice
LBJ 6E341
202- 401-6399
From: Yuan Georgia
To: Rose, Charlie
CC:
Date: 4/30/2010 11:27:18 AM
Subject: About the meeting
From: Finley Steve
To: Yum Georgia
Kvaal James
Bergeron, David
CC: Kolotos John
Jenkins Harold
Date: 7/21/2010 1A1:12PM
Subject: analyst projections on the unseen GE proposal -Deutsche Bank
(b)(5)
North America United States
Industrials Business Services & Educat ion
19 July 2010
DB Education Services
Gainful Employment Update
Paul Ginocchio, CFA
Research Analyst
(+1 ) 415617-4207
paul.ginocchio@db.com
Adrienne Colby
Associate Analyst
() 212 25().0948
adrienne.colby@db.com
At 12% over 10 years, Gainful Employment is less onerous
A Washington polit ical analyst reported today that Gainful Employment (GEl could
now potentially be a debt repayment met ric of 12% of income over 1 0 years, vs
t he previous 8%. At 12%, using our GE model, we calculate no CY1 OE EPS impact
for APOL and DV, a 3% impact for ESI, and "only" a 26% hit to COCO. We also
updated our original EPS impact, assuming 8% over 10 years, correcting an
inconsistency in our model and updating f or new info - t his significantly reduced
t he EPS hit f or DV and ESI. Our top pick in t he sector remains APOL.
We also updated our original Gainful Employment 8% calculations
In our July 2nd not e, we showed a very significant 80% negative impact to EPS for
ESI and DV f rom a Gainful Employment with debt repayment at 8% of income
over 1 0 years. We showed t ransfer credits in our model, but did not actually
include t hem in our calculations. Correct ing t his error, plus updat ing assumptions
for other new informat ion, reduced t he negative EPS impact under the 8% over 1 0
years scenario. For Apollo, t he CY1 OE EPS impact we originally calculated was -
14%, our updated EPS impact is -10%. For DV, the impact goes f rom -79% to-
41 %, for ESI from -80% to -66%, and f or COCO f rom -1 20% t o -109%. For a copy
of our fully-dynamic Gainful Employment EPS impact model, please email us.
No update yet on the next Senate hearing on For Profits
At t he last Senate heari ng on t he For Profit industry on June 24th, Senator Harkin
stated t here would be another one in July and at least one more after that. We had
heard f rom contacts t hat August 4th was t he next li kely dat e, with another one in
September. Due to t he required 2-week not ice period and t he August recess
which starts on the gth, t he hearing has t o be announced by Friday or the next one
will not occur until September. An announcement is now likely in t he next four
days.
Apollo remains our favorite idea in the sector
We find APOL attract ive as 1) it is addressing most of its issues already t hrough
t he University Orientation program, which weeds out uncommitted students
before t hey take on student debt, 2) our updated Gainful Employment calculations
(at 12% over 10 years) suggest no impact on revenues and EPS, and 3) Apol lo's 3-
year draft CDR is rising but manageable. We value APOL using relative valuation
scatter plots of CY1 OE PEs versus peers. We support our relative valuation work
with a DCF analysis. Our DCF calculations include explicit 1 0-yr forecasts. In our
terminal value we use a 3.5% long-term growth rate. Our WACC uses a beta of
1 .0, a 4 o/o risk free rate, and an elevated 8% risk premium. Key risks include:
negat ive regulatory developments that are not already priced in, higher 2009 CDRs
t han expected, a bigger negative growth impact from t he orientation program or
bachelor's degree focus, or a stronger t han expected recovery in job growth.
Deutsche Bank Securities Inc.
Deutsche Bani< IZl
Industry Update
Apollo Group (APOLOQ),US045.56 Buy
2009A 2010E 201 1E
EPS (USD) 3.79 5.35 5.53
P/ E !xl 18_0 8.5 8.2
EV/EBITDA (x) B-1 3.9 3.5
American Public Ed. Inc (APEI.OQ),U$042.67 Hold
2009A 2010E 2011E
EPS (USD) 1.27 1.74 2.50
P/ E !xl 28.6 24.5 17.1
EV/EBITDA (x) 13.5 11.6 7.8
Corinthi an Colleges Inc (COCO.OQ),US010.40 Buy
2009A 2010E 2011E
EPS (USD) 0.82 1.63 2 04
P/E !xl 19.4 64 5.1
EV/EBITDA (x) 7.0 3.0 1.9
OeVry (OV.N),U$052.85 Hold
2009A 2010E 201 1E
EPS(USD) 2.30 3.78 5.12
P/ E !xl 22.2 14.0 10.3
EV/EBITDA (x) 12.2 74 4.9
ITT Education Services (ESI.N),U$086.53 Buy
2009A 2010E 2011E
EPS(USD) 7.98 11.04 11.71
P/ E !xl 12.9 7.8 7.4
EV/EBITDA (x) 7.3 4.2 3.8
All prices are t hose current at t he end of t he previous t rading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware t hat the f irm
may have a confl ict of interest that could affect the object ivity of t his report. Investors should consider t his report as only a single
factor in making t heir invest ment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
MICA(P) 007/05/2010
19 July 2010 Business Services & Education DB Education Services
Deutsche Bank l/l
Gainful employment calculations at 12% of income over 10 years
We have updated our analysis of the estimated effects of the Department of Education's
(DoE) Gainful Employment (GE) proposal on revenues and EPS for Apoll o, Corinthian, DeVry
and ITI at a 12% income repayment threshold. There were reports out today from a
Washington political analyst suggesting gainful employment's metrics on debt repayment
could be 12% of income over 10 years, versus the previ ous 8% over 10 years. Due to this
news, we felt it would be helpful to run this potential new scenario through our Gainful
Employment EPS impact model (please see our assumptions in the next section which are
important to understanding our EPS impact).
We bel ieve that under this potent ial new scenario, that Gainful Employment is less onerous.
The EPS impact to Apoll o and DeVry, we believe, could be zero, at ITI it is very minor, and at
COCO the impact is vastly reduced - from wiping out earnings to "only" a 26% EPS impact.
Figure 1: Summary of impact of Gainful Employment under various scenario's
0% 0% -3% -1 0% -4% -14%
-3% -26% -14% -1 09% -16% -120%
0% 0% -1 0% -41% -19% -79%
-1% -3% -29% -66% -35% -80%
Soorco DeutSChe 8MI:. com(Nny nfortNt>:>n. Oepr of Educ.,IOn. 8LS
Updated debt repayment calculations at 8% over 10 years versus Original scenario
We have updated our EPS impact calculations for 8% over 10 years versus what we
published originally on 2 July 201 0. Even though we showed transfer credits in our
worksheet, our original gainful employment calculations f or ITI and DeVry did not include
these transfer credits. This was a significant oversight on our part and this change alone took
the EPS impact for DeVry from -79% to about -40%, while for ESI the EPS impact moved
from -80% to -50%. In addition t o now correctly incl uding transfer credits, we have made
some other adjustments to our assumptions for all the companies which we outline below.
These changes take us from the "original" 8% calcs to the "updated" 8% calcs in Figure 1
above.
Apollo Group: We reduced APOL's online BA enrollment exposure from 14% to 4%
as on APOL's last earnings call they stated most of their on-ground students were
BA's and most of their online students were Associates'. We also increased our
transfer credit assumptions for the online BA program due to its higher cost versus
on-campus. We assume students who chose this higher cost program would not
need many credits to graduate. Apollo did disclose on its website that its average
debt per bachelor graduate in 2007-2008 was $25,200, while for associates was
$14,200. We are still 11 o/o and 12% above these averages in our model, which
should generally account for the 2-years of tuition increases that have occurred.
DeVry: We slightly decreased DeVry's transfer credit assumptions from 1 year in the
BA program to 0.75, to be conseNative. We raised the average BA salary slightly to
be "above $50,000", which is what we believe DeVry BA's average. We also raised
the Associate salary to $33,288, which is the low end of the starting salaries
disclosed in DeVry's 10K.
ITI Technical Institute: We slightly decreased ITI Tech's t ransfer credit assumptions
from 1.25 years in the BA program to 0.75, t o be conseNative. Due to their slightly
Page 2 Deutsche Bank Securities Inc.
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lower High School student exposure, ITI's transfer credits may be slightly higher
than DV's, but we assume the same to reduce complexity. We lowered the cash
pay assumption from 10% of tuition to 5% as there is commentary in the 1 OK that
suggests this level; something we overlooked in the first go around. Finally, we
slightly lowered salaries as the $32,800 average salary in 2008, disclosed in the
2009 1 OK, is likely the product of a 80/20 mix of associates/bachelor's, not the 85/15
that we originally assumed.
Corinthian Colleges: We increased our cash pay assumption from 2% to 5%, as we
assume COCO's cash pay is similar to ESI's, and we now have a hard data point for
ESI. Otherwise, we made no other meaningful changes to our COCO gainful
employment calculations.
Please note that the Dept of Education has yet to release its Gainful Employment
proposal. In the last version of the proposal in January, the Dept proposed requi ri ng
students of For-Profit Title IV eligible programs to be able to replay their total
student debt with less than 8% of a graduates' expected annual income and be
repayable over a 10 year period. With the publi cation of its Program Integrity NPRM
in mid-June, the Dept indicated its plans to release GE in a second NPRM later this
summer (we believe late July to Mid-August ).
Major assumptions in our Gainful Employment calculations
We make five key assumptions in our Gainful Employment EPS impact calculations:
1) The number of credits the average student transfers in with from another institution,
2) We do not assume that students have any debt associated with these t ransfer
credits, which is not a correct assumption but one we have absolutely no data on t o
help guide us,
3) We assume a percentage of cash tuition contribution per student,
4) We assume starting graduate salaries for APOL, DV & ESI based on disclosed data
by the companies and their peers (we use Standard Occupational Code-Bureau of
Labor Statistics data, which may no longer be valid, for COCO),
5) We are assuming no offsetting cost cut s or potential revenues, from increased
tuition at certain programs or larger class sizes. In light of this final assumption, our
calculations may somewhat reflect a worst case scenario.
We remind investors that the DoE's GE draft proposed evaluating Title IV eligibil ity on an
individual program by program basis, not on an institution-wide basis. Due to the lack of
granular program dat a available, our GE estimates above are constrained to high level,
school-wide calculations. which could lead to significant variation from the actual program by
program impact.
Finally, we note that although our analysis assumes that schools would cut tuition costs in
response to a GE proposal, schools may decide to eliminate specific programs, rather than
lower tuition. We believe this is largely due to a school's inability to control or limit the
amount of debt a student qualifies for and may chose to take on. In Apollo's FY 3010 100
filing, the company makes the following comments in regards to Gainful Employment: "If this
regulation is adopted in a form similar to the U.S. Department of Education's proposal in the
negotiated rulemaking process, it could render many of our programs, and many programs
offered by other proprietary educational institutions. ineligible for Title IV funding ... If a
Page 3
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Page4
particular program ceased to be eligi ble for Title IV funding, in most cases it would not be
practical to continue offering that course under our current business model."
We have included snapshots of our Gainful Employment analysis for Apollo, Cori nthian,
DeVry and ITI in Appendix 1, at the end of this note.
Deutsche Bank l/l
Appendix 1
Figure 2: Gainful Employment Calculations -Apollo Group
n9'Pot-8i111ai-tuitfon-cuts __________ - ---------- _________ .A.f'o c -------APo
Tuition & Fees
source
Program
o/o of Total Enrollment
Avg. Pell Grant '08-'09 (DoE)
Percent of Students getting Pell
Assumed years of credits t ransferred
Total Tuit ion & Fees
Cash/out of pocket payments
Pell Grants
Avg. Debt f rom School
Monthly payments over 10 years at 6.8% interest rate
DB ests.
DoE
DoE
DB ests.
calc
7%
calc
sum
mort calc
$ 67,000
online
website
BA
4%
$ 2,695
55%
2.00
$ 33,500
2,345
2,960
28, 195
$ 324
$ 54,400 $ 22,200
avg. ground online
website website
BA Assoc
38% 40%
$ 2,695 $ 2,695
55% 55%
1.50 0.20
$ 34,000 $ 19,980
2,380 1,399
3,700 2,664
27,920 15,917
$ 321 $ 183
Implied Requiroo Salary to meet monthly Qa e
....
Assumed starting salary
Total monthl y student debt payments
Max Debt Load
Cash/out of pocket payments
add Avg. Pell Grants
Total Tuit ion & Fees
Implied Price Cut@ 8o/o.of salary over 10yrs
Step 2 - Revenue Reduction
Estimate of impact of current Gainful Employment
PhD & Master's
Online Bachelor's degrees*
On campus Bachelor's degrees*
Online associates "
On campus associates
Total revenue impact
DB est.
Mort. Calc.
o/o of Revs
19%
4%
38%
39%
0%
100%
$ 50,000 $ 50,000
$ 500 $ 500
43,448 43,448
2,345 2,380
2,960 3,700
$ 48,753 $ 49,528
46% 46%
Price Cut Rev impact
0% 0.0%
0.0% 0.0%
0.0% 0.0%
0.0% 0.0%
0% 0.0%
0.0%
Step 3 - Impact to EPS and PE EPS PE
Current Calendar 201 OE DB EPS
EPS impact from revenue decrease with no cost offset
Est imated impact f rom Gainful Employment
NOt<> PriCes as ol July 19" r PM E1
I'JP-cut sc t/>31 star11trg b#l:hell>t'ss.l.,yls$501:
r JN<> f)tif:eCVI tf .lf
Soorco Com,oany dJt.) 06utsche &tnt estimates
$ 5.66 8.6x
$ 5.66 8.6x
$ 25,000
$ 250
21,724
1,399
2,664
$ 25,787
29%
Page 5
19 July 2010 Business Services & Educati on DB Educati on Services
Deutsche Bank l/l
..
Step 1 - calculation Source/Calc DV DV
Exposure to HS Grads Co. comments 30% 30%
Tuition & Fees $ 61,700 $ 35,038
source 10-K 10-K
Program BA Assoc.
%of Total Enrollment 52% 15%
Avg. Pell Grant '08-'09 (DoE) DoE $ 2,572 $ 2,572
Percent of Students getting Pell DoE 77% 77%
Assumed years of credits transferred DB est. 0.75 0.25
Total Tuition & Fees calc $ 50,131 $ 30,658
Cash/out of pocket payments 10% 5,013 3,066
Pell Grants calc 6,420 3,457
Avg. Debt from School sum 38,698 24,135
Average Starting Salary est, See Calc A $ 50,071 $ 33,288
Monthly payment at 8% of salary
I
12% $ 501 $ 333
Max Debt Load, over 10 years, 6.8% int.rate mort calc $ 43,510 $ 28,926
Cash/out of pocket payments from above 5,013 3,066
add Avg. Pell Grants from above 6,420 3,457
Total Tuition & Fees $ 54,943 $ 35,449
Implied Price Cut@ 8% of salary over 1 Oyrs 10% 16%
Step 2 - Revenue Reduction
Estimate of impact of current Gainful Employment %of Revs Price Cut Rev impact
Ross Medical 12% 0% 0.0%
Keller Graduate School 14% 0% 0.0%
Bachelor's degrees* 40% 0% 0.0%
Associate's degrees 12% 0% 0.0%
US Healthcare & Chamberlain 15% 0% 0.0%
Becker CPA/CFA & Other (Fanor, Advanced Academics HS) 7% 0% 0.0%
Total revenue impact 100% 0.0%
Step 3 - Impact to EPS and PE EPS PE
Estimated impact from Gainful Employment
Note Pnces as of July rg .., J PM ET
1' /P- CUI .SSUmll'q SWIIT'q l>aCheiOr 's .. lary I$ $5()1(
1" /Pnce cur assum.,gnanJ119.scNres salary 1$ $271<
Source Company datil ono Oe<ti$CI>o 8ilnk entnliii9S
Page 6
$
$
4.48
4.48
0%
11 .9x
11 .9x
0%
Deutsche Bank l/l
Step 1 - calculatton Source/Calc ESI ESI
Exposure to HS Grads Co. comments 20-25% 20-25%
Tuition & Fees $ 69,600 $ 34,800
source 10-K 10-K
Program BA Assoc.
% ofT otal Enrollment Company data 15% 85%
Avg. Pell Grant '08-' 09 (DoE) DoE 2.550 2.550
Percent of Students getting Pell DoE 80% 80%
Assumed years of credtts transferred DB ests. 0.75 0.25
Total Tuition & Fees calc $ 56,550 $ 30,450
Cash/out of pocket payments 5% 2,828 1,523
Pell Grants calc 6,630 3.570
Avg. Debt from School (D) sum 47,093 25.358
Average Starting Salary est. See Calc A $ 50.000 $ 29,000
Implied monthly payments to cover debt (D) (8%. 1 Oyrs. 6'8%) $ 542
Implied starting salary by debt (D) $ 54.194
Monthly payment at 8% of salary 12% $ 500 $ 290
Max Debt load. over 10 years. 6.8% int.rate mort calc $ 43.448 $ 47.093 $ 25.200
Cash/out of pocket payments from above 2.828 2.828 1.523
add Avg. Pell Grants from above 6,630 6,630 3,570
Total Tuition & Fees $ 52,905 $ 56,550 $ 30,292
Implied Pnce Cut@ 8% oi salary over 10yrs -6% -1 '};,
Step 2 - Revenue Reductton
Bachelors
Associates
%of Revs
15%
85%
100%
Price Cut Rev impact
-6% -1.0%
-1% -0.4%
-1.4%
Step 3- Impact to EPS and PE EPS PE
Estimated impact f rom Gainful Employment
Nolo Prices as of July 19'), 1 PM ET
Source COmpany data aOO Deutsch6 fUnk esflmates
$
$
11.04
(0.36)
10.68
-3%
8.0x
8.3x
3%
$ 292
$ 29.181
$ 25.358
1.523
3,570
$ 30,450
Page 7
Deutsche Bank l/l
Figure 5: Gainful Employment Calculations- Corinthian Colleges
l Source/Calc COCO COCO CCICO COCO COCO COCO
Exposure to HS Grads l 11 Co oomments 5%to tO%
TUitiOn & Fees $ 15.409 $31,000 $ 26,450 $ 26.450 $ 26.450 $ 19.026
source College Nav Assoc. College Nav College Nav College Nav College Nav
Program Med Assist Biz& HC AutoMech Dresel Auto Body Eleeutcian
9'o of Total Enrollment -4%16% revs! <I% II% revs! <1% 11% revs! <1%ll%revsl
Avg Pel! Grant 'OS. '09 (DoEJ
Percent of Students gettrng Pel!
Total Turuon & Fees
Cash/out or pod:et payments
Pel! Grants
Avg Debt from School
Average Startrng Salary
sou roe
lmphed monthly payments to cover debt in row IS IS%. !Oyrs. 6.8%1
lmphed startrng salary by debtrn row IS

Max Debt Load. over 10 years. 6S% rnr rate
Cash/out of pod:et payments
add Avg Pel! Grants
Total Turtron & Fees
Certrficate rn Healthcare
Assoaate's tn Bustness
Assoctate's tn Cnmmal Justtoe
Auto mechanrc
Dresel mechanre+
Auto body
Trades
Current Calendar 201 OE 08 EPS
EPS rmpaet from revenue deCiease wuh no cost offset
Esbmated rmpact from Garnful Employment
Nore Prie; as of July IS" I PM ET
DoE
DB est
calc
5%
calc
sum
SOC codes
I
12%
mort calc
!rom abOve
!rom abOve
%of Revs
$
$
56%
13%
16%
1096
2%
2%
1%
100%
171
(045l
126
269'o
$ 2.407 $2.407
SO% SO%
$ 15,409 $31.000
770 t,550
2.166 4,333
t2.472 25.117
$ 24.060 1 $ 2.200 1
BLS
$
Price Cut
0%
-13\l'o
13%
2%
20%
II%
0%
S.lx
na
DB est
242
$ 21.029
1.550
4.333
26.911
Rev impact
0.0%
-17%
21%
-0.2%
04%
02%
00%
-3.4%
$ 2,407 $
SO%
$ 26.450 $
1,323
2.166
22.96t
$ 25.aa:J $
BLS
$ 289
$ 28:005
$ Zf:9 !'
$ 25,117 $ 22.489 $
1.550 t,323
4,333 2166
31,000 25.977
POC-e cut assummg stJrting salary for In busiflfiSS and Comindl Justice is $24k. $26K tor Auto Mechanic. $33/K for Diesel Mechanic and $30K for Auto Body.
SWu:e Cc"'Pinr ct.>t mi OeU!s.;he S.nkest'""''"'
Page 8
2.407 $ 2.407 $ 2,407
SO% SO% SO%
26,450 $ 26.450 $ 19.026
1.323 t,323 95t
2,t66 2.166 2.t66
22.961 22.961 15.900
32.660 $ 29.620 $ 35.900
BLS BLS BLS
28,38) $ 25,739 $ 31,274
1,323 t.323 951
2166 2,166 2,t66
31,669 29.227 34,391
Deutsche Bank l/l
Appendix 2
Important Disclosures
Additional information available upon request
Disclosure checklist
Company Ticker Recent price* Disclosure
Apollo Group APOL.OQ 45.56 (USD) 16 Jul 1 0 2
* Prices are sourced from local exchanges via Reuters. Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.
Important Disclosures Required by U.S. Regulators
Disclosures marked with an asterisk may also be requi red by at least one jurisdiction in addition to t he United States. See
"Important Disclosures Required by Non-US Regulators" and Explanatory Notes.
2. Deutsche Bank and/or its affiliate(s) makes a market in securities issued by t his company.
Important Disclosures Required by Non-U.S. Regulators
Please also refer to disclosures in the " Important Disclosures Required by US Regulators" and the Explanatory Notes.
2. Deutsche Bank and/or its affiliate(s) makes a market in securities issued by t his company.
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this
research, please see the most recently published company report or visit our global disclosure look-up page on our
website at http:Uqm .db .com/qer/disclosure/DisclosureOirectory.eqsr.
Analyst Certification
The views expressed in this report accurately reflect t he personal views of the undersigned lead analyst about t he subject
issuers and the securities of t hose issuers. In addit ion, t he undersigned lead analyst has not and will not receive any
compensat ion for providi ng a specific recommendat ion or view in this report. Paul Ginocchio
Deutsche Bank Securities Inc. Page 9
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Historical recommendations and target price: Apollo Group (APOL.OQ)
(as of 7/16/2010)
'00.00
90.00
80.00
70.00
Q)
0
~ 60.00
0...
>-
50.00 ....
~
::J
40.00 0
Q)
U)
30.00
20.00
'0.00
Previous Recommendations
Strong Buy
Buy
Market Perform
Underperform
Not Rated
Suspended Ratmg
Current Recommendations
Buy
Hold
Sell
Not Rated
Suspended Rating
New Recommendation Structure
as of September 9, 2002
0.00 +----.----,----,----,----.----.----.---.----.----.----.---_J
Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 00 Apr 09 Jul 09 Oct 00 Jan '0 Apr '0
Date
1. 4/20/2009: Buy, Target Price Change US080.00 2. 7/1/2010: Buy, Target Price Change US075.00
Equ1ty rat1ng key Equ1ty ratmg d1spers1on and bank1ng relat1onsh1ps
Buy: Based on a current 12- month view of total share-
holder return (TSR = percentage change in share price
f rom current price to projected target price plus pro-
jected dividend yield), we recommend t hat investors
buy the stock.
Sell: Based on a current 12-month view of total share-
holder return, we recommend that investors sell the
stock
Hold: We take a neutral view on the stock 12-months
out and, based on this time horizon, do not recommend
either a Buy or Sell.
Notes:
1 . Newly issued research recommendations and target
prices always supersede previously published research.
2. Ratings definitions prior to 27 January, 2007 were:
Buy: Expected total return (including dividends) of
10% or more over a 12-month period
Hold: Expected total return (i ncluding dividends)
between -1 0% and 1 0% over a 12-month period
Sell: Expected total return (including dividends) of-
1 0% or worse over a 12-month period
Page 10
500
400
300
200
100 1% 27%
0 + - - L - - ~ ~ - - - - ~ - - ~ ~ - , , _ ~ ~ - - ~ ~
Buy Hold Sell
0 Companies Covered 0 Cos. w/ Banking Relationship
North American Universe
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(b)(5)
From: Shireman_ Bob
To: Cunningham, Peter
Rogers. :.Margot
Kanter. Martha
Miller Tony
Martin, Cannel
Rose, Charlie
Yuan Georgia
Gomez, Gabriella
Madzelan, Dan
CC: Manheimer, Ann
Date: 3/24/2010 10:14:56 PM
Subject: Arne's Frontline interview today
(b)(5)
From: Finley, Steve
To: Macias, Wendy
CC:
Date: 9/7/2010 9:35:12 AM
Subject: Bloomberg article
The story seems more balanced that previous coverage on this issue by Bloomberg, since it points out the push by
schools to generate comments from students. Note the highlights:
http://www.bloomberg.com/news/2010-09-07/obama-student-aid-rule-riles-for-profits-spurs-most-letters-since-
1983.html
Obama Student-Aid Regulations Rile For-Profit Colleges, Spur Letter Blitz
Matthew Kapral, a student at Education Management Corp. ' s Art Institute of Pittsburgh, was walking to class in July
when a school representative sat him in front of a computer and coached him on a letter opposing limits on federal
student aid to for-profit colleges.
"They kind of started it off with a paragraph, and I added a sentence or two myself," said Kapral, who estimated that his
bachelor' s degree in graphic design will cost him $84,000.
For-profit colleges are enlisting students and teachers to lobby against proposed limits on student aid, and may at times
be using misleading tactics, the U.S. Department of Education said. The proposed government crackdown on aid has
generated about 26,000 letters to the department, the most on any topic since 1983.
College representatives and lobbyists also are flocking to lawmakers' offices in the U.S. capital and their home districts.
Donald Graham, chairman and chief executive officer of Washington Post Co., owner of the Kaplan education business
as well as the Washington Post newspaper and other media, met Aug. 3 with Senator Tom Harkin , an Iowa Democrat,
to discuss the proposed regulations. The newspaper ran an editorial criticizing the department's effotts to crack down on
comparues.
"There' s an immense sense of urgency and recognition by the schools that if the rules goes into effect as is, there are
substantial threats to their business model," Jarrel Price , an analyst with Height Analytics LLC in Washington, said in a
telephone interview.
Details of.ProposaJ
The proposed regulations, announced July 23, would make for-profit education programs qualify for government aid
either by showing that a certain percentage of former students are repaying their loans or that the average former student
earns enough to repay.
No programs would lose eligibility before the 2012-2013 school year, and, to give colleges time to adjust, a maximum of
5 percent of programs can lose eligibility in the first year of implementation, the Education Department said in a statement
Data released by the government show that, if the rule were in place now, loan repayment rates at Education
Management and Apollo Group Inc. would put their programs in danger of U.S. loan restrictions, and Washington Post
programs might lose eligibility.
Sales Tactics
U.S. Education Secretary Arne Duncan received so many letters asking him notto cut off funding to for -profit college
students, without mentioning the proposed rule, that the department began calling the writers to clarify their purpose, said
David Bergeron, acting deputy assistant education secretary for policy, planning and innovation in the Office of
Postsecondary Education.
"They had been told the rule was going to take away all financial aid to students at for-profit colleges," Bergeron said in
a telephone interview. "We' re concerned that some people are misrepresenting the rule to generate comment."
The department wouldn' t say which schools' students had been called.
One letter to the department, dated Aug. 10, was written by Jacqueline Bledsoe, of Fort Lauderdale, Florida, who is "an
online PhD student at a for-profit institution while working full time," according to the letter.
Keiser Role
"Very few schools where I live had the program, format, schedule, and accreditation I was looking for, and I finally
found a for-profit that was appropriate for me," Bledsoe wrote. She didn' t disclose that she is also associate vice
president of student services at Keiser University, a for-profit college in Fort Lauderdale.
Bledsoe said in an e-mail that she stood by the comment she posted "as a student."
Coaching students to wtite letters is needed to help them protect their interests, said Harris Miller , CEO of the
Washington-based Career College Association, an industry group of 1,500 education companies with 3.2 million
students. The group has been reaching out throughout Congress and encouraged schools to support letter-writing
campaigns, including those from students and teachers, Miller said in an interview in his Washington office.
"Commenting on a Federal Register notice is not something you learn in a civics class," Miller said. "We' ve encouraged
people in our outreach to make this as easy as possible."
Post Editorial
In an Aug. 22 editorial , "How to Discourage College Students," the Washington Post newspaper criticized the effort to
rein in lending to for-profit college students, saying it would remove an important educational option for poor and
working students.
"The more options available to parents and students, the better," the Post said in the editorial. "Particularly among some
Democrats, that's not always the prevailing view."
Asked in an interview whether he influenced the editorial , Graham said Fred Hiatt , the editorial page editor, is in charge
of the opinion columns and sets policy.
Congress and the administration of President Barack Obama have attacked what they call high-pressure sales tactics
and low student loan repayments at for-profit colleges, which can receive as much as 90 percent of their revenue from
federal financial aid programs.
A Government Accountability Office probe of 15 schools, including some owned by Education Management or
Washington Post Co., found that recruiters at all 15 misled investigators posing as students as the recruiters tried to
persuade people to enroll. Pittsburgh-based Education Management is the second- biggest for-profit college in the U.S.
by enrollment. No. 1 Apollo Group Inc. operates the University of Phoenix, which had 476,500 students as of May 31,
according to a company filing.
Student Aid Rule
The rule proposed by the Education Department might restrict or disqualify for-profit schools' programs from
participation in government-aid programs when fewer than 45 percent of their students are repaying principal on their
loans. The rule is called "gainful employment," because its intent is to show whether educational programs improve
students' job prospects. As of the close ofU.S. markets Sept. 3, an index of 12 education company stocks had fallen
27 percent since the department announced the proposed rule July 23.
Graham said the regulation would hurt all schools, both for-profit and not-for-profit, that serve low-income students. The
gainful-employment rule won' t serve its purpose of getting students better jobs or reducing their debt, he said.
"There are a variety of changes that could be made that would have a much greater impact on reducing overall student
debt, reducing the number of student defaults," Graham said in a telephone interview.
Education accounted for about 58 percent ofWashington Post Co.' s 2009 revenue of$4.57 billion, according to a
company tiling.
Biggest Response
Most Education Department proposals prompt about 400 to 600 comments, Bergeron said. The response to the gainful-
employment rule may be the biggest to a department measure since 1983, when the Reagan Administration proposed
cuts in funding for disabled children' s education, Education Department officials said. The White House was flooded
with about 40,000 letters opposing the measure, according to a 1997 report by the National Council on Disability , a
federal agency in Washington.
About six boxes of letters, along with compact discs containing thousands of comments both for and against the gainful
employment rule, remain to be scrumed and copied into the department's computers, according to the department.
Education Management, whose biggest shareholder is Goldman Sachs Group Inc. in New York, hired DCI Group , a
Washington- based company that advertises its ability to generate "direct contact-- phone calls, letters and e-mails-
from key community leaders."
Writing Assistance
All Education Management employees could expect to receive calls during business hours from DCI Group
representatives to assist them in crafting letters to Secretary Duncan on the rule, Todd Nelson , CEO of Education
Management, said in an e-mail on Aug. 24.
The rule "could have a particularly negative effect on students who rely on federal grants and loans in the pursuit of their
degrees," Nelson said in the e-mail. "Likewise, the proposed rule could have a significant impact on those who staff and
support academic programs offered at proprietaty institutions, including ours."
Education Management' s programs had about 136,000 students in October 2009. The company got about 89 percent
of its net revenue from government sources in the year ended June 30, up from 82 percent a year earlier, according to a
company filing. The legaJ limit is 90 percent.
The company "believes it is important during this public comment period on the proposed Federal Gainful Employment
Rule that our students, faculty and staff be provided an opportunity to voice their opinion, if they choose to do so,"
Jacquelyn Muller, a spokeswoman, said Sept. 1 in an e-mail.
From: Shireman Bob
To: Jenkins, Harold
Yuan Georgia
CC:
Date: 2/5/2010 5:29:20 PM
Sub.iect: CONFIDENTIAL attorney communication
(b)(5)
(b)(5)
-Bob
Robert Shireman, Deputy Undersecretary
U.S. Department ofEducation
400 Maryland Ave., S.W.
Room 7E310
Washington, D.C. 20202
(202) 260-0101
Fax: 202-205-0063
bob.shireman@ed.gov
Attached
I Nonresponsive
From: Finley, Steve
To: Macias, Wendy
CC:
Date: 6/30/2010 12:08:44 PM
Subject: devl)' brochure
From: Arsenault Leigh
To: Bergeron. David
Yuan, Georgia
Adams. Kristen
Kvaaf, .Tames
Smith Kathleen
CC:
Date: 9/28/2010 3:31:38 PM
Subject: draft list of invitees
Hi David, Georgia, Kristen, James, and Kathleen:
(b)(S)
Thanks!
Leigh
(b)(5)
DRAFT 1 *INTERNAL DOCUMENT* DELIBERATIVE PROCESS
CONFIDENTIAL
1
(b)(S)
Georgia Yuan
Postsecondruy and Regulatory Setvice
LBJ 6E341
202-401-63 99
From: Yuan Georgia
To: K vaal. James
CC:
Date: 9/22/2010 2:07:00 PM
Subject: draft on meetings
(b)(5)
CONFIDENTIAL
(b)(5)
(b){S)
1
(b)(5)
Georgia Yuan
Postsecondaty and Regulatory SeiVice
LBJ 6E341
202- 401-6399
From: Yuan Georgia
To: Shireman, Bob
KvaaJ James
CC:
Date: 7/1/2010 12:47:12 PM
Sub.iect: FAQ2
DRAFT v.21
(b)(S)
DELIBERATIVE PROCESS
CONFIDENTIAL
DRAFT v.21
(b)(5)
CONFIDENTIAL
6
DRAFT v.21
(b)(S)
CONFIDENTIAL
6
DRAFT v.21
(b)(5)
CONFIDENTIAL
6
DRAFT v.21
(b)(5)
CONFIDENTIAL
6
DRAFT v.21
(b)(5)
CONFIDENTIAL
6
Adrian
(b)(5)
Georgia Yuan
Postsecondruy and Regulatory Setvice
LBJ 6E341
202-401-63 99
From: Yuan Georgia
To: Haro. Adrian
CC: Bergeron. David
Kvaal James
Canada, June
Date: 9/24/2010 9:06:42 AM
Subject: For 12:30 meeting
(b)(5)
CONFIDENTIAL
1
(b)(S)
1
(b)(5)
1
Hello,
From: Eisman Steven <seisman@fppartners corn>
To:
CC:
Date: 5/28/2010 3:13:48 PM
Subject: For-profit education industry
Attachments: ED Presentation SOHN.PPT
My name is Steven Eisman and I am the P01tfolio Manager at FrontPoint Partners Financial Services fund. I wanted to
inform you that I recently spoke at the Ira Sohn conference in New York and my topic was the for-profit education
industry. My presentation was very negative and I wanted to bring to your attention many of the unsaid or unknown
aspects of this industry. We have been researching for-profit schools for over a year now and are very familiar with
every part of these businesses. Attached are the speech I gave and the presentation that was shared.
I have also attached a recent analysis we completed on the gainful employment proposal being reviewed currently. Our
purpose in the analysis is merely to raise awareness on the how critically important choosing the right metrics is to enact
the intended outcomes. Our analysis highlights how changing the key metrics (specifically the debt service% and the
repayment period) drastically affects the intended results. For example, while many schools will have to lower tuition
(resulting in lower student debt levels) under the proposed 8% debt service ratio and 10-yr repayment, under a 10%
ratio and a 15-yr repayment period, many schools will actually be able to raise tuition by 5% or more. Moving to a 20-
yr repayment with 1 00/o ratio provides a much larger opportunity for nearly every school we've followed to raise tuition
substantially (in some cases by 20% or more). While I don' t claim to know the Administration' s ultimate objectives, I
don' t believe raising student debt levels through higher tuition is the intended outcome of the proposed regulation.
Let me be clear- the debate on gainful employment has nothing to do with "student access". It has everything to do with
revenue-per-student (and thus, profit-per-student) for these schools, and that is why the for-profit industry is fighting so
hard to loosen the metrics. I just want to ensure tl1at the Administration is aware of how sensitive the outcomes are to
these metrics. In our opinion, if the Administration were to move substantially away from the initial combination (8% ratio
and a 10-yr repayment period), then it would be better off to have no gainful employment rule at all, since a diluted
version will likely result in no changes at the schools and no reduction in student's debt loads.
Should you have any questions on any of the information provided, I am available to discuss any of our findings or
assumptions.
Steven Eisman
FrontPoint Financial Services Fund
917-934-1770
seisman@fppartners.com
IRA SOHN CONFERENCE
Presentation by Steve Eisman
SUBPRIME GOES TO COLLEGE
May 26,2010
Good Afternoon. I would like to thank the Ira Sohn Foundation for the honor of
speaking before this audience. My name is Steven Eisman and I am the portfolio
manager of the FrontPoint Financial Services Fund. Until recently, I thought that
there would never again be an opportunity to be involved with an industry as socially
destructive and morally bankrupt as the subprime mortgage industry. I was wrong.
The For-Profit Education Industry has proven equal to the task.
The title of my presentation is "Subprime goes to College, . The for-profit industry has
grown at an extreme and unusual rate, driven by easy access to government sponsored
debt in the form of Title IV student loans, where the credit is guaranteed by the
government. Thus, the government, the students and the taxpayer bear all the risk and
the for-profit industry reaps all the rewards. This is similar to the subprime mortgage
sector in that the subprime originators bore far less risk than the investors in their
mortgage paper.
In the past 10 years, the for-profit education industry has grown 5-10 times the
historical rate of traditional post secondary education. As of2009, the industry had
almost 10% ofthe enrolled students but claimed nearly 25% of the $89 billion of
Federal Title IV student loans and grant disbursements. At the current pace of growth,
for- profit schools will draw 40% of all Title IV aid in 10 years.
How has this been allowed to happen?
The simple answer is that they' ve hired every lobbyist in Washington D.C. There has
been a revolving door between the people who work or lobby for thjs industry and the
halls of government. One example is Sally Stroup. She was the head lobbyist for the
Apollo Group - the largest for-profit company in 2001-2002. But from 2002-2006 she
became Assistant Secretary of Post-Secondary Education for the DOE under President
Bush. In other words, she was directly in charge of regulating the industry she had
previously lobbied for.
From 1987 through 2000, the amount of total Title IV dollars received by students of
for-profit schools fluctuated between $2 and $4 billion per annum. But then when the
Bush adrnirustration took over the reigns of government, the DOE gutted many of the
rules that governed the conduct of this industry. Once the floodgates were opened, the
industry embarked on 10 years of unrestricted massive growth.
[Federal dollars flowing to the industry exploded to over $21 billion, a 450% increase.
]
At many major-for profit institutions, federal Title IV loan and grant dollars now
comprise close to 90% of total revenues, up significantly vs. 2001 . And this growth
has driven even more spectacular company profitability and wealth creation for
industry executives. For example, ITT Educational Services (ESI), one of the larger
6
companies in the industry, has a roughly 40% operating margin vs. the 7%-12%
margins of other companies that receive major government contracts. ESI is more
profitable on a margin basis than even Apple.
This growth is purely a function of government largesse, as Title IV has accounted for
more than 100% of revenue growth. Here is one of the more upsetting statistics. In
fiscal 2009, Apollo, the largest company in the industry, grew total revenues by $833
million. Of that amount, $1.1 billion came from Title IV federally-funded student
loans and grants. More than 100% of the revenue growth came from the federal
government. But of this incremental $1.1 billion in federal loan and grant dollars, the
company only spent an incremental $99 million on faculty compensation and
instructional costs - that's 9 cents on every dollar received from the government going
towards actual education. The rest went to marketing and paying the executives.
But leaving politics aside for a moment, the other major reason why the industry has
taken an ever increasing share of government dollars is that it has turned the typical
education model on its head. And here is where the subprime analogy becomes very
clear.
There is a traditional relationship between matching means and cost in education.
Typically, families of lesser financial means seek lower cost institutions in order to
maximize the available Title IV loans and grants- thereby getting the most out of
every dollar and minimizing debt burdens. Families with greater financial resources
often seek higher cost institutions because they can afford it more easily.
The for-profit model seeks to recruit those with the greatest financial need and put
them in high cost institutions. This formula maximizes the amount of Title IV loans
and grants that these students receive.
With billboards lining the poorest neighborhoods in America and recruiters trolling
casinos and homeless shelters (and I mean that literally), the for-profits have become
increasingly adept at pitching the dream of a better life and higher earnings to the most
vulnerable of society.
But if the industry in fact educated its students and got them good jobs that enabled
them to receive higher incomes and to pay off their student loans, everything I've just
said would be irrelevant.
So the key question to ask is- what do these students get for their education? In many
cases, NOT much, not much at all.
Here is one of the many examples of an education promised and never delivered. This
article details a Corinthian Colleges-owned Everest College campus in California
whose students paid $16,000 for an 8-month course in medical assisting. Upon
nearing completion, the students learned that not only would their credits not transfer
to any community or four-year college, but also that their degree is not recognized by
the American Association for Medical Assistants. Hospitals refuse to even interview
graduates.
6
But let's leave aside the anecdotal evidence of this poor quality of education. After all
the industry constantly argues that there will always be a few bad apples. So let's put
aside the anecdotes and just look at the statistics. If the industry provided the right
services, drop out rates and default rates should be low.
Let' s first look at drop out rates. Companies don' t fully disclose graduation rates, but
using both DOE data, company-provided information and admittedly some of our own
assumptions regarding the level of transfer students, we calculate drop out rates of
most schools are 50%+ per year. As seen on this table, the annual drop out rates of
Apollo, ESI and COCO are 50%-l 00%
How good could the product be if drop out rates are so stratospheric? These statistics
are quite alarming, especially given the enormous amounts of debt most for-profit
students must borrow to attend school.
As a result of these high levels of debt, default rates at for profit schools have always
been significantly higher than community colleges or the more expensive private
institutions.
We have every expectation that the industry' s default rates are about to explode.
Because of the growth in the industry and the increasing search for more students, we
are now back to late 1980s levels of lending to for profit students on a per student
basis. Back then defaults were off the charts and fraud was commonplace.
Default rates are already starting to skyrocket. It's just like subprime- which grew at
any cost and kept weakening its underwriting standards to grow.
By the way, the default rates the industry reports are artificially low. There are ways
the industry can and does manipulate the data to make their default rates look better.
But don' t take my word for it. The industry is quite clear what it thinks the default
rates truly are. ESI and COCO supplement Title IV loans with their own private loans.
And they provision 50%-60% up front for those loans. Believe me, when a student
defaults on his or her private loans, they are defaulting on their Title IV loans too.
[Let me just pause here for a second to discuss manipulation of statistics. There are
two key statistics. No school can get more than 90% of its revenue from the
government and 2 year cohort default rates cannot exceed 25% for 3 consecutive years.
Failure to comply with either of these rules and you lose Title IV eligibility. Lose
Title IV eligibility and you' re company' s a zero.
Isn't it amazing that Apollo's percentage of revenue from Title IV is 89% and not over
90%. How lucky can they be? We believe (and many recent lawsuits support) that
schools actively manipulate the receipt, disbursement and especially the return of Title
IV dollars to their students to remain under the 90/10 threshold.]
The bottom line is that as long as the government continues to flood the for profit
education industry with loan dollars AND the risk for these loans is borne solely by the
students and the government, THEN the industry has every incentive to grow at all
6
costs, compensate employees based on enrollment, influence key regulatory bodies and
manipulate reported statistics- ALL TO MAlNTAIN ACCESS TO THE
GOVERNMENT' S MONEY.
In a sense, these companies are marketing machines masquerading as universities.
And when the Bush administration eliminated almost all the restrictions on how the
industry is allowed to market, the machine went into overdrive. [Let me quote a bit
from a former employee of BPI.
"Ashford is a for profit school and makes a majority of its money on federal loans students take out. They
conveniently price tuition at the exact amount that a student can qualify for in federal loan money. There is no regard
to whether a student really belongs in school, the goal is to enroll as many as possible. They a/so go after Gl bill
money and currently have separate teams set up to specifically target military students. If a person has money
available for school Ashford finds a way to go alter them. Ashford is just the middle man, profiting off this money. like
milking a cow and working the system within the limits of what's technically legal, and paying huge salaries while the
student suffers with debt that can't even be forgiven by bankruptcy. We mention tuition prices as little as possible ..
this may cause the student to change their mind.
While it is illegal to pay commissions for student enrollment, Ashford does salary adjustments. basically the same
thing. We are given a matrix that shows the number of students we are expected to enroll. We also have to meet
our quotas and these are high quotas.
Because we are under so much pressure, we are forced to do anything necessary to get people to fill out an
application - our jobs depend on it.
It's a boiler room- selling education to people who really don't want it."
This former employee then gives an example of soliciting a sick old lady to sign up for Ashford
to meet his quota.
"The level of deception is disgusting- and wrong. When someone who can barely afford to live and feed kids as it
is. and doesn't even have the time or education to be able to enroll. they drop out. Then what? Add $20.000 of debt
to their problems- what are they gonna do now. They are officially screwed. We know most of these people will
drop out, but again, we have quotas and we have no choice."]
How do such schools stay in business? The answer is to control the accreditation
process. The scandal here is exactly akin to the rating agency role in subprime
securitizations.
There are two kinds of accreditation-- national and regional. Accreditation bodies are
non-governmental, non-profit peer-reviewing groups. Schools must earn and maintain
proper accreditation to remain eligible for Title IV programs. In many instances, the
for-profit institutions sit on the boards of the accrediting body. The inmates run the
asylum.
Historically, most for profit schools are nationally accredited but national accreditation
holds less value than regional accreditation. The latest trend of for profit institutions is
to acquire the dearly coveted Regional Accreditation through the outright purchase of
small, financially distressed non-profit institutions and then put that school on-line. In
March 2005, BPI acquired the regionally accredited Franciscan University of the
Prairies and renamed it Ashford University. [Remember Ashford. The former
employee I quoted worked at Ashford.] On the date of purchase, Franciscan (now
Ashford) had 312 students. BPI took that school online and at the end of 2009 it had
54,000 students.
SOLUTIONS
6
While the conduct of the industry is egregious and similar to the subprime mortgage
sector in just so many ways, for the investment case against the industry to work
requires the government to do something -- whereas in subprime all you had to do was
wait for credit quality to deteriorate.
So what is the government going to do? ft has already announced that it is exploring
ways to fix the accreditation process. It will probably eliminate the 12 safe harbor
rules on sales practices implemented by the Bush Administration. And I hope that it is
looking at everything and anything to deal with this industry.
Most importantly, the DOE has proposed a rule known as Gainful Employment. In a
few weeks the DOE will publish the rule. There is some controversy as to what the
proposed rule will entail but I hope that the DOE will not backtrack on gainful
employment. Once the rule is published in the federal registrar, the industry has until
November to try to get the DOE to back down.
The idea behind the gainful employment rule is to limit student debt to a certain level.
Specifically, the suggested rule is that the debt service-to-income-ratio not exceed 8%.
The industry has gotten hysterical over this rule because it knows that to comply, it
will probably have to reduce tuition.
[Before I turn to the impact of the rule, let me discuss what happened last week. There
was a news report out that Bob Shireman, the Under Secretary of Education in charge
of this process was leaving. This caused a massive rally in the stocks under the thesis
that this signaled that the DOE was backing down from gainful employment. This
conclusion is absurd. First, of all , inside D.C. it has been well known for a while that
Shireman always intended to go home to California after a period of time. Second, to
draw a conclusion about the DOE changing its policy because Shireman is leaving
presupposes that one government official, one man, drives the entire agenda ofthe
U.S. government.]
I cannot emphasize enough that gainful employment changes the business model. To
date that model has been constant growth in the number of students coupled with
occasional increases in tuition. Gainful employment will cause enrollment levels to
grow less quickly. And the days of raising tuition would be over; in many cases,
tuition will go down.
To illustrate the impact of gainful employment, I've chosen 5 companies, Apollo, ESI,
COCO, EDMC and the Washington Post. Yes, the Washington Post, whose earnings
are all driven by this industry.
Assuming gainful employment goes through, the first year it would impact would
obviously be 2011. However, because the analysis is so sensitive to tuition levels per
school, it's best to have as much information as possible. So for analytical purposes,
we are going to show the impact on actual results in fiscal 2009 and this year' s
estimates under the assumption that gainful employment was already in effect.
We employ 2 scenarios. Scenario 1 is static. It takes actual results and then reduces
tuition costs to get down to the 8% level. Scenario 2 is dynamic. It assumes the same
6
thing as scenario 1 but then assumes the companies can reduce costs by 5%-15%.
Results for each company depend largely on the mix of students, the duration of each
degree and the price of tuition at each institution
For each company, I show the results under the two scenarios and the corresponding
PIEs. Needless to say, the PIE multiples look quite a bit different under either
scenano.
Apollo- In fiscal 2009, the company earned $4.22. The consensus estimate for fiscal
2010 is $5.07. Under scenario 1, fiscal 2009 and the fiscal2010 estimate get cut by
69% and 57%, respectively. Under scenario 2, it gets cut 50% and 41%, respectively.
ESI- In fiscal 2009, the company earned $7.91. The consensus estimate for fiscal
2010 is $11.05. Under scenario l , fiscal 2009 turns slightly negative and the fiscal
2010 estimate gets cut by 74%. Under scenario 2, fiscal2009 declines by 75% and
the 2010 estimate gets cut by 53%.
COCO- In fiscal 2009, the company earned $0.81. The consensus estimate for fiscal
2010 is $1.67. Under scenario 1, fiscal 2009 turns negative and the fiscal 2010
estimate gets cut by 94%. Under scenario 2, fiscal 2009 declines by 79% and the
2010 estimate gets cut by 38%.
EDMC --In fiscal 2009, the company earned $0.87. The consensus estimate for fiscal
2010 is $1 .51. Under scenario 1, fiscal 2009 and the fiscal 2010 estimate turns
massively negative. Under scenario 2, fiscal 2009 and the fiscal 2010 estimate are also
massively negative, just less massively than scenario l. The principal reason why the
numbers are so bad for EDMC is that they have a lot of debt and that debt has to be
serviced and cannot be cut.
Washington Post- The Post' s disclosure of Kaplan metrics is slight. Thus, analyzing
the impact from gainful employment is much more difficult and we have confined our
analysis solely to fiscal 2009. ln fiscal 2009, WPO earned $9. 78. Under scenario 1, a
loss of$33.25 per share occurs. Under scenario 2, there is still a loss of$6.19. The
principal reason why the numbers are so bad for the Post is that more than 100% of its
EBIDTA comes from this industry through its Kaplan division.
[Let me just add one caveat to our analysis. Implementation of gainful employment
could result in a cut in marketing budgets. Given the high drop out rates of this
industry any such cuts could turn a growth industry into a shrinking industry. The
numbers that I just showed do not assume that the industry shrinks but grows at a
slower pace.]
Under gainful employment, most of the companjes still have high operating margins
relative to other industries. They are just less profitable and significantly overvalued.
Downside risk could be as high as 50%. And let me add that I hope that gainful
employment is just the beginning. Hopefully, the DOE will be looking into ways of
improving accreditation and of ways to tighten rules on defaults.
6
Let me end by driving the subprime analogy to its ultimate conclusion. By late 2004,
it was clear to me and my partners that the mortgage industry had lost its mind and a
society-wide calamity was going to occur. It was like watching a train wreck with no
ability to stop it. Who could you complain to? -- The rating agencies? -they were
part of the machine. Alan Greenspan?- he was busy making speeches that every
American should take out an ARM mortgage loan. The OCC? -- its chairman, John
Dugan, was busy suing state attorney generals, preventing them from even
investigating the subprime mortgage industry.
Are we going to do this aU over again? We just loaded up one generation of
Americans with mortgage debt they can' t afford to pay back. Are we going to load up
a new generation with student loan debt they can never afford to pay back. The
industry is now 25% of Title IV money on its way to 40%. If its growth is stopped
now and it is policed, the problem can be stopped. It is my hope that this
Administration sees the nature of the problem and begins to act now. lfthe gainful
employment rule goes through as is, then this is only the beginning of the policing of
this industry.
But if nothing is done, then we are on the cusp of a new social disaster. If present
trends continue, over the next ten years almost $500 billion of Title IV loans will have
been funneled to this industry. We estimate total defaults of $275 billion, and because
of fees associated with defaults, for profit students will owe $330 billion on defaulted
loans over the next 10 years.
[Bracketed Sections might be deleted during the verbal speech because of lack of
time.]
6
From: K vaal, James
To: Kanter, Martha
Ochoa, Bduardo
Bergeron. David
Kolotos, John
Sellers Fred
Yuan, Georgia
Finley, Steve
Chesley, Susan
CC:
Date: 9/2/2010 6:31:34 PM
Subject: FW: A Message from Dr. John Sperling, Founder- University ofPhoenix
The powerpoint is worth a read
September 2, 2010
Attn. Legislative Director
Dear Congress Member,
As founder of the University of Phoenix, I am writing to you and to every Member of Congress concerning recent
actions by the U.S. Department of Education and the Senate Committee on Health, Education, Labor and Pensions. The
Department ofEducation, seconded by the HELP Committee, has proposed new rules that wiU seriously undercut the
ability of the nation to remain globally competitive by undermining a vital sector of our higher education system-for-
profit colleges and universities.
I am writing to you because I am confident that every Member of Congress, whether or not they are a member of a
committee that deals with higher education, would like quality higher education to be available to every American who
seeks to earn a college degree. That is the stated goal ofPresident Obama. However, we will not be able to reach the
President's goals without for -profit colleges. The states do not have the funding needed to increase capacity whereas
private sector colleges like ours can provide the necessary capacity. For-profit colleges already provide flexibility and
access for millions ofunderserved and nontraditional students who could not complete their education in a traditional
institution.
The attached power point has been prepared by NEXUS, a research and policy institute whose primary focus is the for-
profit sector of higher education. Given its commitment to fact based research, not special pleading, the power point
presents a rationale for the need to rethink the reforms proposed by USDOE and the HELP Committee using as an
example the case of the University ofPhoenix, whose massive database on its operations and its academics has been
made available to NEXUS researchers.
As the largest institution in the sector-465,000 students with 90,000 graduates last year-the University ofPhoenix
illustrates the strengths and weaknesses offer-profit colleges and universities. The NEXUS study documents the financial
system that sustains it, the quality of the University' s programs, the innovations it has brought to higher education and
where it has failed to meet regulat01y standards and its own code of conduct. It also documents the steps the University
has taken to insure future compliance with all regulatory standards.
Perhaps the most important finding of the case study is the fact that for-profit institutions operate at no cost to taxpayers
because the interest students pay on their federal loans plus the taxes paid by the institutions is greater than the Pel!
Grants and all of the other state and federal subsidies received by the students and the institutions. Further, the study
shows that not only will the proposed reforms require a meYer increase in Department of Education oversight staff, they
will greatly lower the efficiency and raise the costs of the institutions in the sector-all at the expense of taxpayers.
It would seem wiser to restore the status quo ante when the Department of Education was pursuing a reform that would
truly benefit taxpayers, namely to require all institutions of higher education to measure the learning outcomes of their
students and to publish those results on an annual basis. Overseeing the measurement protocols used by institutions in
order to expose cheating on the tests, would be a far more productive use of Department of Education resources than
what is presently contemplated. Only when learning outcomes are measured and published will taxpayers know what
they are getting for their money and the "bad actors" be easily identified-namely the institutions whose students are low
performers.
When you have finished reviewing the power point, we hope you will be persuaded that for-profit colleges and
universities are a vital sector of the American higher education system that deserve the support of the Department of
Education and the Congress, along with responsible oversight, rather than a set of regulations that will instead inhibit their
efficiency, their growth, their culture of innovation and, most importantly, their ability to deliver a quality education to
millions of! ow-income Americans now denied access to the education they need to give them a chance to join the
middle class.
The worst of these regulations concerns the definition of"gain:ful employment" and a new regulation that sets the
minimum rates at which students in a program must be repaying on the principal of their student loans. The new definition
of gainful employment is so onerous it would make it impossible for the sector to offer many programs that prepare
students for certification in such occupations as teachers, nurses, counselors and public safety officers. The repayment
percentage requirements, apparently arrived at with insufficient attention to their potential negative consequences, would
have a devastating impact on institutions that enroll low-income students who often require several years in the
workforce before they can begin repaying the principal on their student loans. For example, if these requirements were
applied to Historically Black Colleges and Uruversities, over 90% of them would have to close their doors.
Representative Robert Andrews (New Jersey - 01) has proposed a definition of gainful employment that would correct
the many faults of the definition proposed by the Department ofEducation. He has written to Education Secretary Arne
Duncan setting forth the negative consequences resulting from the Department' s definition while proposing an alternative
which would remove these negative consequences and still gain the same objectives. Many of the institutions in the for-
profit sector support Congressman Andrews' s initiative and we are asking all Members of the Congress to lend their
support as well. I have attached a draft of a letter of support wruch we hope you will use as a model for a letter from you
to Secretary Duncan with copies to Speaker Nancy Pelosi and to Congressman Andrews. The University and every
institution in the sector would very much appreciate your support.
Thank you for your time and consideration of this important issue.
SperlingSigReflexBlue. eps
John G. Sperling
Founder
University ofPhoenix
.................................................................................................................................................................................................................................................................................................
-
.. For-Profit Colleges and Universities: America's
Least Cost and Most Efficient System of Higher
Education
Case Study-University of Phoenix
Linking Dialogue to Research
Case Studies on Public Policy and Higher Education
di2!U .,,.v@;Aiaa:;:;
Jorge Klor de Alva, President
August, 2010
NEXUS
& Polley
.. E"tluiit!1.f th.z FYJntiers tf High:- Cdacni:.ion''
199 Fremont Street I Suite 1400 I San Francisco
1
CA 94105
Mobile: 602.684.5401 I contact: jorge@nexusresearchcenter.org
Disclosures
Nexus Research and Policy Center
As an independent, nonprofit, nonpartisan organization, Nexus Research and Policy Center is organized to
conduct educational research-such as in the fields of the learning sciences, assessment and measurement-
and to prepare action-oriented analyses of pressing policy issues facing states and the nation regarding the
improvement of educational efficiency, effectiveness and degree completion success, especially on behalf of
underserved student populations and the institutions that provide them access to higher education. In
particular, Nexus seeks to do research and promote policies that improve the for-profit education sector and
that contribute to a better understanding between the for-profit and traditional sectors of higher education.
Nexus Research and Policy Center was incorporated December 15, 2009, in the state of Arizona as a nonprofit
corporation under the Arizona Revised Statues Sections 10-3101 through 10-11702. It is currently in the
process of completing its organizational plans and filing for 501(c)3 status. As of August 2010, its primary
source of funds is donations in cash and in kind from Apollo Group, Inc. and the John G. Sperling Foundation.
To avoid undue influence from its primary funding sources, Nexus has an independent board with no member
selected by either Apollo or the Foundation. The recognized importance of its independence has led both
Apollo and the Foundation to not interfere with its governance, research agenda, or editorial policy. That said,
while we acknowledge that Nexus' full independence may be questioned as a consequence of its funding
sources and in kind donations from Apollo of employee time, its research is based on government data as well
as other objective and reliable sources. These sources and the methodology used to analyze them-all
acknowledged in the endnotes of this study-have been reviewed by independent researchers and auditors
for validity.
NEXUS
J . o t t ~ : t t o : r A F:"(lll; 1 C"Ut
2
The reason for this case study
This is the first study by Nexus on the current predicament in which higher education in the United States
finds itself as the Department of Education and Congress initiate a new round of reforms of the
regulations governing for-profit colleges and universities.
For two years, the for-profit sector has been under what some have described as an attack by the
Department of Education, the national media, Wall Street short-sellers, and recently Congress. Although
two Government Accountability Office (GAO) studies completed in 2010 (GA0-10-370R, GA0-10-948T)
have shown a total of only 37 out of over 2,000 for-profit institutions violated investigated regulations
since 1998, the whole sector has been directly or indirectly accused of failing to adhere to regulations or
strict codes of ethics and of neglecting to redress unauthorized actions by staff or faculty in a timely
manner.
Therefore, those criticizing the sector have characterized it as corrupt based literally on the actions of a
few individuals In the words of Senator Tom Harkin, Chair of the Committee on Health, Education, Labor
and Pensions ("HELP"), "It is not that there are a few bad apples among the for-profits, but rather the
entire orchard is contaminated."
This case study seeks to provide evidence that the orchard analogy not only does not hold, but that it is
itself a source of contamination that threatens to destroy what the data suggest is the most active,
efficient, and efficacious part of that sector of American higher education dedicated to teaching. In short,
we hope this case study will permit facts to replace anecdotes, research to displace preconceived
opinions, and the protection of taxpayers to trump misguided bureaucratic regulations.
NEXUS
3
The focus on the for-profit sector is primarily a response to President Obama's laudable
call for America to lead the world in college graduates by the year 2020.
The President sees community colleges as the least cost path to achieve his goals.
For his vision to become a reality, students and institutions will need money. But the major source of
federal funds are Pel I Grants and subsidized loans, a high percent of which go to low-income students who
attend for-profit institutions.
Consequently reform efforts seek to move these funds from the for-profits to the public institutions. This
movement of money from the for-profit sector to community colleges underlies the current investigation of
the for-profit sector.
But this strategy is impossible to carry out and is bad policy.
It is financially impossible to implement because it would cost state and local governments nearly one
trillion dollars to pay for the operating and infrastructure costs required to provide access to the 22 million
students needed to produce the 5 million graduates required to meet the President's goal.*
It is bad policy because for-profit institutions now cost the taxpayers nothing and thus they could help
reach the President's goal at no cost to local, state, and federal governments and thus to the taxpayers.
The following tables and graphs will explain why the public and private institutions alone cannot meet the
President's goal and why for-profit institutions are necessary to meet the goal.
*See www.parthenon.com Parthenon Perspectives on Private Sector Post-Secondary Schools-Do They Deliver
Value To Students and Society, Robert Lytle, March 2010, p.2.
NEXUS
4
What is the annual cost to taxpayers per student at a community college,
public university, private college/university and for-profit college/
university?
Figure 1
Student Grants for Tuition
1
Government Subsidies
2
Forgone Taxes3
State and Local Grants
4
Interest Paid by Students on
Loans
5
Corporate Taxes Paid
6
Net Cost I (Benefit) to Taxpayer
per student
Research Expense
Adjusted for Research Expense
per Student
Per Student Taxpayer Costs I (Benefits)
All Institutions, Academic Year 2007-081
1
"'
'
Public Public Private
(2 Year) (4 Year) (4 Year)
$ 423 $ 5,225 $ 7,809
17 40 80
152 868 5,933
6,553 9,866 1,293
(29) (146) (377) vs.
$ 7,116 $ 15,883 $ 14,735
(O) (6,175) (8,356)
$ 6,379
Regionally Accredited
For-Profit ( 4-Year) UOPX
(incl. UOPX)
$ 752 $ 735
77 68
105 35
(248) (218)
$ (784) $ (625)
$ (99) $ (5)
G
(5)
Net Cost to taxpayers for public community colleges and 4-yr colleges per student is on average
$8,600 higher than for-profit, regionally accredited institutions.
NEXUS
* See Appendix 1 for all endnotes, including details on endnotes 1-6 and 11.
5
What is the annual cost to taxpayers per student at an elite
college/university?
Figure 2
Elite Institutions, Academic Year 2007-0811
$50K Tuition
Harvard Princeton
Colleges
1
$ 1,265 $ 24,390 $ 18,397
2
42 49 2
Forgone Taxes
3
11,836 69,996 62,655
4
147 160 281
Interest Paid by Students on Loans
5
(199) (280) (35)
Corporate Taxes Pa id
6
Net Cost I (Benefit) to Taxpayer $ 13,091 $ 94,315 $ 81,300
per Student
Research Expense (1,699) (25,996) (29,091)
Net Cost I (Benefit) to Taxpayer Adjusted $ 11,392 $ 68,319 $ 52,208
for Research Expense per Student
NEXUS
Yale
$ 39,745
51
47,079
2,123
(300)
$ 88,698
(36,585)
$ 52,113
6
Cost effective education at scale: The case of the largest for-
profit institution
The financial relationship between taxpayers and the largest for-profit university, the
University of Phoenix, and its 465,000 students:
Figure 3
Tax supported grants and subsidies
1
J
2
&
4
Interest on loans paid by students
5
Corporate taxes
6
Net receipts from the government
Per Student Cost to Taxpayers
NEXUS
$461,390,166
{118,990,581)
(341,613,215)
786,370
{$5.00)
7
Cost effective education at scale: The case of for-profit institutions
Average taxpayer cost of a student per year:
$8,500 at a public institution; $0 at a for-profit institution
Figure 4

$9,000
C!)
$8,000
:>-.
!-.
C!)
0..
$7,000
E
C!)
$6,000
"Cl

-
r:/J
!-.
C!)
$5,000
0..
:>-.
"Cl
$4,000
......
r:/J
.g
r:/J
$3,000
!-.
C!)

0..
$1,000

$0
Public For-Profit
NEXUS
A F:"(lll; 1 C"Ut
8
Who gains the most from taxpayer subsidies?
It is evident from Figures 1-3 that taxpayer support of higher education is heavily skewed in favor of the
affluent.
Those attending the very top of the pyramid receive as much as $68,000 while those at the bottom receive
nothing if enrolled in a for-profit institution. In fact, low-income working Americans end up paying for
100% of their education while students attending public and non-profit institutions receive subsidies
ranging from $7
1
116 to $68,319.
For example, the case of Harvard:
The cost to taxpayers to produce a Harvard Bachelor's degree is approximately $272,000 (4 times the
$68,000 in annual subsidies). This is equivalent to the taxpayer subsidy for 9.5 public community college
students or nearly 7 students attending a public four year college.
Is this fair?
Is this efficient?
More important, from a taxpayer perspective, the $68,000 currently supporting a year's worth of
education at Harvard would yield the highest economic benefit to taxpayers if it were invested in grants
supporting students who are preparing to enter the fastest growing occupations. And as the tables and
graphs make evident, the best return for taxpayers would be in support of these students at for-profit
colleges and universities.
NEXUS
9
Increasing capacity of public institutions to meet President Obama's 2020 degree
completion goal could cost the US taxpayer an additional $826 billion in federal and
state support over the next decade
Figure 5
Cost to Taxpayers of 2020 Degree Completion Goal Using Only
Public Institutions*
Annual Subsidy per Student
1
&
4
Time to Complete Degree
Total Subsidy per Student
Graduation Rate at Public Schools
7
Targeted #of Graduates
8
Gross New Students Enrolled
9
Average length of Stay for Dropouts
10
Cost to Government
TOTAL
For 2-Year Students
(Associate's Degree)
$
6,976
x 2 years
$
13,952
22.0%
5,000,000
22,727,273
For 4-Year Students
(Bachelor's Degree)
$
15,121
x 4 years
$
60,484
54.9%
8, 132,522
14,813,337
6 mont hs 2 years
$ 131,592,728,224 $ 693,928,667,878
$825,521,396,.'102
*This does not include capital for infrastructure to accommodate 22 million
additional students. If needed capital expenditures are included, the costs are
over one trillion dollars.
NEXUS
10
Comparing $826 billion to the cost of other major government initiatives ...
Figure 6
$1,400
$1,200
$1,000
-Ia $800
0
-
=
:c $600
-
.....
~
0
u $400
$200
$0
NEXUS
Patient Protection
and Affordable Care
Act (2010 health care
bill )
Spending to date on
the War in Iraq
Spending to date on
the War in
Afghanistan
American Recovery
& Reinvestment Act
of2009 (fiscal
stimulus)
Milestone government programs
$826
American Graduation
Initiative and 2020
Higher Education
Goals wi thout For-
Profit Schools
11
... it seems unlikely taxpayers will take on the burden. Consequently,
Meeting President goal of having the largest percentage of college graduates in
the world by 2020 is not possible without the for-profit colleges and universities.
it!.'' ....... '

..... .,, p,,,1" c 12
Why, then, is there such an acrimonious call for reform of the for-profit
sector at a time when the Administration most needs its capacity?
The US DOE negotiated rule making process that began late last year opened the way for bitter allegations
against the for-profit sector. Much hostility towards for-profits that had remained under the surface-the
hate that dare not speak its name-had its release facilitated by the assaults from government, media
and Wall Street. Now everyone who wanted to vent their dislike (editors, staffers, short sellers, etc.) had
the opportunity to do so. This state of affairs has reached its crescendo with three reports that have set
the tone of the present debate:
Subprime Goes to College, Testimony Before the U.S. Senate Committee on Health, Education, Labor and
Pensions, by Steven Eisman (June 24, 2010; http://help.senate.gov/imo/media/doc/Eisman.pdf )
Emerging Risk?: An Overview of Growth, Spending, Student Debt and Unanswered Questions in For-Profit
Higher Education, prepared by the U.S. Senate HELP Committee, Senator Tom Harkin, Chairman (June 24, 2010;
http://harkin.senate.gov/documents/pdf/4c23515814dca.pdf)
For-Profit Colleges: Undercover Testing Finds Colleges Encouraged Fraud and Engaged in Deceptive and
Questionable Marketing Practices, Testimony Before the Committee on Health, Education, Labor, and Pensions,
US Senate. (GA0-10-948T, August 4, 2010; http://www.gao.gov/new.items/d10948t.pdf )
NEXUS
13
Why the hostility towards for-profit colleges and universities?
Resentment against for-profits has a number of sources, including:
The belief that it is unethical/unjust for for-profit institutions to make a profit while public institutions are
starved for funds.
The inability (and frustration) of public institutions to meet the rising demand for higher education
especially among low-income populations.
An unwillingness to recognize that for-profit colleges and universities are helping to meet this demand
through innovation and efficiency-characteristics valued 1n every other sector of our economy.
Although we all recognize the critical importance of good regulation and diligent compliance, there is an
unwillingness to recognize that the inefficiencies in public and non-profit institutions cost taxpayers far
more than the occasional regulatory violations among the for-profits.
An unwillingness to recognize that growth of for-profit colleges and universities is a reflection of the
realities of our economy and that for-profit institutions, as Education Secretary Duncan has observed, are
vital to America's economic future.
NEXUS
14
The essence of the argument against for-profit institutions
At the conclusion of the second HELP hearing (August 4, 2010L Chairman Tom Harkin summarized
the case against for-profit colleges as follows:
" ... 9% of students are in for-profits, but they are consuming almost 24% of Pell Grants, and have 44% of
the defaults."
"What we have done, what has happened, is that with the ease of availability of grants and loans, and
with incentive rates [for recruiters], and with a cloak of secrecy about graduation rates .... we have seen
the numbers of those recruited increase dramatically, but the total enrollments have not-leading us to
believe that many are dropping out with no degree or poorly educated, but with debt they cannot pay."
"So, when we look ahead, education is too important for the future of this country and our students,
and given the budget crisis over the next 10 years, we can't afford for more and more of this money to
be going to investors. We have privatized the profits and socialized the risks, and that is what happened
to the sub primes."
NEXUS
15
A policy shift has taken place from access to degree completion at a time
of financial crisis
Quite apart from the numbers cited by Senator Harkin-to which we will return-is the fact that for over a
decade, facilitating access backed up by the availability of no-cost grants and subsidized loans was the central
policy followed by both states and the federal government.
For-profit institutions responded to this call and made access possible for millions of otherwise underserved
or neglected students, who for work and family reasons could not attend the traditional institutions whose
focus is primarily on the needs and interests of the faculty and young, single, dependent students.
The abrupt shift from access to completion, in part the result of awareness that the U.S. has fallen behind its
global peers in the percentage of adults with degrees, called for dramatic changes in education policy. For
some in the Administration this concern has been heightened by the worst financial crisis since the
Depression. For them this shift has called for a radical reconsideration of how financial aid should be
distributed, unfortunately, this is resulting in a redistribution from lower to upper income groups.
For example, although chief among these changes was the shift from private to government direct lending,
whose aim was to provide a new source of revenue for additional Pel I Grants, the other major shift was in the
desire by the Administration to redirect student aid away from non-traditional students at for-profit
institutions (those more likely to need grants and default on loans) to more traditional students at public
institutions, especially community colleges (who are either dependent on their parents or unlikely to seek
loans).
NEXUS
16
Negative consequences of proposed reforms
In an effort to support this policy shift, attention was focused on the presumed faults of for-profit
colleges and universities. This refocus has resulted in the series of reforms that have been proposed
during the negotiated rulemaking period of 2010. Unfortunately for taxpayers and millions of
underserved, non-traditional students, these reforms will:
Redirect public funds for higher education from lower-income to higher-income students.
Reduce the availability of programs in areas such as nursing, teaching, public safety and other public service
jobs.
Greatly increase the amount of taxpayer support going to higher education.
Greatly reduce the efficiency of proprietary colleges and universities by making them easy prey to suits by
predatory law firms (see slide 40) .
Demean the hard won degrees of millions of students and wipe out billions of dollars in the human capital
they have accumulated.
Ignore, for now, any regulatory violations by public and non-profit institutions.
NEXUS
17
Why can't traditional institutions take on the responsibility of meeting the
rising demand at a cost taxpayers are willing to bear?
Traditional Institutions: Studies in Inefficiency
D Tradition and inefficiency lie at the heart of their growth and financial problems.
D High-maintenance buildings and grounds used primarily during the day for 8 months a year drive costs
up.
D Tenured faculty generally cannot be reassigned when their area of expertise is no longer in demand and
they resist such changes as flexible scheduling and instruction delivered online rather than in costly
classrooms.
D They are caught in a prestige "arms race" forcing each to increase support of non-academic facilities and
activities, in the meantime sports costs have risen to approximately 13% of total costs.
D Meanwhile colleges and universities are increasing their expenditures on administration faster than on
instruction.
D Yet most state governments have failed to tie funding to performance measures in order to increase
accountability and productivity.
NEXUS
18
Why can't private, non-profit institutions help meet rising
demand?
Most selective private, non-profit colleges and universities value reputation over access.
The higher the number of students rejected, the higher their reputation.
The higher the SAT scores of their student body the higher their reputation so students lacking a high
level of preparation will not be admitted.
The higher their tuition, the higher their reputation.
The higher their reputation, the higher their endowment.
The higher their endowment, the higher the taxpayer subsidy they will enjoy so in effect they profit by
staying selective and therefore small.
The cost of tuition at such private institutions has climbed so high only the affluent can afford to enroll.
For example, 58 colleges and universities now charge $50,000 or more in annual tuition.
In the meantime, non-competitive private, non-profit colleges lack the resources to grow and many find
themselves in significant financial difficulties.
NEXUS
19
In contrast, why can for-profit colleges and universities grow to meet
demand?
They are efficient in their operations and in the delivery of instruction, otherwise they cannot survive.
They are innovative and have the capital to fund innovation, otherwise their efficiency and effectiveness
will decline.
They have access to the capital needed for expansion because they provide a cost effective education that
meets the needs of students.
They have powerful incentives to remain in compliance and produce positive educational outcomes
because if they fail to do so they will find themselves without students or financial backing.
Rather than consuming tax dollars, they return profits to taxpayers and are therefore not subject to the
limitations on capacity that traditional institutions have, especially during difficult economic times.
NEXUS
20
However, the shift in the Administration's higher education policy is raising new
questions about the relationship between access and student debt
The increase in demand for higher education is largely driven by demand from low-income populations,
including African Americans, Latinos and Whites, who are the most in need of grants and subsidized loans.
Americans believe that a college degree is the only path from the lower to the middle class and the only way to
guarantee you don't lose your place if you are already there.
12
A recent study found that over 90% of Latino
youth were believers.
13
Because the only way to provide that access to millions of lower and middle-income students is through federal
grants and subsidized loans, these modes of aid have been under increasingly greater pressure.
But because low-income populations are the most likely to need grants, drop out and default on loans, the shift
from access to completion has been a shift from access for the most needy, who are the most likely to enroll in
for-profit institutions, to a shift in completion for the best prepared. But this in turn has raised the question: Are
for-profit institutions saddling their students with loans they can' t repay? And, if so, should USDOE intervene on
behalf of the students and taxpayers by not permitting these schools, and therefore their students, to have
access to these grants and loans?
Given that the cost to taxpayers of Pell Grants and Title IV loans is zero, the real question is: "Should access be
limited to protect low-income groups from excess debt or is access with debt better for low-income students
and for society?"
Figures 7-10 indicate:
- that given the low level of family assistance, the debt load of students in for-profit institutions is not
out of line,
- that access is valued far higher than avoidance of debt and,
- that higher education pays handsomely in terms of income and avoiding unemployment.
NEXUS
21
Average Student Debt Levels by Institution Type
14
Figure 7
$30,000
25,000
20,000
15,000
10,000
5,000
61%

71%

:
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97%

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64%

37%
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98%

120%
100
80
60
40
20
0 - ' -------..1
. --
_.a__
_ _..._...._ 0
4 Year Public 4 Private
Not-for-Profit
4 Year Private
For Profit
2 Public 2 Year Pnvatc
Not-for-Profit
2 Year Private
For Profit
NEXUS
A F:"(lll; 1 C"Ut
Average Debt [ Average Expected Family Contribution + % of Student Borrowing
Given the low level of family assistance available and the relatively
small amount of funds borrowed, the percentage of borrowers is high
but the debt load of students in for-profit institutions is not out of line.
22
Do for-profit institutions exploit low-income students?
Americans for Democratic Action sought an answer to the question, "Does access trump debt?" In October
2009, ADA conducted a survey of 2,250 adults with oversamples of 500 African Americans, 500 Latinos and
250 lower-income Whites on their attitudes toward the for-profits and whether they valued access over
avoidance of debt.
15
Here are their responses.
Figure 8
NEXUS
A F:"(lll; 1 C"Ut
Growth of For-Profits Should be Stopped -
Exploit Low Income Students
60%
31/o

8%
14/o
Agree Disagree Don't know
Darker colors indicate intensity
African Americans:
Agree 36% (20% str.)
Disagree 58% (36%)
Latinos
Agree 36% (20%)
Disagree 58% (32%)
Lower-Income Whites
Agree 34% (16%)
Disagree 56% (35%)
Some people believe these for-profit universities exploit lower-income working students. They have gone to the government
education 1egulato1s to try a11d stop the growth or for pro!il universities and ill casi:!S sllul tllem down Do you agree 01 disagree
that for-profit growth shOuld be stopped? 23
When it comes to access vs. avoidance of debt, access is
valued far higher
Over half of African Americans, Latinos and lower-income Whites agree that debt is
worth the price of getting access to college.
15
When it comes to students with higher risk factors, only a third of those surveyed
feel they are being exploited because they are not prepared and have to drop out,
owing money. Instead, six in ten believe these students deserve the chance to earn a
college degree even if they drop out owing money.
Figure 9
58
Lower Income Whites
53
Latinos
39
58
African Americans
I
60
Total
?---------------_, 33
0 10 20 30 40 so 60
Everyone Deserves a Chance Feel Exploited
NEXUS
A F:"(lll; 1 C"Ut
24
Higher education pays handsomely in terms of income and avoiding
unem ment
Figure 10
Unemployment Rate and Earnings by Level of Educational Attainment
16
Unemployment Rate Median Weekly Earnings
2.5%

Doctoral degree
$1,532
2.3% Professional degree $1,529
3.9% Master's degree $1,257
5.2% Bachelor's degree $1,025
6.8% Associate degree $761
8.6% Some college
$699
9.7% High school diploma $626
14.6% No high school diploma

$454
NEXUS
A F:"(lll; 1 C"Ut
25
Available evidence, therefore, suggests the move to limit access to higher
education for the protection of the poor from excess debt is misplaced
In effect, the survey results make evident that:
Limiting debt by denying access does not serve the interest of the poor.
Nor is it in the best interest of the taxpayer.
Therefore, Pell Grants and Title IV loans are best understood as:
o Preventive action aimed at both creating a competitive workforce and avoiding the much higher cost of
future unemployment and underemployment.
o Zero cost investments because when aggregated, the total in grants and loans is more than off-set in
interest and taxes.
NEXUS
26
Why a case study of the University of Phoenix?

The University of Phoenix (UOPX), with nearly one half million students, is the second largest higher
education system in the U.S., second only to the State University of New York. (The even larger
collection of community colleges in California do not make up an integrated system because they
belong to different community college districts each of which is independent of the others).
With a physical presence in most states and an online presence in all states, UOPX is the first truly
national university.
Because it was among the first, UOPX pioneered most of the practices common among regionally
accredited for-profit institutions and those traditional institutions serving adult learners, including
offering accredited degree programs online (UOPX has done so since 1989, when it began with 12
students using a dial up internet conferencing service-today it enrolls well over 200,000 online
students world wide).
Because of its success in attracting and graduating students (it graduated over 90,000 students last
year) while being committed to "measuring everything that moves" and archiving it, it has
developed what may be the largest database on adult/working learners in the world.
Because it is the largest for-profit institution, it has experienced more visits by regional and
programmatic accreditation and certification teams than any other institution of higher education
in the country.
UOPX spends $50 million annually on developing and maintaining a state of the art educational
infrastructure, which many recognize as one of the world's best. No other institution, of which
Nexus is aware -public, private, non-profit or for-profit-makes investments of this size in their
instructional infrastructure and related systems.
NEXUS
27
What makes the University of Phoenix a relevant case study in
efficiency and innovation?
Because UOPX is designed for working students, who today make up the majority of postsecondary
students:

It recognizes that time is highly valued by working adults and efficiency is a fundamental principle
in the design and operation of its administration and teaching/learning systems.
Even as total enrollment has grown to 465,000, all classes are seminars and therefore small (face-
to-face classes average 14 students, online classes 20) with a faculty of working professionals
trained to deliver interactive learning; as a result, a faculty member can engage students
personally in substantive discussions every minute of class time.
All courses require multiple writing exercises and students must use online programs ( .. Write
Point, .... Plagiarism Check/' etc.) that provide guidance in grammar, style and originality, thereby
leaving faculty free to address student learning.
Campuses are designed to serve a student population within a 20 minute commute and online
classes are available 24/7 supported by an online library and a wide array of online learning
resources, such as simulations and eBooks, all available 24/7.
All administrative functions-enrollment, financial aid, academic advisement, etc.-are available
online.
NEXUS
28
lb .
THE CHARGES AGAINST THE FOR-PROFIT
SECTOR
AND
THE CALL FOR REFORM THROUGH
NEW REGULATIONS
~ N E X U S

' ~
..... .,, ~ p,,,1" c 29
The charge: Students in for-profit colleges are receiving a poor education
and thus are ill prepared for the job market when they graduate

Students attending for-profit colleges and universities see them as a better choice than a public institution, that is why they are
willing to pay the higher tuition-higher for not being subsidized by taxpayers as is the case in public and non-profit institutions.
Many students, including most at a majority of for-profit universities, are already working. Therefore, they are not looking for work,
but rather a better job or a promotion. At institutions such as the University of Phoenix, the data show that during their time as
students their incomes are steadily improving-average annual salary increases range from 8.5% for bachelor's graduates to 9.7% for
master's graduates during the course of their academic program, compared to 3.8%, the national average annual salary increaseY
As Figures 11 and 12 make evident, taking into consideration the number of risk-factors they are likely to have, including the high
probability that these are first generation, low-income minorities, many of whom are single parents, the retention and graduation
rates of students at for-profit institutions suggest they are NOT receiving a substandard education.
Figure 11
NEXUS
.....
(1)
Q)
>-
N
v
.....
(1)
Q)
>-
I
N
....
(1)
Q)
>-
I
o::t
Percent of Beginning Postsecondary
Students with 3 or More Risk Factors
Public
Private non-profit
Career Colleges 56
Public
39
Private non-profit
I
Career Colleges 52
Public
Private non-profit ic---1 9
Career Colleges 52
SOURCE: Educational Policy Institute (EPI) Analysis using the Beginning Postsecondary
70
Students Longit udinal Survey Dat a Analysis System (BPS: 04/06), 2006, US DOE, NCES; Educational Policy Institute (EPI) Analysis using t he
Beginning Postsecondary Students Longit udinal Survey Data; Graduating At-Risk Students: A Cross-Sector Analysis (Imagine America Foundation,
2009), Figure 4, p. 15.
30
For-profit sector graduation rates are high, given how many risk factors
their students have
Figure 12
NEXUS
A F:"(lll; 1 C"Ut
2006 GRADUATION RATES BY ETHNICITV
All 2-Year

Public
('t)
C1l
I
:. 2006 GRADUATION RATES Hispanic
>;-
N
Private, Not-for-Profit
Cll
Career Colleges
2006 GRADUATION RATES Black, Non-
Q,
Hispanic
8
AII4-Year
J::.
I
n 2006 GRADUATION RATES White,
u
en ....
Public
Non-Hispanic
('t)
""""[ "" . J C1l
>-
I
Private, Not-for-Profit ;
'

Career Colleges
I
I
I
l J u
Grand Total All Schools L
.,):.:.) - YL T]

0 10 20 30 40 50 60 70
Percent
SOURCE: Educational Policy Institute (EPI) Analysis using the Beginning Postsecondary Students Longitudinal Survey Data; Graduating
At-Risk Students: A Cross-Sector Analysis (Imagine America Foundation, 2009), Figure 16, p. 26.
Analysis System (2003-04) (DAS), USDOE, NCES.
NOTE: Graduation rates are calculated using only first time, full-time students graduating within 150% of regular
graduation time-as is common with I PEDS graduation rates ,which account for only 48% of 4-yr students and less
than 33% of community college students.
This analysis uses a 2000-entering cohort for 4-yr and 2003-entering cohort for 2-yr calculations. There were not enough
data points to calculate graduation rates by race/ethnicity at less-than-two-year level.
31
The call for reform of the for-profits: Students in for-profit colleges are
receiving a poor education and thus are ill prepared for the job market
when they graduate
The most comprehensive studies of graduates from for-profit institutions show that
completers are well qualified to join the workforce and actively contribute to the
American economy.

The first comprehensive study of t he total annual economic impact of the for-profit postsecondary sector
showed that in 2005 the total direct and i ndirect impact was $38.6 billion.
18
Cl Total direct impact was $18.6 billion (institutional $14.6 billion; student expenses $4.0 billion)
Cl Total indirect impact was $20.0 billion (increased graduate earnings $3.5 billion; resulting increased
economic activity $16.5 billion)
Cl The 376,560 career college completers entering the workforce in 2005 had median salaries of
$39,546 for a gross salary total of $14.9 billion.
A second study undertaken in 2010 showed that for-profit sector students "experience strong income gains
from their educational investment."
19
Cl For-profit sector students reported average income gains of $7,900, or 54%, exceeding public school
students' gains of $7,300.
Cl Over a 30-year working life, these gains are expected to translate into approximately $250,000 more
income.
NEXUS
32
The call for reform of the for-profits: For-profit institutions lower the
quality of higher education
o Only 25% of students attend 4 year residential colleges/universities, ranging from small liberal arts
colleges to large research universities whose faculty conduct most of the academic research.
o These institutions receive a large percentage of state and federal support and almost 100% of the positive
media coverage, but are subject to little oversight by accreditors or state and federal regulators. This
sector, viewed by many as the only education worth having, defines "quality education."
o Nearly three million of the remaining 75% study at for-profit institutions. Most of these students work and
often have families; therefore, they have specific educational needs and must study in a variety of modes:
full-time, part-time, on campus and online. Because these students do not study full -time on campus and
the institutions are mostly open admission, their education is branded by critics as inferior. Consequently,
with minimal exceptions, during this period of debate these institutions and their students are now
receiving nearly 100% of the negative media coverage.
o However, because traditional institutions cannot or will not meet the needs of most working students,
these students perceive them as ideal for young, dependent students but as substandard for them.
o The quality of education, then, is not determined by its mode of delivery, but rather by how well it
addresses the needs of students and by the learning outcomes of those students.
o As Figure 13 demonstrates, comparative studies show learning outcomes at the largest for-profit
institution are equal to or better than learning outcomes at comparable public and private institutions
for similarly situated students. Therefore, it is not the case that for-profit institutions lower the quality
of higher education.
NEXUS
33
For-profit institutions do not lower the quality of higher education
0 On average, UOPX students enroll with lower assessment scores than the national average.
Improvement in MAPP scores demonstrates that they reduce that gap significantly by their
senior year.
0 Compared to students from other comparable institutions, UOPX students demonstrate
similar to better levels of improvement throughout the course of their education, especially
in English and mathematics.
Figure 13
PERCENTAGE IMPROVEMENT IN MAPP SCORES: FRESHMEN TO SENIORS
20
NEXUS
34
The call for reform of the for-profits: Whether they drop out or graduate, these
students are stuck with a mountain of debt that will blight their lives
Most students at for-profit institutions come from a lower socio-economic level than those attending
public institutions. There is no evidence that students borrow at a rate that is higher than the
average for this demographic considering comparable risks and adequate financial aid advice. (Many
public community colleges provide little to no advising on financial aid as they strive to avoid poor
default rates.)
Furthermore, at many institutions, such as UOPX, students only take one or two courses at a time
and generally pay for them at the beginning of each course. Given this, and the fact that those who
drop out typically do so after only one or two courses, UOPX students have low levels of debt.
In fact, for students graduating between July 2007 and June 2008, UOPX loan debt was comparable
with students at private, non-profit four-year institutions:
21
Figure 14
60% /
50%
40%
20%
10%
NEXUS
No Debt
-
_J!17
<$30, 500 >$30,500
2007-08 CRADUATES
Private 4-Yr
2007-08 CRADUATES UOPX
35
Further evidence that students from for-profit colleges and universities are not graduating with mountains of debt
comes from the US DOE data on the average amount of federally subsidized loans received per student in 2007-08
(the most recent period for which data is available).
22
Once again, although for-profit institutions have a higher
proportion of students borrowing, the amounts borrowed are relatively small and comparable to those found
among students in traditional institutions.
Figure 15
NEXUS
A F:"(lll; 1 C"Ut
Amount of Financial Aid Received*
$20,000
$18,000
$16,000
,....
--------
$14,000 /.:
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
so

Average
AID per
recipient
Average
GRANTS per
recipient
Average
LOANS per
recipient
All undergraduates
Public 4-year doctoral
Public 4-year non-doctoral
Public 2-year
Non-profit 4-year doctoral
Non-profit 4-year non-doctoral
For-profit 2-year or more
*AID is from any source except family and friends. PLUS loans included in "AID per recipient," not in "LOANS per
recipient," which includes private (alternative) loans. Figures on loans do not include cumulative debt.
36
Of all the proposed regulations in this reform effort, the most convoluted and potentially onerous are the ones
under the label of "gainful employment." The bureaucratic complexity of these regulations is apparent from an
analysis of their requirements and consequences (see Appendix 2).
These regulations would measure students' debt-to-salary ratio after they left a for-profit institution.
Programs in which recent students are spending more on their loans as a percentage of their income
than the regulations call for would be required to limit enrollment and the institutions would have to
inform prospective students of the graduates' historical debt to income ratio. If their students also fail
to meet proposed ratio cutoffs for repayment, students of those schools could be barred from
receiving federal student aid.
Although in 40 years of its application, neither Congress nor USDOE had seen the need to spell out
what "gainful employment" meant, the current reform effort chose to define it and build regulations
around it as the most effective way to reduce the amount of Pel I Grants and subsidized loans going to
students who wish to enroll in a for-profit institution.
The significance of these "gainful employment!/ regulations is such that they may end up depriving
hundreds of thousands of students of access to for-profit institutions if they are interested in programs
that lead to relatively low starting wages, such as teaching, nursing, counseling, and administration of
justice.
NEXUS
J . o t t ~ : t t o : r A F:"(lll; 1 C"Ut 37
As part of the "gainful employment" campaign, in an unexplained, recently released list, US DOE identified
over 8,000 institutions and the debt repayment data of their students.
23
If all the institutions listed were subject to the proposed repayment rate cutoffs of 45% and 35%, the
following catastrophe for American higher education would result:
Because 50% (nearly 4,000) of the institutions had repayment rates below 45% their affected
programs would be put into a "restricted" category in which enrollment growth would be
limited. And because over 20% (more than 1,600) had repayment rates below 35%, given the
likelihood that they would also have a too high loan service to debt ratio, their new students
would be ineligible for federal student grants while aid to existing students would be
terminated by the end of the following academic year.
As for the fate of the institutions serving our nation's most underserved students, the following
would have their students ineligible for federal student grants within a year:
40% of community colleges
90% of Historically Black Colleges and Universities
45% of campuses where Hispanic students constitute more than 25% of the students
66% of schools that focus on less than four year degrees and have the highest
concentration of Pell students
NEXUS
The call for reform of the for-profits: These students are defaulting on student
loans at a rate that will cost the government billions
At UOPX dollar-based cohort default rates (CDR) are lower than borrower-based default rates because most
students who leave exit early in a program and thus incur a lower amount of debt.
24
Again, comparing similarly
situated students, there is no evidence that dropouts have above average defaults.
Figure 16
University of Phoenix Default Rates (2-Year)
13.1%
9.3%
7.2%
5.9%
6.7%
-,
2006 2007 2008 (Draft)
Official CDR Dollars Defaulted CDR
Further, there is no net loss to the government from UOPX student's defaulted loans. Repayments on
defaulted loans range from $1.11 to $1.22,2
5
more than enough to cover the cost of collections. Given
the cost of funds to the government, the difference between what is collected on a non-defaulted and a
defaulted loan is very small. Therefore, the claim that the government is losing billions on bad loans is
incorrect.
NEXUS
39
The call for reform of the for-profits: The for-profits are gorging on stimulus
money by using boiler room tactics to lure students
As has been shown and as is only logical, it is in the interest of for-profit institutions to enroll those students who are
most likely to persist and ultimately graduate. As is the case with the military, who must recruit if it is to fill its ranks,
students for whom college is not an expected step need to be informed. Students respond to the advertisements of
for-profit institutions because they have either not succeeded in traditional institutions or these have made little or no
effort to address their needs. And as has been shown, their debt levels are comparable to those of students similarly
situated in traditional institutions.
Yet recruitment of at-risk students and "saddling" them with debt is the justification given for eliminating
the "safe harbor" rulings that USDOE put in place to help guide for-profit institutions as they seek to comply
with the prohibition against incentive compensation.
These rulings resolved much of the chaos surrounding the prohibition and have provided a modicum of
safety from predatory law firms that shop for, and often implant, employees or students willing to claim a
college has violated USDOE regulations. Indeed, since the announcement that they would be removed, 23
lawsuits have been filed.
The elimination of the safe harbors will make it almost impossible to reward enrollment counselors, or any
one else in the institution, for superior performance in helping to make access possible.
Relying solely on the basis of rare instances of abuse (see note 28, Appendix 1), USDOE proposes to reverse
itself in a way that will simply reintroduce the chaos of the past and open the door to more predatory law
firms. Surely that will not promote greater accountability or better student outcomes. And it bears asking,
What other American enterprise is required to bar compensation based on performance?
NEXUS
The call for reform of the for-profit sector should rest on objective research,
not questionable assumptions
At the August 4, 2010 HELP hearing Gregory D. Kutz, Managing Director Forensic Audits and Special
Investigations, testified that 15 out of 15 for-profit colleges examined by the GAO in the course of a
((mystery shopper" investigation ((encouraged fraud and engaged in deceptive and questionable marketing
practices."
26
Right after the hearing the Career College Association, along with a number of for-profit institutions, made
it clear that they found the ((GAO report deeply troubling" and would ((increase emphasis on
compliance ... immediately."
27
Given the seriousness of the charges found in the GAO report (four of which were alleged to be
fraudulent), it is apparent that the for-profit sector- indeed, the non-profit and public sectors as we/1_-
are in need of better oversight mechanisms both externally, through a tightening of the accreditation
review process, and internally, through better training and closer supervision.
That said, the regulatory changes called for should rest on solid research, not questionable assumptions.
NEXUS
41
Is the entire orchard contaminated? What is the prevalence of "bad
actors"?
Unlike the GAO mystery shopper study whose results concerning 15 campuses were presented at the second
HELP hearing, the GAO previously undertook a substantially more comprehensive study, that time using
sound scientific research principles, which covered thousands of colleges and universities looking for
violations of USDOE regulations between 1998-2009.
In that study of thousands of institutions the GAO found only 22 for-profit institutions in violation of
Departmental regulations.
28
Clearly, 22 out of several thousand seems to indicate a low probability
that "the orchard is contaminated."
Almost every company has employees who violate company policy, but that is not a basis for claiming
that all employees violate policy or even that many violate company policy.
Over the past year, every media report of boiler-room tactics has been anecdotal- with no data
beyond reporting a conversation with one or two employees. The recent GAO mystery shopper probe
of 15 campuses is no exception.
NEXUS
42
"Bad actors" are unlikely to last long in the for-profit environment
It is difficult to objectively characterize an institution like UOPX of being a ubad actor." Why?
UOPX has 20,000 staff, 30,000 faculty and 465,000 students at 200 campuses in 40 states and online
students in all 50 states. Its size alone demands robust compliance and quality control systems-and
it experiences continuous oversight by institutional and programmatic accreditors along with over
40 state regulating bodies plus USDOE.
Between Enrollment, Academic, and Financial counselors, UOPX employs nearly 10,000 people.
Almost the totality of their contact with prospective or current students is by phone. These
counselors make approximately 25,000 recorded calls per day. A call containing a word or phrase
indicating a possible infraction is electronically tagged for immediate action.
Its 66 Quality Assurance personnel monitor, analyze and respond to these calls. If a prospective
student or students has been misinformed or is not successful in obtaining service, the student is
called within 2 hours.
Counselors who visit companies complete logs of all visits which aid Quality Assurance personnel in
the investigation of any reported infraction.
Any employee who has failed to follow policy is subject to being counseled, retrained, reprimanded,
or discharged. (The employees involved in the much ballyhooed unauthorized recruitment at a
homeless shelter did not remain for long in UOPX.
29
)
NEXUS
43
"Bad actors" among the critics of the for-profit sector
We noted earlier that the present state of acrimony concerning the for-profit sector has reached its crescendo with
three reports that have set the tone of the present debate. One of these, Subprime Goes to College, is the testimony
at the first HELP hearing (June 24) of Steven Eisman, a well -known short seller.
It is not the purpose of this study to address the ethical and perhaps legal questions surrounding the invitation of a
short seller to testify at a Senate hearing where his testimony would (and did) help to line his pockets. The troubling
nature of this affair is well captured in a recent Huffington Post piece by Melanie Sloan, Executive Director, Citizens
for Responsibility and Ethics in Washington.
30
Having enumerated a number of cases where short sellers have sought
to manipulate the negotiated rule making process and the HELP hearings for personal gain, she goes on to note,
"These examples suggest there may be a concerted effort by those who stand to benefit financially to drive
down the stock price of certain for-profit schools. Knowing this/ how can we be sure that the new regulations
the Department of Education is proposing are really in the best interest of the Americans most likely to attend
these schools? Even more disturbing, the revelations of the hedge fund managers' efforts here raise the specter
of whether federal oversight and regulatory processes are being secretly manipulated for financial benefit in
other instances.
While for-profit colleges have been rightfully criticized for offering little transparency as to how well taxpayers
have been served by our substantial investment in that industry, some of the efforts to fuel anger against and
encourage regulation of these schools are similarly lacking in transparency. Congress and the Department of
Education should remain vigilant against the efforts of a few opportunistic multi-millionaires to abuse the
regulatory process for their own pecuniary interests."
We will now turn to the merits of Eisman's often quoted testimony.
NEXUS
44
Mr. Eisman's allegations made before the HELP Committee
Mr. Eisman's testimony repeated USDOE's charges of misbehavior which, as is evident from the data presented
in this study, are incorrect.
Mr. Eisman: For-Profit institutions recruit students with the greatest financial need and put them into their highest
cost institutions ... and why? To maximize the amount of Pelf Grants and Title IV loans their students can receive.
For-profits are able to enroll students because students see them as a superior choice for themselves. Many have
tried other public and non-profit institutions and have found those unable to meet their needs as workers,
parents and adults.
Mr. Eisman: The entire business model of for-profit schools is centered on growing enrollment-it is the single most
important measure of growth and profitability_ period.
Enrollment grows at the for-profits because students see them as the best choice, and growth and profitability
follow when students succeed in both learning outcomes and degree completion. To the extent the latter are
missing, enrollments and profitability will necessarily decline along with investor interest.
Mr. Eisman: The high default rate among students at for-profit colleges leaves poor students in debt for an education
that does not prepare them for a job that would allow them to pay their loans.
As this study shows this statement is incorrect. According to a number of studies, the type of institution attended
(for-profit or traditional) accounts for only approximately 5% of the total contribution to increased student
default for high-risk students.
31
Thus defaults among for-profit students are no higher than would be expected
given their lower level of income and the lower income of their families.
Mr. Eisman: For-Profit schools are spending only slightly more than half of revenues actually educating students, and
in several cases are shrinking the amount spent on instruction and increasing the compensation of the managers.
Revenue spent on instruction by public institutions averages 48% and for all traditional institutions (including
non-profits) 52% . At the University of Phoenix in 2009 it was nearly 55% of total expenses.
32
NEXUS
45
Has subprime gone to college?
The most disturbing claim in Mr. Eisman's testimony is that if present lending trends continue, USDOE uwill face nearly
$275B in defaults over the next 10 years on a half-a-trillion dollars of lending to the For-Profit Industry."
Figure 17, which he presented at the HELP hearing, presents a false and misleading view of the cost to the government
from defaulted loans.
Figure 17
If thes., trPnds continttl>, WP bPlievP thP DOF. will face nearly $27?iR in ovl>r
the next 10 years on a ht'llhHrillion dollars of lendu1g to the f or-Profit Indust:ry
SMO

$400
L}>U
m

!

.3

- S<O
!
S1SO
$100
$50
so
I
Prof ett d (InS I 3nd Cumulatv Dt fllultd Doll:u-s
lor ForProflt Educat ion Students. 2007 2020
OToml S1a1\'o<OI O:UISII'> FP 'ill ,_l'S
I

5-123
And DOC3U$(1 offrxJS 3SSOCi;nqd <.ti!il
clef>J.ult. uw <lllle.:.i:>
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. . me3tllrlg For-e.ront srudents will owe
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-
-
BilliOn {[Of Iars on Clef8Uflft$J.IOU!1S
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2007 2008 2009 2010 20 11 2012 2013 20 1 2010 2017 2018 2019 2020
!o..tf'!t 3.1
)
In addition, as we noted previously, there is no net loss to the government from student's defaulted loans because
repayments on defaulted loans range from $1.11 to $1.22. Given the cost of funds to the government, the difference
between what is collected on a non-defaulted and a defaulted loan is very small.
the claim that the government is losing $330 billions as noted in the slide is false.
NEXUS
A F:"(lll; 1 C"Ut 46
Furthermore, Mr. Eisman fails to consider four crucial factors that counter his
claim that future loan defaults represent a bubble analogous to the subprime
bubble
First, this is a false analogy. Defaulted student loans only lower the Government's profit while toxic mortgages
brought bankruptcy.
Second, using his own assumptions, for-profit schools will pay $75 billion in income taxes from 2010-2020.
Third, the government receives interest income from performing Title IV loans, which would total $35 billion
from 2010-2020.
Fourth, his analysis does not include recovery rates on defaulted loans. At any recovery rate above 42%, for-
profit schools will actually generate a profit to the US taxpayer from 2010-2020 versus a taxpayer loss of
$510 billion on similar students at community colleges.
Lastly, his claim assumes that community colleges are the cheapest education option and the source of
needed future capacity. However, community colleges are very expensive for taxpayers, who must provide
approximately $7,000 in annual subsidy for every student enrolled in one. And that's assuming there is
additional capacity in community colleges (which there is not).
NEXUS
47
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z
0
-
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....J
u
z
0
u
Conclusion #1

There are three major arguments put forth by those demanding reform of the for-profit
sector:
1. The for-profits are {I ripping off" the taxpayer as they ugorge" on the stimulus money.
2. They are loading up low-income students with debts they cannot pay.
3. The for-profits are delivering education of such low quality their students are unprepared for gainful
employment.
The statistical data presented in this study answer the first two arguments, namely:
o For-profit institutions do not cost the government billions of dollars; rather, they cost the
government nothing.
o For-profit institutions are not loading up low-income students with any more debt than could be
expected based on their risk factors, especially their low personal and family incomes.
NEXUS
49
Conclusion #2

No statistical data have been presented in defense of the argument that the for-profits are
providing poor education.
D Instead, those demanding reform accept as prime facie evidence that because of their for-profit status,
these institutions cannot possibly deliver a good education.
D The only basis upon which to judge the quality of learning outcomes delivered by the for-profits is to
compare them with the measured outcomes in traditional institutions.
D And since we know that measurement in this area is possible (see, for instance, slide 34), the question
is, why have those measurements not been undertaken?
They have not been undertaken because traditional institutions have vigorously resisted
measuring their learning outcomes for several reasons:
D Many believe there is no objective way to properly measure learning outcomes in all disciplines.
D Most are concerned about making public their learning outcomes for fear the results will be used
against them.
D Some believe that the only quantitative measures needed to affirm the learning outcomes of their
students are their inputs: quality of faculty, students and resources.
D A few argue that the learning outcomes of each professor's students are unique to the professor, and
thus comparable measurements are impossible.
NEXUS
50
Conclusion #3

The Commission on the Future of Higher Education (operating when Margaret Spellings was Secretary of
Education), sought to rebut the arguments which the traditionals levied against measuring learning
outcomes, but to no avail. Resistance to measurement was so strong within the traditional sector that the
Commission was unable to achieve this reform. In fact, one of its reasons for supporting the for-profit
sector was their leadership in measuring the learning outcomes of their students.
For there to be any credibility in the third major argument put forth by those who demand reform, they
must provide evidence, based on generally accepted learning measurement protocols, that the learning
outcomes of for-profit students are lower than comparable students at public institutions.
If the call for {/reform" of the regionally accredited for-profit colleges and universities is to have a useful
outcome, it should be the renewal of the call for all institutions of higher education to publish data on the
learning outcomes of their students. Only then can the taxpayers have the data needed for the efficient
disbursement of local, state and federal education subsidies.
NEXUS
51
Conclusion #4
For-profit colleges and universities would not exist if traditional institutions had organized themselves
to serve all potential students, had not raised tuition so high, and not restricted access so sharply that
America fell from first in college graduates among nations to 12th. With little money and little wilt
traditional institutions cannot provide access to the 22 million new students needed to lead the world
in college graduates. As this study helps to make clear, achieving this goal is not possible without the
for-profit colleges and universities.
iii;!\.,, ....... '
~ ~
~ N E X U S
: ..... .,, ~ p,,,1" c
52
Appendix 1: Endnotes
1
Sum of Federal Grants, Contracts (which includes Pell) and Federal Appropriations. Details: Federal funds received by/di rected towards
institutions- includes Federal Grants, Contracts and Appropriations as reported to I PEDS. Since UOPX, the largest of the For-Profits, reports the
corresponding federal assistance received by students as revenue, to capture the same data that the other sectors capture under GASB and FASB
reporting as Federal Grants and Contracts, an assumption was made that the federal support received by this sector was comparable to the Pell,
Academic and National Smart Grants received during AY2007-08. For-profits do not receive Federal Appropriations. NOTE: Title IV loans and Gl Bill
grants are not reflected in this line item for any of the sectors. Title IV loans are subject to repayment and recipients of the Gl Bill must serve their
country in exchange for these grants.
2
Government Subsidy was calculated for the reported period by taking the average of 3-month Treasury Bill rate of 2.91% times the total subsidized
loans disbursed in AY2007-08. Details: Government Subsidized Title IV loans (FFEL and Direct Loans) are interest-free to the student while in-
school, but represent a cost to the Federal Government and thus the taxpayer. The cost of this subsidy was estimated to be the equivalent of the
average 3-month Treasury bill rate (2.91%) times the total subsidized loan disbursements made during AY2007-08.
3
Forgone Taxes include investment income which would otherwise be subject to a 40% tax rate, increases to the endowment taxed at a 25% gift tax
rate and sales and other taxes at .5% of operating revenues. Details: Public and private institutions are tax-exempt. As such, they do not pay tax
on investment income, increases to endowments (gifts), or operating revenues. For-profits pay sales tax on revenues (which include Pelland Title
IV loans) and income taxes on operating profits and investment income. In an effort to make the analysis meaningful, the position was taken that
non-payment of taxes represents a cost to the taxpayer and payment of taxes represents a benefit received by the taxpayer (see also footnote 6
below).
4
Sum of State and Local Grants, Contracts and Appropriations. Details: State and local support received by/directed towards institutions- includes
state grants, contracts and appropriations plus local/private grants, contracts and appropriations. Since UOPX, the largest of the For-profits, reports
any state and local assistance received by students as revenue, to capture the same data that the other sectors capture under GASB and FASB
reporting as State and Local Grants and Contracts, data was pulled directly from the State and Local Grants I PEDS submissions for this sector. For-
profits do not receive State Appropriations.
5
Interest that accrues on Unsubsidized Loans (6.8%) and Parent and Grad PLUS loans (8.5%) while student is in school that gets added to principal
loan balance. Details: The Federal Budget takes into account that the government collects 100% on average for each Title IV dollar loaned
("principal"), regardless of default rates. This is due to the government's ability to charge students for collection and other fees with very
aggressive collection tools (wage garnishment and offsetting tax refunds). Given that interest accrued while students are in-school is included in
the principal, the assumption was made that the taxpayer benefits by an amount equal to the interest charged on unsubsidized (6.8%) and Parent
and Grad PLUS loans (8.5%) disbursed during the period. NOTE: The position was taken that any loss incurred by the taxpayer associated with the
servicing of loans impacted profits, interest earned not dollars loaned.
NEXUS
53
6
Corporate Taxes reflect Sales Tax paid (0.5% of revenues) and Tax Paid on Net Profits (estimated at 10.8% of revenues) .
7
NCES Enrollment in Postsecondary Institutions, Fa/12008, based on 2004 cohort (2-yr degree) or 2002 cohort (4-yr degree) completing in 150% of
normal program completion time.
8
Data from the National Center for Higher Education Management Systems.
9
2-yr degree: 5 million targeted graduated I 22% graduation rate; 4-yr degree: 8.1 million targeted I 54.9% graduation rate.
10
Estimated
11
Net Cost to Taxpayers Analysis
Objective: Compare for-profit, regionally accredited universities (" For-Profits") -with UOPX being a subset of that population-with their peer
group (a sample of 20 community colleges, public and private universities) to determine the net cost to taxpayers for each sector on a per student
basis. An additional comparison was made to "Elite" universities for added perspective.
Data Analyzed: Publicly available information for all reporting sectors (public, private and proprietary/for-profit). The primary source for this
information was the Integrated Postsecondary Education Data System (I PEDS) which serves as the core postsecondary education data collection
program for USDOE's National Center for Education Statistics (NCES). Unless otherwise noted, the website used as a source for I PEDS data is:
http://nces.ed.gov/ipeds/datacenter/Default.aspx.
Accounting Standards: Public-sector follows Governmental Accounting Standards Board (GASB) when reporting to I PEDS. Private and for-profit
sectors follow Financial Accounting Standards Board (FASB) when reporting to I PEDS.
Student Population: Public & Private Sector: Full-time equivalent (FTE) as reported in the IPEDS Fall 2008 submission was used given that state and
federal governments use this figure to allocate resources. For-profits: 12-Month Unduplicated Headcount- all students are considered "full-time"
for purposes of I PEDS submissions.
Research Expense: The amount of money spent on research activities was considered a benefit to society and was therefore deducted from the
cost to taxpayers for public and private institutions.
Caveat : This schedule analyzes total dollars for each relevant category in relation to the student population it serves. It is not meant to be indicative
of a typical student within the sector. Rather, it is an argument in support of for-profits playing a critical role in the President' s Initiative at a limited
cost to the taxpayer, especially when compared to their peer group.
NEXUS
54
Appendix 1
OPERATIONAL DEFINITIONS AND PROCEDURES
FOR ENDNOTE 11
Institution Groupings
1. Arizona State University
2. University of Central Florida
3. California State University -Fullerton
4. University of Florida
5. Florida International University
6. University of Illinois-Urbana-Champaign
7. Florida State University
8. University of Maryland-College Park
9. Indiana University-Bloomington
10. University of Michigan-Ann Arbor
11. Michigan State University
12. University of Minnesota-Twin Cities
13. Ohio State University (The)
14. University of South Florida
15. Purdue University
16. University of Texas-Austin
17. Texas A&M University
18. University of Washington-Seattle
19. University of Arizona (The)
20. University of Wisconsin-Madison
NEXUS
Austin Community College
Northern Virginia Community college
Central New Mexico Community College
Oakland Community College
Columbus State Community College
Palm Beach Community College
Cuyahoga Community College
Pima Community College
El Camino Community College
Portland Community College
El Pa,so Community College
Riverside Community College
Florida Community College-Jacksonville
Salt Lake Community College
Houston Community College
San Jacinto Community College
Mesa Community College
Tidewater Community College
Miami Dade College
Valencia Community College
55
Appendix 1
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Boston University
National University
Brigham Young University-Provo
New York University
Columbia University in the City of NY
Northeastern University
DePaul University
Nova Southeastern University
Embry-Riddle Aeronautical University-Daytona Beach
Park University
George Washington University
Saint Leo University
Harvard University
Syracuse University
Indiana Wesleyan University
Temple University
Johns Hopkins University
usc
Liberty University
Webster University
f-VI ~ ! 1 d I= I III J
Academy of Art University
American Intercontinental University
American Public University System
Argosy University
Art lnstitute(s)
Ashford University
Capella University
Colorado Technical University
DeVry University
Grand Canyon University
Heald College
Kaplan University
Keiser University
South University
Strayer University
Sullivan University
TUI University
University of Phoenix
Walden University
Western International University
56
Appendix 1
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Harvard University
Yale University
Princeton University
Sarah Lawrence College
Smith College
Amherst College
Bryn Mawr College
Vassar College
Harvey Mudd College
Wellesley College
Bowdoin College
Swarthmore College
Skidmore College
*For a complete list of the 58 colleges and universities charging $50,000 or more in tuition, see
http://chronicle.com/article/Table-Dozens-More-Colleges/49002/
NEXUS
57
Appendix 1
1 - Number of Students
IPEDS data- Full -time equivalent enrollments are derived from the fall enrollment survey for Public and Private Institutions
Path for For-Profits
1. 12 Month Enrollment
2. 12 Month Unduplicated Headcount
3. Gender
4. 2007-08
5. Level of Student- all students total
6. Select From List of Variables- Grand total
2 - Direct Government Support
IPEDS data
Path
1. Finance
2. Public institutions - GASB 34/35
3. Revenue and other additions
4. 2007-08
5. Federal operating grants and contracts
6. State operating grants and contracts
7. Local/private operating grants and contracts
8. Federal appropriations
9. State appropriations
10. Local appropriations, educational district taxes, and similar support
Note- Public institutions in Pennsylvania were excluded from this analysis because they use FASB standards.
NEXUS
58
Appendix 1
Private Not-For-Profit- FASB Standards
!PEDS data
Path
1. Finance
2. Private not-for-profit institutions or Public institutions using FASB
3. Revenues and investment return
4. 2007-08
5. Federal grants and contracts
6. State grants and contracts
7. Local grants and contracts
10. Local appropriations
Note -It was assumed that all not-for-profit institutions accounted for Pelland other grants as part of federal grants
and contracts
NEXUS
59
Appendix 1
Private For-Profit- FASB Standards
Website- http:/ /federalstudentaid.ed.gov/datacenter
Path
1. Programmatic Volume Reports
2. Grant Volume- Grant Program- select AY 2007-2008 Q4
3. Q4 07-08 YTD tab
4. Sum disbursements
5. Federal Pell Grant Program
6. Academic Competitiveness
7. National Smart Program
IPEDS data
Path
1. Finance
4. 2007-08
Note -It was assumed that all federal grants and contracts for for-profit institutions were Pelland all state and local grants
were as reported in IPEDS.
NEXUS
60
Appendix 1
3- Student loan Interest Rate Subsidy
Website- http://federalstudentaid.ed.gov/datacenter
Path
2. Loan Volume- Direct Loan Program- AY 2007-2008 Q4, Tab 2
3. Federal Family Education Loan Program- AY 2007-2008 Q4, Tab 2
4. FFEL Subsidized-$ of disbursements
5. DL Subsidized-$ of disbursements
Note- FFEL and DL subsidized loans incur no interest while recipients are in-school. It was assumed that the interest-free
loans extended to students in-school amounted to a subsidy for higher education and the value of such subsidy was
calculated by taking the average 3-Mth Treasury Bill rates for July '07- June '08 (estimated cost to the Government) times
the subsidized loan disbursements during AY 2007-08.
4- Expected Interest Paid on Student loans
Path- Same as in Step 3 above
Notes
The amount of money earned in interest for loans during the 2007-08 school year was calculated by multiplying the
applicable interest rate times the amount of FFEL & DL disbursements
The interest rates were
FFEL & DL Unsubsidized- 6.8%
FFEL & DL Parents Plus- 8.5%
FFEL & DL Grad Plus- 8.5%
The time value of money was not considered in the estimates
NEXUS
61
Appendix 1
5- Taxes Foregone (Paid) on Investment Income
IPEDS data
Paths
Finance
Public institutions- GASB 34/35
Revenue and other additions
2007-2008
Investment income
Notes
Finance
Private not-for-profit institutions,
or Public institutions using FASB
Revenues and investment return
2007-2008
Investment return
Finance
Private for-profit institutions
2007-2008
Investment income and
investment gains (losses)
included in income
Investment income
It was assumed that taxes not paid on investment income were a subsidy to public and not-for-profit institutions.
Investment income taxed at the corporate rate of 40 percent was added to the cost to taxpayers for public and not-
for-profit institutions. On the other hand the taxes paid by for-profit institutions were subtracted from the cost to
taxpayers.
The I PEDS definition of investment income for not-for-profit and for-profit institutions includes unrealized gains. It
was assumed that these gains will be realized at some point in the future and therefore included in the estimate
NEXUS
62
Appendix 1
6- Taxes Foregone (Paid) on Additions to Endowments
I PEDS data
Paths
Finance
2007-2008
Gifts, including contributions
from affiliated organizations; and
Capital grants and gifts
Notes
Finance
2007-2008
Private gifts, grants, and
contracts; and Contributions from
affiliated organizations
For-profit institutions
The tax not paid by the contributors was considered to be a subsidy for public and not-for-profit education.
The taxes foregone by contributors was assumed to be 25 percent of the total
Additions to investment capital for for-profit institutions was not considered in the calculations
NEXUS
63
Appendix 1
7 - Taxes (Paid) on Corporate Profits
Data Sources
IPEDS data
Apollo Group Annual Report- Fiscal 2008
IPEDS path
N/A N/A Finance
2007-2008
Total revenues and investment
return
Notes - The income tax paid by for-profit institutions was assumed to be the same as University of Phoenix's
10.8 percent rate for fiscal 2008. This amount was subtracted from the cost to taxpayers for the for-profit
institutions.
NEXUS
64
Appendix 1
8 -Sales and Other Taxes Foregone (Paid)
Notes- It was assumed that .5 percent of net revenues, estimated in step 8 above, were paid for sales, real estate, and
other state and local taxes. This amount was subtracted from the cost to taxpayers for the for-profit institutions.
Conversely, this amount was added to the cost to taxpayers for public and not-for-profit institutions.
9 - Research Expense
I PEDS data
Not-for-profit institutions For-profit institutions
Finance Finance Finance
Public institutions- GASB 34/35 Private not-for-profit institutions, Private for-profit institutions
Expenses and other deductions Expenses by function Expenses by function
N 2007-2008 2007-2008
Research- Current year total Research- Total amount Research and public service
The amount of money spent on research activities can be considered a benefit to society and was therefore deducted from
the cost to taxpayers for public and not-for-profit institutions.
NEXUS
65
Appendix 1
12
See Other Ways To Win: Creating Alternatives for High School Graduates, Kenneth Carter Gray, Edwin L. Herr, 2"d Ed., Thousand Oaks, CA: Corwin
Press, 2000.
13
AP-Univision Poll: College Dreams for Hispanics, Ricardo Alonzo-Zaldivar and Trevor Tompson (AP), Jul 28, 2010,
http:l/www.google.com/hostednews/ap/article/ALeqMSjUxEFfBJq40hE877S6 9 fldH3vAD9H8HQBOO
14
U.S. Department of Education- National Center for Education Statistics, 2007-08 National Postsecondary Student Aid Study (NPSAS:08).
15
See www.adaction.org/media/Report%20Summary.pdf
16
Bureau of Labor Statistics, Current Population Survey. Data are 2009 annual averages for persons age 25 and over. Earnings are for full-time wage
and salary workers. http://www.bls.gov/emp/ep chart OOl.htm . See Higher Education at the Crossroads, Apollo Group, Inc., August 2010, Exhibit 1,
p. 8; http://www.apollogrp.edu/lnvestor/Reports/Higher Education at a Crossroads FINALv2[1].pdf .
17
Source: University of Phoenix data based on institutional research on entering student income, registration survey completing student income and
end-of-program survey; national data from Culpepper and Associates compensation and benefits surveys, published in University of Phoenix
Academic Annual Report, http://www.phoenix.edu/about us/publications/academic-annual-report.html
18
Economic Impact of America's Career Colleges. Washington, D.C.: Imagine America Foundation, 2007, Table 1, Table 3, pp. 1, 9.
19
Parthenon Perspectives on Private Sector Post-Secondary Schools: Do They Deliver Value to Students and Society?, Robert Lytle, Roger Brinner, Chris
Ross, Boston: The Parthenon Group, 2010, p. 10.
20
Source: Educational Testing Service (ETSL Measure of Proficiency and Progress (MAPP) . Note: Masters colleges include institutions that offer
baccalaureate through graduate ;"Educational Testing Service (ETSL Measure of Proficiency and Progress {MAPP}, results published in University of
Phoenix Academic Annual Report, http://www.phoenix.edu/about us/publications/academic-annual-report.html . See Higher Education at the
Crossroads, Apollo Group, Inc., August 2010, Exhibit 18, p. 28.
21
Higher Education at the Crossroads, Apollo Group, Inc., August 2010, p. 29.
22
Source: National Postsecondary Student Aid Study, USDOE; see Chronicle of Higher Education, Almanac Issue 2010-11, August 27, 2010, p. 40.
66
Appendix 1
23
Estimated Repayment Rates by lnstitution--FY 2009; ge-cumulative-rates.xlsx ; analysis of data performed by Mark Schneider, AIR.
24
Higher Education at the Crossroads, Apollo Group, Inc., August 2010, Exhibit 20, p. 30.
25
0ffice of Management and Budget (OMBL Federal Credit Supplement, Budget of the U.S. Government, Presidenfs FY2011 (FY2010 subsidy
estimatesL Table 3 (DIRECT LOANS: ASSUMPTIONS UNDERLYING THE 2010 SUBSIDY ESTIMATES L pages 14-15.
http://www. whitehouse.gov /omb/budget/Su pplemental (p. 23 ).
26
For-Profit Colleges: Undercover Testing Finds Colleges Encouraged Fraud and Engaged in Deceptive and Questionable Marketing Practices,
Testimony Before the Committee on Health, Education, Labor, and Pensions, US Senate. (GA0-10-948T, August 4, 2010;
http://www.gao.gov/new.items/d10948t.pdf )
2
7
See, for example,
http://www.career.org/iMISPublic/AM/Template.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=21024;
http ://phx. corporate-ir. net/phoenix.zhtm l?c= 79624&p=irol-newsArticle&l D=145 707 6&highlight=; http://www .sun-
sentinel.com/news/broward/pembroke-pines/fl-kaplan-for-profit-investigation-20100805,0,7297093.story.
28
Higher Education: Information on Incentive Compensation Violations Substantiated by the Department of Education, February 23, 2010.{pp. 2,
10-12} GA0-10-370R Higher Education http://www.gao.gov/new.items/d10370r.pdf .
29
See http://www.phoenix.edu/about us/media relations/for-the-record/university-of-phoenix-responds-to-good-morning-america.html .
30
Melanie Sloan, "For-Profit Education: Will We Ever Learn?", posted August 18, 2010, http://www.huffingtonpost.com/melanie-sloan/for-
profit-education-will b 686100.html.
3
1
" Factors Affecting the Probability of Default: Student Loans in California", NASFAA Journal of Student Financial Aid, Jennie Woo, 2002;
Parthenon Perspectives on Private Sector Post-Secondary Schools: Do They Deliver Value to Students and Society?, Robert Lytle, Roger
Brinner, Chris Ross, Boston: The Parthenon Group, 2010, p. 29).
3
2
U.S. Department of Education, National Center for Education Statistics, Digest of Education Statistics 2008,
http://nces.ed.gov/pubs2009/2009020.pdf; Higher Education at the Crossroads, Apollo Group, Inc., August 2010, p. 27.
67
Appendix 2: Proposed Gainful Employment Definitions, Regulations
and Potential Consequences
Program
Federal fiscal year (FFY)
3 year period (3YP)
Prior 3 Year period
(P3YP)
Earnings Year
Loan repayment rate
Calc
Original Outstanding
Principal Balance (OOPS)
Loans Paid in Full (LPF)
Reduced Principal Loan
(RPL)
A program refers to any educational program offered by the institution under 668.8(c)(3) or (d);
A Federal fiscal year (FFY) is the 12-month period starting October 1 and ending September 30;
A three-year period (3YP) is the period covering the three most recently completed award years prior to the earnings
year;
A prior three-year period (P3YP) is the period covering the fourth, fifth, and sixth most recently completed award years
prior to the earnings year (i.e., the three years preceding the 3YP);
Earnings year is the most recent calendar year for which earnings data are available
- --
(OOPB of LPF plus OOPB of RPL)
(OOPB of all loans for students attending the program)
The OOPS is the amount of the outstanding balance on FFEL or Direct loans owed by students who attended the
program, including capitalized interest, on the date those loans entered repayment.
The OOPS of all loans includes the FFEL and Direct loans that entered repayment for the prior four FFYs.
LPF are loans to students who attended the program that have been paid in full. However, a loan that is paid through a
consolidation loan is not counted as paid in full for this purpose until the consolidation loan is paid in full.
The OOPS of LPF in the numerator of the ratio is the total amount of OOPS for these loans.
RPL represents a loan where payments made by a borrower during the most recently completed FFY reduced the
outstanding principal balance of that loan from the beginning of that FFY. RPL also includes loans for borrowers whose
payments during that FFY qualify for the Public Service Loan Forgiveness program, even if there is no reduction during
the FFY in the outstanding principal balance of those loans.
The OOPS of RPL in the numerator of the ratio is the total amount of the OOPS for these loans.
Exclusions from the calc The following are excluded from both the numerator and the denominator of the ratio:
(i) The OOPS of borrowers on an in-school deferment or a military-related deferment status.
(ii) The OOPS of borrowers entering repayment after March 31 of the most recent FFY.
Appendix 2
Discretionary Earnings
Threshold
Total Income Threshold
Annual Loan Payment
Average annual earnings
Discretionary Income
Prior 3YP data can be
used by the Institution as
a substitute for average
earnings data if:
Annual loan payment < Discretionary threshold * (Average Annual Earnings- (1.5 * Poverty Guideline))
(Discretionary threshold= either 30% (Low threshold) or 20% (high threshold))
Annual loan payment < Earnings threshold * Average Annual Earnings
(Earnings threshold= either 8% (high threshold) or 12% (low threshold))

The Secretary determines the median loan debt of students who completed the program at the institution during
the 3YP and uses this amount to calculate an annual loan payment based on a 10-year repayment schedule and
the current annual interest rate on Federal Direct Unsubsidized Loans.
o Note: No change from prior version
' If data are available, the Secretary also calculates the median loan debt of students who completed the program
during the P3YP.
In general, loan debt includes title IV, HEA program loans, other than Parent PLUS loans, and any private
educational loans or debt obligations arising from institutional financing plans.
Loan debt does not include any debt obligations arising from student attendance at prior or subsequent
institutions unless the other and current institutions are under common ownership or control, or are otherwise
related entities.
o Note: Institutional debt only is calculated
The Secretary uses the most currently available actual, average annual earnings obtained from a Federal agency, of the
students who completed the program during the 3YP and, if the data are available, during the P3YP.
Notes:
We can't get these data; and it specifies that we will NOT be able to get this data in the future either
Earnings will likely come from the Social Security Administration, or some other federal entity
The difference between average annual earnings and 150 percent of the most current Poverty Guideline for a single
person in the continental U.S. The Poverty Guidelines are published annually by the U.S. Department of Health and
Human Services (HHS) and are available at http://aspe.hhs.gov/poverty
(i) The institution shows that students completing the program typically experience a significant increase in earnings
after an initial employment period and explains the basis for that earnings pattern; and
(ii) The institution provides the Secretary the information needed to calculate the annual debt measures under this
section, including the CIP code, and for each student who completed the program, the completion date, the amount
received from private educational loans, and the amount of debt incurred from institutional financing plans.
Appendix 2
Debt warning
disclosures
Restricted Programs
Ineligible program
On or after July 1, 2012, unless the program meets both the repayment requirement AND the Income
requirements, the Secretary notifies the institution that it must:
(1) Include a prominent warning in its promotional, enrollment, registration, and in all other materials,
including those on its Web site, and in all admissions meetings with prospective students, that is designed
and intended to alert prospective and currently enrolled students that they may have difficulty repaying
loans obtained for attending that program
(2) Disclose to current and prospective students, the program's most recent loan repayment rate and most
recent debt measures.
The Secretary notifies an institution whenever one of its program's is placed on a restricted status under
paragraph:
(1) The institution must provide annually to the Secretary the employer affirmations specified in paragraph
(2) The institution must make the debt warning disclosures; and
(3) Limits the enrollment of title IV, HEA program recipients in that program to the average number enrolled
during the prior three award years
Except for the transition year (2012) after July 1, 2012 a program becomes ineligible if it does not satisfy at
least one of the debt thresholds. In this case:
The Secretary notifies the institution that the program is ineligible on this basis, and the institution may
not disburse any title IV, HEA program funds to students who begin attending that program after the
date specified in the Secretary's notice.
However, the institution may disburse title IV, HEA program funds to students who began attending the
program before it became ineligible for the remainder of the award year and for the award year
following the Secretary's notice.
Appendix 2
Transition year for
Ineligible Programs
(i.e. Award year
beginning July 1, 2012)
The Secretary caps the number of ineligible programs:
(A) Sorting all programs subject to this section by category based solely on the credential awarded as
determined by the Secretary (e.g., certificate, associate degree, baccalaureate degree, and graduate and
professional degree) and then within each category, by loan repayment rate, from lowest rate to highest rate;
and
(B) For each category of programs, beginning with the ineligible program with the lowest loan repayment
rate, identifying the ineligible programs that account for a combined number of students that completed the
programs in the most recently completed award year that do not exceed five percent of the total number of
students who completed programs in that category. For each ineligible program that falls within the five
percent grouping by category during the transition period, the Secretary notifies the institution that the
program no longer qualifies as an eligible program.
For every other ineligible program (i.e. those not in the 5% category), the Secretary notifies the institution
that:
(A) It must limit the enrollment of title IV, HEA program recipients in that program to the average number of
title IV, HEA program recipients enrolled during the prior three award years;
(B) It must provide the employer affirmations; and
(C) It must provide the debt warning disclosures.
Employer Affirmations Documentation from employers not affiliated with the institution affirming that the curriculum of the
additional program aligns with recognized occupations at those employers' businesses, and that there are
projected job vacancies or expected demand for those occupations at those businesses. The number and
locations of the businesses for which affirmation is required must be commensurate with the anticipated size
ofthe program.
Appendix 2
DOE Approval for Adding
Additional Programs
Delay in Approval
Calculating the measures
for new programs
Before an institution offers an additional program that is subject to the requirements of this section, the institution
must apply to the Secretary to have that program approved as an eligible program. As part of its application, the
institution must provide:
(i) If the additional program constitutes a substantive change as provided under 34 CFR 602.22(a)(l), documentation
of the approval of the substantive change by its accrediting agency;
(ii) Projected student enrollment for the next five years for each location of the institution that will offer the additional
program; and
(iii) Documentation from employers not affiliated with the institution affirming that the curriculum of the additional
program aligns with recognized occupations at those employers' businesses, and that there are projected job vacancies
or expected demand for those occupations at those businesses. The number and locations of the businesses for which
affirmation is required must be commensurate with the anticipated size ofthe program.
In determining whether to approve the additional program, the Secretary may restrict the approval for an initial period
based on the projected growth estimates provided by the institution and the demonstrated ability of the institution to
offer programs subject to this section.
If the additional program constitutes a substantive change based solely on program content, the Secretary calculates
the loan repayment rate and debt measures for that program as soon as data are available. Otherwise, the Secretary:
(i) Calculates the loan repayment rate by using loan data from the additional program and, for the first three years,
loan data from all other programs currently or previously offered by the institution that are in the same job family as
the additional program. Any loans from the programs in the same job family that enter repayment after the third year
that the loan repayment rate is calculated for the additional program, are not included in that program's loan
repayment rate.
(ii) Calculates the debt measures by using the loan debt incurred by students in the additional program and in all other
programs currently or previously offered by the institution that are in the same job family as the additional program
1
until loan debt data are available for a 3YP solely for the additional program.
72
Appendix 2

Jmr.
Above
45%
35%to
45%
Below
35%
I
Gainful Employment Proposed Rule
Above 12% of Total Income
AND
Above 30.% of Discretionary
Income
"adjusted" Fully Eligible
Restricted
Ineligible
m
r:.1m:1:11
11
F. IT.
Neither Other Column
!"adjusted" Fully Eligible I
Restricted I
Restricted
Below 8% of Total Income
OR
Below 20% of Discretionary Income
Fully Eligible
73
Appendix 2
Overview of Consequences
Pass the Loan Repayment test (e.g. Loan repayment rate
of at least 45%)
AND
Pass the Debt Burden thresholds (e.g. either a debt to
earnings ratio of 20% or less of discretionary income OR
8% or less of average annual earnings.)
Pass the Loan Repayment test
OR
Pass the Debt Burden Thresholds
Fail the highest level of the loan repayment test (less
than 45% but more than 35%)
AND
Fail both of the highest limits of the Debt Burden
thresholds (e.g. either a debt to earnings ratio of
between 20%- 30% of discretionary income or more
than 8%, but less than 12% of average annual earnings.)
Loan repayment rate below 35%
AND
Fail either of the lower limits of the Debt Burden
thresholds (debt-earnings ratio above 30% of
discretionary income and 12% of annual earnings)
Program not in existence long enough to demonstrate
repayment and debt-earnings outcomes.
Consequences
Eligible None.
Eligible Institutions must warn consumers and current students
of high debt levels and provide the most recent debt
measures for the program.
Restricted Institutions must:
(1) demonstrate employer support for the program, and
(2) warn consumers and current students of high debt
levels and provide the most recent debt measures for
the program.
(3) Enrollment growth is subject to limits (no more than
the average new enrollment over the past 3 years)
Ineligible No new students may receive title IV aid. Current
students may continue to receive aid for the rest of the
year and one additional award year. While phasing out a
program, institutions must warn current and prospective
students of high debt loads and reduced ability to repay
their loans from projected earnings and provide the
most recent debt measures for the program.
Adding new Institution must demonstrate employer support for the
programs program, and the new program is subject to limits on
enrollment growth at the discretion of the DOE.
SAMPLE LETTER for Member of the U.S. House of Representatives
Secretary Ame Dtmcan
400 Maryland A venue Southwest
Washington, DC 20202
Dear Secretary Duncan:
I am wri ting to request that the Department ';t,'ithdraw the Notice of Proposed Rulemaking published on Jul y 26,
2010, regarding Gainful Employment. If the draft mle is adopted, it will cut off access to postsecondary education
for hundreds of thousands of students at a time when our country desperately needs more skilled workers.
The Department's most recent proposal to make programs primarily in private sector colleges and universities
ineligible based on a complicated formula that does not tmly measure educational quality- generally referred to as
"gainfttl employment" - should be rejected, because:
It will eliminate access to higher education for many working adults and lower income students.
It will eliminate programs we all deem necessary yet not impact programs that are of questionable value.
By requiring data from the IRS, it raises privacy concerns for students and graduates.
It impacts almost exclusively the proprietary sector of higher education ,.vhile ignoring the same issues
concerning student debt found at public and private non-profit institutions.
It is beyond the Department's statutory authority.
In the reauthorization of the Higher Education Act of 2008, Congress added numerous additional protections, but
we never once debated the Gainful Employment regulations. And it would make these dramatic changes without
Congress being directly involved, even though just two years ago Congress completed action on a comprehensive
updating of the HEA.
I believe Congress, the Administration and the industry should take a more comprehensive look at the retum on
investment of higher education for students and taxpayers. That is why we are in the process of developing a
legislati ve proposal that will create a Quality Index for postsecondary institutions that will consider various
outcomes including graduation, j ob placement, student loan repayments, and pass rates on various credentialing
examinations. Such a metric wi ll also take into account the type of student being educated, understanding that
students with various "risk factors," such as the first to attend college or being a working parent, present additional
challenges to institutions that accept them.
Attached is an outline of the Quality Index prepared by Representative Robert Andrews, (COl-New Jersey). I
strongly urge the Secretary to adopt his as the gainful employment language.
V cry truly yours,
Member of Congress
cc. Speaker Nancy Pelosi
Office of the Speaker
H-232, US Capitol
WashingtoD, DC 20515
Rep. Rob Andrews' Proposed Quality Index f01 Higher Education to be issued in lieu of the present
gainful employment language
Goal: to assure that schools, irrespective of ownership, offering career preparation education are
providing value added for taxpayers.
To achieve this goal, we propose an index as follows:
A. Weighted average factors
I. Job placement in jobs paying at least the 25th percentile of Bureau ofLabor Statistics
reported income for that job in that region (50 percent of score)
ll. Graduation from an accredited program (30 percent of score)
ill. Loan default rate (20 percent of score)
B. Multiplier to take into account a school ' s effort to train those most in need. To calculate the
multiplier, take the percentage ofPell eligible students and add it to l , so a school with 38 percent
Pell eligible has a multiplier of 1.38. Multiply the weighted average of the factors by the multiplier
in order to produce the quality index score.
Success Threshold: To determine the success threshold for this index, one would take the target return
for taxpayers on aid dollars invested, and then determine the score necessary to generate that return. This
number becomes the success threshold.
Consequences: Schools failing to meet the success threshold would be required to develop and
implement remediat1on plans for a given number of years. Schools chronicall y failing to meet the
threshold for a given number of years wouJd lose Titl e IV eligibility for the program in question.
From: Finley Steve
To: Macias, \Vendy
CC:
Date: 9/3/2010 10:07:16 AM
From: Kvaal, James
Sent: Thursday, September 02, 2010 6:32PM
To: Kanter, Martha; Ochoa, Eduardo; Bergeron, David; Kolotos, John; Sellers, Fred; Yuan, Georgia; Finley, Steve;
Chesley, Susan
Subject: FW: A Message from Dr. John Sperling, Founder- University of Phoenix
The powerpoint is worth a read
September 2, 2010
Attn. Legi.slativeDirector
As founder of the University of Phoenix, I am writing to you and to every Member of Congress conceming recent
actions by the U.S. Department ofEducation and the Senate Committee on Health, Education, Labor and Pensions. The
Department of Education, seconded by the HELP Committee, has proposed new rules that will seriously undercut the
seeks to earn a college degree. That is the stated goal of President Obama. However, we will not be able to reach the
President' s goals without for-profit colleges. The states do not have the funding needed to increase capacity whereas
institution.
presents a rationale for the need to rethink the refonns proposed by USDOE and the HELP Committee using as an
exan1ple the case of the University ofPhoenix, whose massive database on its operations and its academics has been
illustrates the strengths and weaknesses offer-profit colleges and universities. The NEXUS study docun1ents the financial
where it has failed to meet regulatory standards and its own code of conduct. It also documents the steps the University
because the interest students pay on their federal loans plus the taxes paid by the institutions is greater than the Pell
shows that not only will the proposed reforms require a major increase in Department of Education oversight staff, they
truly benefit taxpayers, namely to require all institutions of higher education to measure fue learning outcomes of their
performers.
millions of! ow-income Americans now denied access to tl1e education they need to give them a chance to join the
middle class.
The worst of these regulations concerns the definition of"gainful employment'' and a new regulation that sets the
minimum rates at which students in a program must be repaying on the princ1pal of their student loans. The new definition
of gainful employment is so onerous it wouJd make it impossible for the sector to offer many programs that prepare
applied to Historically Black Colleges and Universities, over 900/o of them would have to close their doors.
Representative Robert Andrews (New Jersey- 01) has proposed a definition of gainful employment that would correct
the many faults of the definition proposed by the Department ofEducation. He has written to Education Secretary Ame
Duncan setting forth the negative consequences resulting from the Department's definition while proposing an alternative
support as well. I have attached a draft of a letter of support which we hope you will use as a model for a letter from you
SperlingSigReflexBlue. eps
John G. Sperling
Founder
-
.. For-Profit Colleges and Universities: America's
Least Cost and Most Efficient System of Higher
Education
Case Study-University of Phoenix
Linking Dialogue to Research
Case Studies on Public Policy and Higher Education
di2!U .,,.v@;Aiaa:;:;
Jorge Klor de Alva, President
August, 2010
NEXUS
& Polley
.. E"tluiit!1.f th.z FYJntiers tf High:- Cdacni:.ion''
199 Fremont Street I Suite 1400 I San Francisco
1
CA 94105
Mobile: 602.684.5401 I contact: jorge@nexusresearchcenter.org
Disclosures
Nexus Research and Policy Center
As an independent, nonprofit, nonpartisan organization, Nexus Research and Policy Center is organized to
conduct educational research-such as in the fields of the learning sciences, assessment and measurement-
and to prepare action-oriented analyses of pressing policy issues facing states and the nation regarding the
improvement of educational efficiency, effectiveness and degree completion success, especially on behalf of
underserved student populations and the institutions that provide them access to higher education. In
particular, Nexus seeks to do research and promote policies that improve the for-profit education sector and
that contribute to a better understanding between the for-profit and traditional sectors of higher education.
Nexus Research and Policy Center was incorporated December 15, 2009, in the state of Arizona as a nonprofit
corporation under the Arizona Revised Statues Sections 10-3101 through 10-11702. It is currently in the
process of completing its organizational plans and filing for 501(c)3 status. As of August 2010, its primary
source of funds is donations in cash and in kind from Apollo Group, Inc. and the John G. Sperling Foundation.
To avoid undue influence from its primary funding sources, Nexus has an independent board with no member
selected by either Apollo or the Foundation. The recognized importance of its independence has led both
Apollo and the Foundation to not interfere with its governance, research agenda, or editorial policy. That said,
while we acknowledge that Nexus' full independence may be questioned as a consequence of its funding
sources and in kind donations from Apollo of employee time, its research is based on government data as well
as other objective and reliable sources. These sources and the methodology used to analyze them-all
acknowledged in the endnotes of this study-have been reviewed by independent researchers and auditors
for validity.
NEXUS
2
The reason for this case study
This is the first study by Nexus on the current predicament in which higher education in the United States
finds itself as the Department of Education and Congress initiate a new round of reforms of the
regulations governing for-profit colleges and universities.
For two years, the for-profit sector has been under what some have described as an attack by the
Department of Education, the national media, Wall Street short-sellers, and recently Congress. Although
two Government Accountability Office (GAO) studies completed in 2010 (GA0-10-370R, GA0-10-948T)
have shown a total of only 37 out of over 2,000 for-profit institutions violated investigated regulations
since 1998, the whole sector has been directly or indirectly accused of failing to adhere to regulations or
strict codes of ethics and of neglecting to redress unauthorized actions by staff or faculty in a timely
manner.
Therefore, those criticizing the sector have characterized it as corrupt based literally on the actions of a
few individuals In the words of Senator Tom Harkin, Chair of the Committee on Health, Education, Labor
and Pensions ("HELP"), "It is not that there are a few bad apples among the for-profits, but rather the
entire orchard is contaminated."
This case study seeks to provide evidence that the orchard analogy not only does not hold, but that it is
itself a source of contamination that threatens to destroy what the data suggest is the most active,
efficient, and efficacious part of that sector of American higher education dedicated to teaching. In short,
we hope this case study will permit facts to replace anecdotes, research to displace preconceived
opinions, and the protection of taxpayers to trump misguided bureaucratic regulations.
NEXUS
3
The focus on the for-profit sector is primarily a response to President Obama's laudable
call for America to lead the world in college graduates by the year 2020.
The President sees community colleges as the least cost path to achieve his goals.
For his vision to become a reality, students and institutions will need money. But the major source of
federal funds are Pel I Grants and subsidized loans, a high percent of which go to low-income students who
attend for-profit institutions.
Consequently reform efforts seek to move these funds from the for-profits to the public institutions. This
movement of money from the for-profit sector to community colleges underlies the current investigation of
the for-profit sector.
But this strategy is impossible to carry out and is bad policy.
It is financially impossible to implement because it would cost state and local governments nearly one
trillion dollars to pay for the operating and infrastructure costs required to provide access to the 22 million
students needed to produce the 5 million graduates required to meet the President's goal.*
It is bad policy because for-profit institutions now cost the taxpayers nothing and thus they could help
reach the President's goal at no cost to local, state, and federal governments and thus to the taxpayers.
The following tables and graphs will explain why the public and private institutions alone cannot meet the
President's goal and why for-profit institutions are necessary to meet the goal.
*See www.parthenon.com Parthenon Perspectives on Private Sector Post-Secondary Schools-Do They Deliver
Value To Students and Society, Robert Lytle, March 2010, p.2.
NEXUS
4
What is the annual cost to taxpayers per student at a community college,
public university, private college/university and for-profit college/
university?
Figure 1
1
2
Forgone Taxes3
4
Interest Paid by Students on
Loans
5
Corporate Taxes Paid
6
per student
Research Expense
Adjusted for Research Expense
per Student
All Institutions, Academic Year 2007-081
1
"'
'
Public Public Private
(2 Year) (4 Year) (4 Year)
$ 423 $ 5,225 $ 7,809
17 40 80
152 868 5,933
6,553 9,866 1,293
(29) (146) (377) vs.
$ 7,116 $ 15,883 $ 14,735
(O) (6,175) (8,356)
$ 6,379
Regionally Accredited
For-Profit ( 4-Year) UOPX
(incl. UOPX)
$ 752 $ 735
77 68
105 35
(248) (218)
$ (784) $ (625)
$ (99) $ (5)
G
(5)
Net Cost to taxpayers for public community colleges and 4-yr colleges per student is on average
$8,600 higher than for-profit, regionally accredited institutions.
NEXUS
* See Appendix 1 for all endnotes, including details on endnotes 1-6 and 11.
5
What is the annual cost to taxpayers per student at an elite
college/university?
Figure 2
Elite Institutions, Academic Year 2007-0811
$50K Tuition
Harvard Princeton
Colleges
1
$ 1,265 $ 24,390 $ 18,397
2
42 49 2
Forgone Taxes
3
11,836 69,996 62,655
4
147 160 281
Interest Paid by Students on Loans
5
(199) (280) (35)
Corporate Taxes Pa id
6
Net Cost I (Benefit) to Taxpayer $ 13,091 $ 94,315 $ 81,300
per Student
Research Expense (1,699) (25,996) (29,091)
Net Cost I (Benefit) to Taxpayer Adjusted $ 11,392 $ 68,319 $ 52,208
for Research Expense per Student
NEXUS
Yale
$ 39,745
51
47,079
2,123
(300)
$ 88,698
(36,585)
$ 52,113
6
Cost effective education at scale: The case of the largest for-
profit institution
The financial relationship between taxpayers and the largest for-profit university, the
University of Phoenix, and its 465,000 students:
Figure 3
Tax supported grants and subsidies
1
J
2
&
4
Interest on loans paid by students
5
Corporate taxes
6
Net receipts from the government
Per Student Cost to Taxpayers
NEXUS
$461,390,166
{118,990,581)
(341,613,215)
786,370
{$5.00)
7
Cost effective education at scale: The case of for-profit institutions
Average taxpayer cost of a student per year:
$8,500 at a public institution; $0 at a for-profit institution
Figure 4

$9,000
C!)
$8,000
:>-.
!-.
C!)
0..
$7,000
E
C!)
$6,000
"Cl

-
r:/J
!-.
C!)
$5,000
0..
:>-.
"Cl
$4,000
......
r:/J
.g
r:/J
$3,000
!-.
C!)

0..
$1,000

$0
Public For-Profit
NEXUS
A F:"(lll; 1 C"Ut
8
Who gains the most from taxpayer subsidies?
It is evident from Figures 1-3 that taxpayer support of higher education is heavily skewed in favor of the
affluent.
Those attending the very top of the pyramid receive as much as $68,000 while those at the bottom receive
nothing if enrolled in a for-profit institution. In fact, low-income working Americans end up paying for
100% of their education while students attending public and non-profit institutions receive subsidies
ranging from $7
1
116 to $68,319.
For example, the case of Harvard:
The cost to taxpayers to produce a Harvard Bachelor's degree is approximately $272,000 (4 times the
$68,000 in annual subsidies). This is equivalent to the taxpayer subsidy for 9.5 public community college
students or nearly 7 students attending a public four year college.
Is this fair?
Is this efficient?
More important, from a taxpayer perspective, the $68,000 currently supporting a year's worth of
education at Harvard would yield the highest economic benefit to taxpayers if it were invested in grants
supporting students who are preparing to enter the fastest growing occupations. And as the tables and
graphs make evident, the best return for taxpayers would be in support of these students at for-profit
colleges and universities.
NEXUS
9
Increasing capacity of public institutions to meet President Obama's 2020 degree
completion goal could cost the US taxpayer an additional $826 billion in federal and
state support over the next decade
Figure 5
Cost to Taxpayers of 2020 Degree Completion Goal Using Only
Public Institutions*
Annual Subsidy per Student
1
&
4
Time to Complete Degree
Total Subsidy per Student
Graduation Rate at Public Schools
7
Targeted #of Graduates
8
Gross New Students Enrolled
9
Average length of Stay for Dropouts
10
Cost to Government
TOTAL
For 2-Year Students
(Associate's Degree)
$
6,976
x 2 years
$
13,952
22.0%
5,000,000
22,727,273
For 4-Year Students
(Bachelor's Degree)
$
15,121
x 4 years
$
60,484
54.9%
8, 132,522
14,813,337
6 mont hs 2 years
$ 131,592,728,224 $ 693,928,667,878
$825,521,396,.'102
*This does not include capital for infrastructure to accommodate 22 million
additional students. If needed capital expenditures are included, the costs are
over one trillion dollars.
NEXUS
10
Comparing $826 billion to the cost of other major government initiatives ...
Figure 6
$1,400
$1,200
$1,000
-Ia $800
0
-
=
:c $600
-
.....
~
0
u $400
$200
$0
NEXUS
Patient Protection
and Affordable Care
Act (2010 health care
bill )
Spending to date on
the War in Iraq
Spending to date on
the War in
Afghanistan
American Recovery
& Reinvestment Act
of2009 (fiscal
stimulus)
Milestone government programs
$826
American Graduation
Initiative and 2020
Higher Education
Goals wi thout For-
Profit Schools
11
... it seems unlikely taxpayers will take on the burden. Consequently,
Meeting President goal of having the largest percentage of college graduates in
the world by 2020 is not possible without the for-profit colleges and universities.
it!.'' ....... '

..... .,, p,,,1" c 12
Why, then, is there such an acrimonious call for reform of the for-profit
sector at a time when the Administration most needs its capacity?
The US DOE negotiated rule making process that began late last year opened the way for bitter allegations
against the for-profit sector. Much hostility towards for-profits that had remained under the surface-the
hate that dare not speak its name-had its release facilitated by the assaults from government, media
and Wall Street. Now everyone who wanted to vent their dislike (editors, staffers, short sellers, etc.) had
the opportunity to do so. This state of affairs has reached its crescendo with three reports that have set
the tone of the present debate:
Subprime Goes to College, Testimony Before the U.S. Senate Committee on Health, Education, Labor and
Pensions, by Steven Eisman (June 24, 2010; http://help.senate.gov/imo/media/doc/Eisman.pdf )
Emerging Risk?: An Overview of Growth, Spending, Student Debt and Unanswered Questions in For-Profit
Higher Education, prepared by the U.S. Senate HELP Committee, Senator Tom Harkin, Chairman (June 24, 2010;
http://harkin.senate.gov/documents/pdf/4c23515814dca.pdf)
For-Profit Colleges: Undercover Testing Finds Colleges Encouraged Fraud and Engaged in Deceptive and
Questionable Marketing Practices, Testimony Before the Committee on Health, Education, Labor, and Pensions,
US Senate. (GA0-10-948T, August 4, 2010; http://www.gao.gov/new.items/d10948t.pdf )
NEXUS
13
Why the hostility towards for-profit colleges and universities?
Resentment against for-profits has a number of sources, including:
The belief that it is unethical/unjust for for-profit institutions to make a profit while public institutions are
starved for funds.
The inability (and frustration) of public institutions to meet the rising demand for higher education
especially among low-income populations.
An unwillingness to recognize that for-profit colleges and universities are helping to meet this demand
through innovation and efficiency-characteristics valued 1n every other sector of our economy.
Although we all recognize the critical importance of good regulation and diligent compliance, there is an
unwillingness to recognize that the inefficiencies in public and non-profit institutions cost taxpayers far
more than the occasional regulatory violations among the for-profits.
An unwillingness to recognize that growth of for-profit colleges and universities is a reflection of the
realities of our economy and that for-profit institutions, as Education Secretary Duncan has observed, are
vital to America's economic future.
NEXUS
14
The essence of the argument against for-profit institutions
At the conclusion of the second HELP hearing (August 4, 2010L Chairman Tom Harkin summarized
the case against for-profit colleges as follows:
" ... 9% of students are in for-profits, but they are consuming almost 24% of Pell Grants, and have 44% of
the defaults."
"What we have done, what has happened, is that with the ease of availability of grants and loans, and
with incentive rates [for recruiters], and with a cloak of secrecy about graduation rates .... we have seen
the numbers of those recruited increase dramatically, but the total enrollments have not-leading us to
believe that many are dropping out with no degree or poorly educated, but with debt they cannot pay."
"So, when we look ahead, education is too important for the future of this country and our students,
and given the budget crisis over the next 10 years, we can't afford for more and more of this money to
be going to investors. We have privatized the profits and socialized the risks, and that is what happened
to the sub primes."
NEXUS
15
A policy shift has taken place from access to degree completion at a time
of financial crisis
Quite apart from the numbers cited by Senator Harkin-to which we will return-is the fact that for over a
decade, facilitating access backed up by the availability of no-cost grants and subsidized loans was the central
policy followed by both states and the federal government.
For-profit institutions responded to this call and made access possible for millions of otherwise underserved
or neglected students, who for work and family reasons could not attend the traditional institutions whose
focus is primarily on the needs and interests of the faculty and young, single, dependent students.
The abrupt shift from access to completion, in part the result of awareness that the U.S. has fallen behind its
global peers in the percentage of adults with degrees, called for dramatic changes in education policy. For
some in the Administration this concern has been heightened by the worst financial crisis since the
Depression. For them this shift has called for a radical reconsideration of how financial aid should be
distributed, unfortunately, this is resulting in a redistribution from lower to upper income groups.
For example, although chief among these changes was the shift from private to government direct lending,
whose aim was to provide a new source of revenue for additional Pel I Grants, the other major shift was in the
desire by the Administration to redirect student aid away from non-traditional students at for-profit
institutions (those more likely to need grants and default on loans) to more traditional students at public
institutions, especially community colleges (who are either dependent on their parents or unlikely to seek
loans).
NEXUS
16
Negative consequences of proposed reforms
In an effort to support this policy shift, attention was focused on the presumed faults of for-profit
colleges and universities. This refocus has resulted in the series of reforms that have been proposed
during the negotiated rulemaking period of 2010. Unfortunately for taxpayers and millions of
underserved, non-traditional students, these reforms will:
Redirect public funds for higher education from lower-income to higher-income students.
Reduce the availability of programs in areas such as nursing, teaching, public safety and other public service
jobs.
Greatly increase the amount of taxpayer support going to higher education.
Greatly reduce the efficiency of proprietary colleges and universities by making them easy prey to suits by
predatory law firms (see slide 40) .
Demean the hard won degrees of millions of students and wipe out billions of dollars in the human capital
they have accumulated.
Ignore, for now, any regulatory violations by public and non-profit institutions.
NEXUS
17
Why can't traditional institutions take on the responsibility of meeting the
rising demand at a cost taxpayers are willing to bear?
Traditional Institutions: Studies in Inefficiency
D Tradition and inefficiency lie at the heart of their growth and financial problems.
D High-maintenance buildings and grounds used primarily during the day for 8 months a year drive costs
up.
D Tenured faculty generally cannot be reassigned when their area of expertise is no longer in demand and
they resist such changes as flexible scheduling and instruction delivered online rather than in costly
classrooms.
D They are caught in a prestige "arms race" forcing each to increase support of non-academic facilities and
activities, in the meantime sports costs have risen to approximately 13% of total costs.
D Meanwhile colleges and universities are increasing their expenditures on administration faster than on
instruction.
D Yet most state governments have failed to tie funding to performance measures in order to increase
accountability and productivity.
NEXUS
18
Why can't private, non-profit institutions help meet rising
demand?
Most selective private, non-profit colleges and universities value reputation over access.
The higher the number of students rejected, the higher their reputation.
The higher the SAT scores of their student body the higher their reputation so students lacking a high
level of preparation will not be admitted.
The higher their tuition, the higher their reputation.
The higher their reputation, the higher their endowment.
The higher their endowment, the higher the taxpayer subsidy they will enjoy so in effect they profit by
staying selective and therefore small.
The cost of tuition at such private institutions has climbed so high only the affluent can afford to enroll.
For example, 58 colleges and universities now charge $50,000 or more in annual tuition.
In the meantime, non-competitive private, non-profit colleges lack the resources to grow and many find
themselves in significant financial difficulties.
NEXUS
19
In contrast, why can for-profit colleges and universities grow to meet
demand?
They are efficient in their operations and in the delivery of instruction, otherwise they cannot survive.
They are innovative and have the capital to fund innovation, otherwise their efficiency and effectiveness
will decline.
They have access to the capital needed for expansion because they provide a cost effective education that
meets the needs of students.
They have powerful incentives to remain in compliance and produce positive educational outcomes
because if they fail to do so they will find themselves without students or financial backing.
Rather than consuming tax dollars, they return profits to taxpayers and are therefore not subject to the
limitations on capacity that traditional institutions have, especially during difficult economic times.
NEXUS
20
However, the shift in the Administration's higher education policy is raising new
questions about the relationship between access and student debt
The increase in demand for higher education is largely driven by demand from low-income populations,
including African Americans, Latinos and Whites, who are the most in need of grants and subsidized loans.
Americans believe that a college degree is the only path from the lower to the middle class and the only way to
guarantee you don't lose your place if you are already there.
12
A recent study found that over 90% of Latino
youth were believers.
13
Because the only way to provide that access to millions of lower and middle-income students is through federal
grants and subsidized loans, these modes of aid have been under increasingly greater pressure.
But because low-income populations are the most likely to need grants, drop out and default on loans, the shift
from access to completion has been a shift from access for the most needy, who are the most likely to enroll in
for-profit institutions, to a shift in completion for the best prepared. But this in turn has raised the question: Are
for-profit institutions saddling their students with loans they can' t repay? And, if so, should USDOE intervene on
behalf of the students and taxpayers by not permitting these schools, and therefore their students, to have
access to these grants and loans?
Given that the cost to taxpayers of Pell Grants and Title IV loans is zero, the real question is: "Should access be
limited to protect low-income groups from excess debt or is access with debt better for low-income students
and for society?"
Figures 7-10 indicate:
- that given the low level of family assistance, the debt load of students in for-profit institutions is not
out of line,
- that access is valued far higher than avoidance of debt and,
- that higher education pays handsomely in terms of income and avoiding unemployment.
NEXUS
21
Average Student Debt Levels by Institution Type
14
Figure 7
$30,000
25,000
20,000
15,000
10,000
5,000
61%

71%

:
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
97%

-.
64%

37%
'

98%

120%
100
80
60
40
20
0 - ' -------..1
. --
_.a__
_ _..._...._ 0
4 Year Public 4 Private
Not-for-Profit
4 Year Private
For Profit
2 Public 2 Year Pnvatc
Not-for-Profit
2 Year Private
For Profit
NEXUS
A F:"(lll; 1 C"Ut
Average Debt [ Average Expected Family Contribution + % of Student Borrowing
Given the low level of family assistance available and the relatively
small amount of funds borrowed, the percentage of borrowers is high
but the debt load of students in for-profit institutions is not out of line.
22
Do for-profit institutions exploit low-income students?
Americans for Democratic Action sought an answer to the question, "Does access trump debt?" In October
2009, ADA conducted a survey of 2,250 adults with oversamples of 500 African Americans, 500 Latinos and
250 lower-income Whites on their attitudes toward the for-profits and whether they valued access over
avoidance of debt.
15
Here are their responses.
Figure 8
NEXUS
A F:"(lll; 1 C"Ut
Growth of For-Profits Should be Stopped -
Exploit Low Income Students
60%
31/o

8%
14/o
Agree Disagree Don't know
Darker colors indicate intensity
African Americans:
Agree 36% (20% str.)
Disagree 58% (36%)
Latinos
Agree 36% (20%)
Disagree 58% (32%)
Lower-Income Whites
Agree 34% (16%)
Disagree 56% (35%)
Some people believe these for-profit universities exploit lower-income working students. They have gone to the government
education 1egulato1s to try a11d stop the growth or for pro!il universities and ill casi:!S sllul tllem down Do you agree 01 disagree
that for-profit growth shOuld be stopped? 23
When it comes to access vs. avoidance of debt, access is
valued far higher
Over half of African Americans, Latinos and lower-income Whites agree that debt is
worth the price of getting access to college.
15
When it comes to students with higher risk factors, only a third of those surveyed
feel they are being exploited because they are not prepared and have to drop out,
owing money. Instead, six in ten believe these students deserve the chance to earn a
college degree even if they drop out owing money.
Figure 9
58
Lower Income Whites
53
Latinos
39
58
African Americans
I
60
Total
?---------------_, 33
0 10 20 30 40 so 60
Everyone Deserves a Chance Feel Exploited
NEXUS
A F:"(lll; 1 C"Ut
24
Higher education pays handsomely in terms of income and avoiding
unem ment
Figure 10
Unemployment Rate and Earnings by Level of Educational Attainment
16
Unemployment Rate Median Weekly Earnings
2.5%

Doctoral degree
$1,532
2.3% Professional degree $1,529
3.9% Master's degree $1,257
5.2% Bachelor's degree $1,025
6.8% Associate degree $761
8.6% Some college
$699
9.7% High school diploma $626
14.6% No high school diploma

$454
NEXUS
A F:"(lll; 1 C"Ut
25
Available evidence, therefore, suggests the move to limit access to higher
education for the protection of the poor from excess debt is misplaced
In effect, the survey results make evident that:
Limiting debt by denying access does not serve the interest of the poor.
Nor is it in the best interest of the taxpayer.
Therefore, Pell Grants and Title IV loans are best understood as:
o Preventive action aimed at both creating a competitive workforce and avoiding the much higher cost of
future unemployment and underemployment.
o Zero cost investments because when aggregated, the total in grants and loans is more than off-set in
interest and taxes.
NEXUS
26
Why a case study of the University of Phoenix?

The University of Phoenix (UOPX), with nearly one half million students, is the second largest higher
education system in the U.S., second only to the State University of New York. (The even larger
collection of community colleges in California do not make up an integrated system because they
belong to different community college districts each of which is independent of the others).
With a physical presence in most states and an online presence in all states, UOPX is the first truly
national university.
Because it was among the first, UOPX pioneered most of the practices common among regionally
accredited for-profit institutions and those traditional institutions serving adult learners, including
offering accredited degree programs online (UOPX has done so since 1989, when it began with 12
students using a dial up internet conferencing service-today it enrolls well over 200,000 online
students world wide).
Because of its success in attracting and graduating students (it graduated over 90,000 students last
year) while being committed to "measuring everything that moves" and archiving it, it has
developed what may be the largest database on adult/working learners in the world.
Because it is the largest for-profit institution, it has experienced more visits by regional and
programmatic accreditation and certification teams than any other institution of higher education
in the country.
UOPX spends $50 million annually on developing and maintaining a state of the art educational
infrastructure, which many recognize as one of the world's best. No other institution, of which
Nexus is aware -public, private, non-profit or for-profit-makes investments of this size in their
instructional infrastructure and related systems.
NEXUS
27
What makes the University of Phoenix a relevant case study in
efficiency and innovation?
Because UOPX is designed for working students, who today make up the majority of postsecondary
students:

It recognizes that time is highly valued by working adults and efficiency is a fundamental principle
in the design and operation of its administration and teaching/learning systems.
Even as total enrollment has grown to 465,000, all classes are seminars and therefore small (face-
to-face classes average 14 students, online classes 20) with a faculty of working professionals
trained to deliver interactive learning; as a result, a faculty member can engage students
personally in substantive discussions every minute of class time.
All courses require multiple writing exercises and students must use online programs ( .. Write
Point, .... Plagiarism Check/' etc.) that provide guidance in grammar, style and originality, thereby
leaving faculty free to address student learning.
Campuses are designed to serve a student population within a 20 minute commute and online
classes are available 24/7 supported by an online library and a wide array of online learning
resources, such as simulations and eBooks, all available 24/7.
All administrative functions-enrollment, financial aid, academic advisement, etc.-are available
online.
NEXUS
28
lb .
THE CHARGES AGAINST THE FOR-PROFIT
SECTOR
AND
THE CALL FOR REFORM THROUGH
NEW REGULATIONS
~ N E X U S

' ~
..... .,, ~ p,,,1" c 29
The charge: Students in for-profit colleges are receiving a poor education
and thus are ill prepared for the job market when they graduate

Students attending for-profit colleges and universities see them as a better choice than a public institution, that is why they are
willing to pay the higher tuition-higher for not being subsidized by taxpayers as is the case in public and non-profit institutions.
Many students, including most at a majority of for-profit universities, are already working. Therefore, they are not looking for work,
but rather a better job or a promotion. At institutions such as the University of Phoenix, the data show that during their time as
students their incomes are steadily improving-average annual salary increases range from 8.5% for bachelor's graduates to 9.7% for
master's graduates during the course of their academic program, compared to 3.8%, the national average annual salary increaseY
As Figures 11 and 12 make evident, taking into consideration the number of risk-factors they are likely to have, including the high
probability that these are first generation, low-income minorities, many of whom are single parents, the retention and graduation
rates of students at for-profit institutions suggest they are NOT receiving a substandard education.
Figure 11
NEXUS
.....
(1)
Q)
>-
N
v
.....
(1)
Q)
>-
I
N
....
(1)
Q)
>-
I
o::t
Percent of Beginning Postsecondary
Students with 3 or More Risk Factors
Public
Private non-profit
Career Colleges 56
Public
39
Private non-profit
I
Career Colleges 52
Public
Private non-profit ic---1 9
Career Colleges 52
SOURCE: Educational Policy Institute (EPI) Analysis using the Beginning Postsecondary
70
Students Longit udinal Survey Dat a Analysis System (BPS: 04/06), 2006, US DOE, NCES; Educational Policy Institute (EPI) Analysis using t he
Beginning Postsecondary Students Longit udinal Survey Data; Graduating At-Risk Students: A Cross-Sector Analysis (Imagine America Foundation,
2009), Figure 4, p. 15.
30
For-profit sector graduation rates are high, given how many risk factors
their students have
Figure 12
NEXUS
A F:"(lll; 1 C"Ut
2006 GRADUATION RATES BY ETHNICITV
All 2-Year

Public
('t)
C1l
I
:. 2006 GRADUATION RATES Hispanic
>;-
N
Private, Not-for-Profit
Cll
Career Colleges
2006 GRADUATION RATES Black, Non-
Q,
Hispanic
8
AII4-Year
J::.
I
n 2006 GRADUATION RATES White,
u
en ....
Public
Non-Hispanic
('t)
""""[ "" . J C1l
>-
I
Private, Not-for-Profit ;
'

Career Colleges
I
I
I
l J u
Grand Total All Schools L
.,):.:.) - YL T]

0 10 20 30 40 50 60 70
Percent
SOURCE: Educational Policy Institute (EPI) Analysis using the Beginning Postsecondary Students Longitudinal Survey Data; Graduating
At-Risk Students: A Cross-Sector Analysis (Imagine America Foundation, 2009), Figure 16, p. 26.
Analysis System (2003-04) (DAS), USDOE, NCES.
NOTE: Graduation rates are calculated using only first time, full-time students graduating within 150% of regular
graduation time-as is common with I PEDS graduation rates ,which account for only 48% of 4-yr students and less
than 33% of community college students.
This analysis uses a 2000-entering cohort for 4-yr and 2003-entering cohort for 2-yr calculations. There were not enough
data points to calculate graduation rates by race/ethnicity at less-than-two-year level.
31
The call for reform of the for-profits: Students in for-profit colleges are
receiving a poor education and thus are ill prepared for the job market
when they graduate
The most comprehensive studies of graduates from for-profit institutions show that
completers are well qualified to join the workforce and actively contribute to the
American economy.

The first comprehensive study of t he total annual economic impact of the for-profit postsecondary sector
showed that in 2005 the total direct and i ndirect impact was $38.6 billion.
18
Cl Total direct impact was $18.6 billion (institutional $14.6 billion; student expenses $4.0 billion)
Cl Total indirect impact was $20.0 billion (increased graduate earnings $3.5 billion; resulting increased
economic activity $16.5 billion)
Cl The 376,560 career college completers entering the workforce in 2005 had median salaries of
$39,546 for a gross salary total of $14.9 billion.
A second study undertaken in 2010 showed that for-profit sector students "experience strong income gains
from their educational investment."
19
Cl For-profit sector students reported average income gains of $7,900, or 54%, exceeding public school
students' gains of $7,300.
Cl Over a 30-year working life, these gains are expected to translate into approximately $250,000 more
income.
NEXUS
32
The call for reform of the for-profits: For-profit institutions lower the
quality of higher education
o Only 25% of students attend 4 year residential colleges/universities, ranging from small liberal arts
colleges to large research universities whose faculty conduct most of the academic research.
o These institutions receive a large percentage of state and federal support and almost 100% of the positive
media coverage, but are subject to little oversight by accreditors or state and federal regulators. This
sector, viewed by many as the only education worth having, defines "quality education."
o Nearly three million of the remaining 75% study at for-profit institutions. Most of these students work and
often have families; therefore, they have specific educational needs and must study in a variety of modes:
full-time, part-time, on campus and online. Because these students do not study full -time on campus and
the institutions are mostly open admission, their education is branded by critics as inferior. Consequently,
with minimal exceptions, during this period of debate these institutions and their students are now
receiving nearly 100% of the negative media coverage.
o However, because traditional institutions cannot or will not meet the needs of most working students,
these students perceive them as ideal for young, dependent students but as substandard for them.
o The quality of education, then, is not determined by its mode of delivery, but rather by how well it
addresses the needs of students and by the learning outcomes of those students.
o As Figure 13 demonstrates, comparative studies show learning outcomes at the largest for-profit
institution are equal to or better than learning outcomes at comparable public and private institutions
for similarly situated students. Therefore, it is not the case that for-profit institutions lower the quality
of higher education.
NEXUS
33
For-profit institutions do not lower the quality of higher education
0 On average, UOPX students enroll with lower assessment scores than the national average.
Improvement in MAPP scores demonstrates that they reduce that gap significantly by their
senior year.
0 Compared to students from other comparable institutions, UOPX students demonstrate
similar to better levels of improvement throughout the course of their education, especially
in English and mathematics.
Figure 13
PERCENTAGE IMPROVEMENT IN MAPP SCORES: FRESHMEN TO SENIORS
20
NEXUS
34
Most students at for-profit institutions come from a lower socio-economic level than those attending
public institutions. There is no evidence that students borrow at a rate that is higher than the
average for this demographic considering comparable risks and adequate financial aid advice. (Many
public community colleges provide little to no advising on financial aid as they strive to avoid poor
default rates.)
Furthermore, at many institutions, such as UOPX, students only take one or two courses at a time
and generally pay for them at the beginning of each course. Given this, and the fact that those who
drop out typically do so after only one or two courses, UOPX students have low levels of debt.
In fact, for students graduating between July 2007 and June 2008, UOPX loan debt was comparable
with students at private, non-profit four-year institutions:
21
Figure 14
60% /
50%
40%
20%
10%
NEXUS
No Debt
-
_J!17
<$30, 500 >$30,500
2007-08 CRADUATES
Private 4-Yr
2007-08 CRADUATES UOPX
35
Further evidence that students from for-profit colleges and universities are not graduating with mountains of debt
comes from the US DOE data on the average amount of federally subsidized loans received per student in 2007-08
(the most recent period for which data is available).
22
Once again, although for-profit institutions have a higher
proportion of students borrowing, the amounts borrowed are relatively small and comparable to those found
among students in traditional institutions.
Figure 15
NEXUS
A F:"(lll; 1 C"Ut
Amount of Financial Aid Received*
$20,000
$18,000
$16,000
,....
--------
$14,000 /.:
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
so

Average
AID per
recipient
Average
GRANTS per
recipient
Average
LOANS per
recipient
All undergraduates
Public 4-year doctoral
Public 4-year non-doctoral
Public 2-year
Non-profit 4-year doctoral
Non-profit 4-year non-doctoral
For-profit 2-year or more
*AID is from any source except family and friends. PLUS loans included in "AID per recipient," not in "LOANS per
recipient," which includes private (alternative) loans. Figures on loans do not include cumulative debt.
36
Of all the proposed regulations in this reform effort, the most convoluted and potentially onerous are the ones
under the label of "gainful employment." The bureaucratic complexity of these regulations is apparent from an
analysis of their requirements and consequences (see Appendix 2).
These regulations would measure students' debt-to-salary ratio after they left a for-profit institution.
Programs in which recent students are spending more on their loans as a percentage of their income
than the regulations call for would be required to limit enrollment and the institutions would have to
inform prospective students of the graduates' historical debt to income ratio. If their students also fail
to meet proposed ratio cutoffs for repayment, students of those schools could be barred from
receiving federal student aid.
Although in 40 years of its application, neither Congress nor USDOE had seen the need to spell out
what "gainful employment" meant, the current reform effort chose to define it and build regulations
around it as the most effective way to reduce the amount of Pel I Grants and subsidized loans going to
students who wish to enroll in a for-profit institution.
The significance of these "gainful employment!/ regulations is such that they may end up depriving
hundreds of thousands of students of access to for-profit institutions if they are interested in programs
that lead to relatively low starting wages, such as teaching, nursing, counseling, and administration of
justice.
NEXUS
As part of the "gainful employment" campaign, in an unexplained, recently released list, US DOE identified
over 8,000 institutions and the debt repayment data of their students.
23
If all the institutions listed were subject to the proposed repayment rate cutoffs of 45% and 35%, the
following catastrophe for American higher education would result:
Because 50% (nearly 4,000) of the institutions had repayment rates below 45% their affected
programs would be put into a "restricted" category in which enrollment growth would be
limited. And because over 20% (more than 1,600) had repayment rates below 35%, given the
likelihood that they would also have a too high loan service to debt ratio, their new students
would be ineligible for federal student grants while aid to existing students would be
terminated by the end of the following academic year.
As for the fate of the institutions serving our nation's most underserved students, the following
would have their students ineligible for federal student grants within a year:
40% of community colleges
90% of Historically Black Colleges and Universities
45% of campuses where Hispanic students constitute more than 25% of the students
66% of schools that focus on less than four year degrees and have the highest
concentration of Pell students
NEXUS
The call for reform of the for-profits: These students are defaulting on student
loans at a rate that will cost the government billions
At UOPX dollar-based cohort default rates (CDR) are lower than borrower-based default rates because most
students who leave exit early in a program and thus incur a lower amount of debt.
24
Again, comparing similarly
situated students, there is no evidence that dropouts have above average defaults.
Figure 16
University of Phoenix Default Rates (2-Year)
13.1%
9.3%
7.2%
5.9%
6.7%
-,
2006 2007 2008 (Draft)
Official CDR Dollars Defaulted CDR
Further, there is no net loss to the government from UOPX student's defaulted loans. Repayments on
defaulted loans range from $1.11 to $1.22,2
5
more than enough to cover the cost of collections. Given
the cost of funds to the government, the difference between what is collected on a non-defaulted and a
defaulted loan is very small. Therefore, the claim that the government is losing billions on bad loans is
incorrect.
NEXUS
39
The call for reform of the for-profits: The for-profits are gorging on stimulus
money by using boiler room tactics to lure students
As has been shown and as is only logical, it is in the interest of for-profit institutions to enroll those students who are
most likely to persist and ultimately graduate. As is the case with the military, who must recruit if it is to fill its ranks,
students for whom college is not an expected step need to be informed. Students respond to the advertisements of
for-profit institutions because they have either not succeeded in traditional institutions or these have made little or no
effort to address their needs. And as has been shown, their debt levels are comparable to those of students similarly
situated in traditional institutions.
Yet recruitment of at-risk students and "saddling" them with debt is the justification given for eliminating
the "safe harbor" rulings that USDOE put in place to help guide for-profit institutions as they seek to comply
with the prohibition against incentive compensation.
These rulings resolved much of the chaos surrounding the prohibition and have provided a modicum of
safety from predatory law firms that shop for, and often implant, employees or students willing to claim a
college has violated USDOE regulations. Indeed, since the announcement that they would be removed, 23
lawsuits have been filed.
The elimination of the safe harbors will make it almost impossible to reward enrollment counselors, or any
one else in the institution, for superior performance in helping to make access possible.
Relying solely on the basis of rare instances of abuse (see note 28, Appendix 1), USDOE proposes to reverse
itself in a way that will simply reintroduce the chaos of the past and open the door to more predatory law
firms. Surely that will not promote greater accountability or better student outcomes. And it bears asking,
What other American enterprise is required to bar compensation based on performance?
NEXUS
The call for reform of the for-profit sector should rest on objective research,
not questionable assumptions
At the August 4, 2010 HELP hearing Gregory D. Kutz, Managing Director Forensic Audits and Special
Investigations, testified that 15 out of 15 for-profit colleges examined by the GAO in the course of a
((mystery shopper" investigation ((encouraged fraud and engaged in deceptive and questionable marketing
practices."
26
Right after the hearing the Career College Association, along with a number of for-profit institutions, made
it clear that they found the ((GAO report deeply troubling" and would ((increase emphasis on
compliance ... immediately."
27
Given the seriousness of the charges found in the GAO report (four of which were alleged to be
fraudulent), it is apparent that the for-profit sector- indeed, the non-profit and public sectors as we/1_-
are in need of better oversight mechanisms both externally, through a tightening of the accreditation
review process, and internally, through better training and closer supervision.
That said, the regulatory changes called for should rest on solid research, not questionable assumptions.
NEXUS
41
Is the entire orchard contaminated? What is the prevalence of "bad
actors"?
Unlike the GAO mystery shopper study whose results concerning 15 campuses were presented at the second
HELP hearing, the GAO previously undertook a substantially more comprehensive study, that time using
sound scientific research principles, which covered thousands of colleges and universities looking for
violations of USDOE regulations between 1998-2009.
In that study of thousands of institutions the GAO found only 22 for-profit institutions in violation of
Departmental regulations.
28
Clearly, 22 out of several thousand seems to indicate a low probability
that "the orchard is contaminated."
Almost every company has employees who violate company policy, but that is not a basis for claiming
that all employees violate policy or even that many violate company policy.
Over the past year, every media report of boiler-room tactics has been anecdotal- with no data
beyond reporting a conversation with one or two employees. The recent GAO mystery shopper probe
of 15 campuses is no exception.
NEXUS
42
"Bad actors" are unlikely to last long in the for-profit environment
It is difficult to objectively characterize an institution like UOPX of being a ubad actor." Why?
UOPX has 20,000 staff, 30,000 faculty and 465,000 students at 200 campuses in 40 states and online
students in all 50 states. Its size alone demands robust compliance and quality control systems-and
it experiences continuous oversight by institutional and programmatic accreditors along with over
40 state regulating bodies plus USDOE.
Between Enrollment, Academic, and Financial counselors, UOPX employs nearly 10,000 people.
Almost the totality of their contact with prospective or current students is by phone. These
counselors make approximately 25,000 recorded calls per day. A call containing a word or phrase
indicating a possible infraction is electronically tagged for immediate action.
Its 66 Quality Assurance personnel monitor, analyze and respond to these calls. If a prospective
student or students has been misinformed or is not successful in obtaining service, the student is
called within 2 hours.
Counselors who visit companies complete logs of all visits which aid Quality Assurance personnel in
the investigation of any reported infraction.
Any employee who has failed to follow policy is subject to being counseled, retrained, reprimanded,
or discharged. (The employees involved in the much ballyhooed unauthorized recruitment at a
homeless shelter did not remain for long in UOPX.
29
)
NEXUS
43
"Bad actors" among the critics of the for-profit sector
We noted earlier that the present state of acrimony concerning the for-profit sector has reached its crescendo with
three reports that have set the tone of the present debate. One of these, Subprime Goes to College, is the testimony
at the first HELP hearing (June 24) of Steven Eisman, a well -known short seller.
It is not the purpose of this study to address the ethical and perhaps legal questions surrounding the invitation of a
short seller to testify at a Senate hearing where his testimony would (and did) help to line his pockets. The troubling
nature of this affair is well captured in a recent Huffington Post piece by Melanie Sloan, Executive Director, Citizens
for Responsibility and Ethics in Washington.
30
Having enumerated a number of cases where short sellers have sought
to manipulate the negotiated rule making process and the HELP hearings for personal gain, she goes on to note,
"These examples suggest there may be a concerted effort by those who stand to benefit financially to drive
down the stock price of certain for-profit schools. Knowing this/ how can we be sure that the new regulations
the Department of Education is proposing are really in the best interest of the Americans most likely to attend
these schools? Even more disturbing, the revelations of the hedge fund managers' efforts here raise the specter
of whether federal oversight and regulatory processes are being secretly manipulated for financial benefit in
other instances.
While for-profit colleges have been rightfully criticized for offering little transparency as to how well taxpayers
have been served by our substantial investment in that industry, some of the efforts to fuel anger against and
encourage regulation of these schools are similarly lacking in transparency. Congress and the Department of
Education should remain vigilant against the efforts of a few opportunistic multi-millionaires to abuse the
regulatory process for their own pecuniary interests."
We will now turn to the merits of Eisman's often quoted testimony.
NEXUS
44
Mr. Eisman's allegations made before the HELP Committee
Mr. Eisman's testimony repeated USDOE's charges of misbehavior which, as is evident from the data presented
in this study, are incorrect.
Mr. Eisman: For-Profit institutions recruit students with the greatest financial need and put them into their highest
cost institutions ... and why? To maximize the amount of Pelf Grants and Title IV loans their students can receive.
For-profits are able to enroll students because students see them as a superior choice for themselves. Many have
tried other public and non-profit institutions and have found those unable to meet their needs as workers,
parents and adults.
Mr. Eisman: The entire business model of for-profit schools is centered on growing enrollment-it is the single most
important measure of growth and profitability_ period.
Enrollment grows at the for-profits because students see them as the best choice, and growth and profitability
follow when students succeed in both learning outcomes and degree completion. To the extent the latter are
missing, enrollments and profitability will necessarily decline along with investor interest.
Mr. Eisman: The high default rate among students at for-profit colleges leaves poor students in debt for an education
that does not prepare them for a job that would allow them to pay their loans.
As this study shows this statement is incorrect. According to a number of studies, the type of institution attended
(for-profit or traditional) accounts for only approximately 5% of the total contribution to increased student
default for high-risk students.
31
Thus defaults among for-profit students are no higher than would be expected
given their lower level of income and the lower income of their families.
Mr. Eisman: For-Profit schools are spending only slightly more than half of revenues actually educating students, and
in several cases are shrinking the amount spent on instruction and increasing the compensation of the managers.
Revenue spent on instruction by public institutions averages 48% and for all traditional institutions (including
non-profits) 52% . At the University of Phoenix in 2009 it was nearly 55% of total expenses.
32
NEXUS
45
Has subprime gone to college?
The most disturbing claim in Mr. Eisman's testimony is that if present lending trends continue, USDOE uwill face nearly
$275B in defaults over the next 10 years on a half-a-trillion dollars of lending to the For-Profit Industry."
Figure 17, which he presented at the HELP hearing, presents a false and misleading view of the cost to the government
from defaulted loans.
Figure 17
If thes., trPnds continttl>, WP bPlievP thP DOF. will face nearly $27?iR in ovl>r
the next 10 years on a ht'llhHrillion dollars of lendu1g to the f or-Profit Indust:ry
SMO

$400
L}>U
m

!

.3

- S<O
!
S1SO
$100
$50
so
I
Prof ett d (InS I 3nd Cumulatv Dt fllultd Doll:u-s
lor ForProflt Educat ion Students. 2007 2020
OToml S1a1\'o<OI O:UISII'> FP 'ill ,_l'S
I

5-123
And DOC3U$(1 offrxJS 3SSOCi;nqd <.ti!il
clef>J.ult. uw <lllle.:.i:>
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. . me3tllrlg For-e.ront srudents will owe
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-
-
BilliOn {[Of Iars on Clef8Uflft$J.IOU!1S
(
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2007 2008 2009 2010 20 11 2012 2013 20 1 2010 2017 2018 2019 2020
!o..tf'!t 3.1
)
In addition, as we noted previously, there is no net loss to the government from student's defaulted loans because
repayments on defaulted loans range from $1.11 to $1.22. Given the cost of funds to the government, the difference
between what is collected on a non-defaulted and a defaulted loan is very small.
the claim that the government is losing $330 billions as noted in the slide is false.
NEXUS
A F:"(lll; 1 C"Ut 46
Furthermore, Mr. Eisman fails to consider four crucial factors that counter his
claim that future loan defaults represent a bubble analogous to the subprime
bubble
First, this is a false analogy. Defaulted student loans only lower the Government's profit while toxic mortgages
brought bankruptcy.
Second, using his own assumptions, for-profit schools will pay $75 billion in income taxes from 2010-2020.
Third, the government receives interest income from performing Title IV loans, which would total $35 billion
from 2010-2020.
Fourth, his analysis does not include recovery rates on defaulted loans. At any recovery rate above 42%, for-
profit schools will actually generate a profit to the US taxpayer from 2010-2020 versus a taxpayer loss of
$510 billion on similar students at community colleges.
Lastly, his claim assumes that community colleges are the cheapest education option and the source of
needed future capacity. However, community colleges are very expensive for taxpayers, who must provide
approximately $7,000 in annual subsidy for every student enrolled in one. And that's assuming there is
additional capacity in community colleges (which there is not).
NEXUS
47
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z
0
-
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u
z
0
u
Conclusion #1

There are three major arguments put forth by those demanding reform of the for-profit
sector:
1. The for-profits are {I ripping off" the taxpayer as they ugorge" on the stimulus money.
2. They are loading up low-income students with debts they cannot pay.
3. The for-profits are delivering education of such low quality their students are unprepared for gainful
employment.
The statistical data presented in this study answer the first two arguments, namely:
o For-profit institutions do not cost the government billions of dollars; rather, they cost the
government nothing.
o For-profit institutions are not loading up low-income students with any more debt than could be
expected based on their risk factors, especially their low personal and family incomes.
NEXUS
49
Conclusion #2

No statistical data have been presented in defense of the argument that the for-profits are
providing poor education.
D Instead, those demanding reform accept as prime facie evidence that because of their for-profit status,
these institutions cannot possibly deliver a good education.
D The only basis upon which to judge the quality of learning outcomes delivered by the for-profits is to
compare them with the measured outcomes in traditional institutions.
D And since we know that measurement in this area is possible (see, for instance, slide 34), the question
is, why have those measurements not been undertaken?
They have not been undertaken because traditional institutions have vigorously resisted
measuring their learning outcomes for several reasons:
D Many believe there is no objective way to properly measure learning outcomes in all disciplines.
D Most are concerned about making public their learning outcomes for fear the results will be used
against them.
D Some believe that the only quantitative measures needed to affirm the learning outcomes of their
students are their inputs: quality of faculty, students and resources.
D A few argue that the learning outcomes of each professor's students are unique to the professor, and
thus comparable measurements are impossible.
NEXUS
50
Conclusion #3

The Commission on the Future of Higher Education (operating when Margaret Spellings was Secretary of
Education), sought to rebut the arguments which the traditionals levied against measuring learning
outcomes, but to no avail. Resistance to measurement was so strong within the traditional sector that the
Commission was unable to achieve this reform. In fact, one of its reasons for supporting the for-profit
sector was their leadership in measuring the learning outcomes of their students.
For there to be any credibility in the third major argument put forth by those who demand reform, they
must provide evidence, based on generally accepted learning measurement protocols, that the learning
outcomes of for-profit students are lower than comparable students at public institutions.
If the call for {/reform" of the regionally accredited for-profit colleges and universities is to have a useful
outcome, it should be the renewal of the call for all institutions of higher education to publish data on the
learning outcomes of their students. Only then can the taxpayers have the data needed for the efficient
disbursement of local, state and federal education subsidies.
NEXUS
51
Conclusion #4
For-profit colleges and universities would not exist if traditional institutions had organized themselves
to serve all potential students, had not raised tuition so high, and not restricted access so sharply that
America fell from first in college graduates among nations to 12th. With little money and little wilt
traditional institutions cannot provide access to the 22 million new students needed to lead the world
in college graduates. As this study helps to make clear, achieving this goal is not possible without the
for-profit colleges and universities.
iii;!\.,, ....... '
~ ~
~ N E X U S
: ..... .,, ~ p,,,1" c
52
1
Sum of Federal Grants, Contracts (which includes Pell) and Federal Appropriations. Details: Federal funds received by/di rected towards
institutions- includes Federal Grants, Contracts and Appropriations as reported to I PEDS. Since UOPX, the largest of the For-Profits, reports the
corresponding federal assistance received by students as revenue, to capture the same data that the other sectors capture under GASB and FASB
reporting as Federal Grants and Contracts, an assumption was made that the federal support received by this sector was comparable to the Pell,
Academic and National Smart Grants received during AY2007-08. For-profits do not receive Federal Appropriations. NOTE: Title IV loans and Gl Bill
grants are not reflected in this line item for any of the sectors. Title IV loans are subject to repayment and recipients of the Gl Bill must serve their
country in exchange for these grants.
2
Government Subsidy was calculated for the reported period by taking the average of 3-month Treasury Bill rate of 2.91% times the total subsidized
loans disbursed in AY2007-08. Details: Government Subsidized Title IV loans (FFEL and Direct Loans) are interest-free to the student while in-
school, but represent a cost to the Federal Government and thus the taxpayer. The cost of this subsidy was estimated to be the equivalent of the
average 3-month Treasury bill rate (2.91%) times the total subsidized loan disbursements made during AY2007-08.
3
Forgone Taxes include investment income which would otherwise be subject to a 40% tax rate, increases to the endowment taxed at a 25% gift tax
rate and sales and other taxes at .5% of operating revenues. Details: Public and private institutions are tax-exempt. As such, they do not pay tax
on investment income, increases to endowments (gifts), or operating revenues. For-profits pay sales tax on revenues (which include Pelland Title
IV loans) and income taxes on operating profits and investment income. In an effort to make the analysis meaningful, the position was taken that
non-payment of taxes represents a cost to the taxpayer and payment of taxes represents a benefit received by the taxpayer (see also footnote 6
below).
4
Sum of State and Local Grants, Contracts and Appropriations. Details: State and local support received by/directed towards institutions- includes
state grants, contracts and appropriations plus local/private grants, contracts and appropriations. Since UOPX, the largest of the For-profits, reports
any state and local assistance received by students as revenue, to capture the same data that the other sectors capture under GASB and FASB
reporting as State and Local Grants and Contracts, data was pulled directly from the State and Local Grants I PEDS submissions for this sector. For-
profits do not receive State Appropriations.
5
Interest that accrues on Unsubsidized Loans (6.8%) and Parent and Grad PLUS loans (8.5%) while student is in school that gets added to principal
loan balance. Details: The Federal Budget takes into account that the government collects 100% on average for each Title IV dollar loaned
("principal"), regardless of default rates. This is due to the government's ability to charge students for collection and other fees with very
aggressive collection tools (wage garnishment and offsetting tax refunds). Given that interest accrued while students are in-school is included in
the principal, the assumption was made that the taxpayer benefits by an amount equal to the interest charged on unsubsidized (6.8%) and Parent
and Grad PLUS loans (8.5%) disbursed during the period. NOTE: The position was taken that any loss incurred by the taxpayer associated with the
servicing of loans impacted profits, interest earned not dollars loaned.
NEXUS
53
6
Corporate Taxes reflect Sales Tax paid (0.5% of revenues) and Tax Paid on Net Profits (estimated at 10.8% of revenues) .
7
NCES Enrollment in Postsecondary Institutions, Fa/12008, based on 2004 cohort (2-yr degree) or 2002 cohort (4-yr degree) completing in 150% of
normal program completion time.
8
Data from the National Center for Higher Education Management Systems.
9
2-yr degree: 5 million targeted graduated I 22% graduation rate; 4-yr degree: 8.1 million targeted I 54.9% graduation rate.
10
Estimated
11
Net Cost to Taxpayers Analysis
Objective: Compare for-profit, regionally accredited universities (" For-Profits") -with UOPX being a subset of that population-with their peer
group (a sample of 20 community colleges, public and private universities) to determine the net cost to taxpayers for each sector on a per student
basis. An additional comparison was made to "Elite" universities for added perspective.
Data Analyzed: Publicly available information for all reporting sectors (public, private and proprietary/for-profit). The primary source for this
information was the Integrated Postsecondary Education Data System (I PEDS) which serves as the core postsecondary education data collection
program for USDOE's National Center for Education Statistics (NCES). Unless otherwise noted, the website used as a source for I PEDS data is:
http://nces.ed.gov/ipeds/datacenter/Default.aspx.
Accounting Standards: Public-sector follows Governmental Accounting Standards Board (GASB) when reporting to I PEDS. Private and for-profit
sectors follow Financial Accounting Standards Board (FASB) when reporting to I PEDS.
Student Population: Public & Private Sector: Full-time equivalent (FTE) as reported in the IPEDS Fall 2008 submission was used given that state and
federal governments use this figure to allocate resources. For-profits: 12-Month Unduplicated Headcount- all students are considered "full-time"
for purposes of I PEDS submissions.
Research Expense: The amount of money spent on research activities was considered a benefit to society and was therefore deducted from the
cost to taxpayers for public and private institutions.
Caveat : This schedule analyzes total dollars for each relevant category in relation to the student population it serves. It is not meant to be indicative
of a typical student within the sector. Rather, it is an argument in support of for-profits playing a critical role in the President' s Initiative at a limited
cost to the taxpayer, especially when compared to their peer group.
NEXUS
54
Appendix 1
OPERATIONAL DEFINITIONS AND PROCEDURES
FOR ENDNOTE 11
Institution Groupings
1. Arizona State University
2. University of Central Florida
3. California State University -Fullerton
4. University of Florida
5. Florida International University
6. University of Illinois-Urbana-Champaign
7. Florida State University
8. University of Maryland-College Park
9. Indiana University-Bloomington
10. University of Michigan-Ann Arbor
11. Michigan State University
12. University of Minnesota-Twin Cities
13. Ohio State University (The)
14. University of South Florida
15. Purdue University
16. University of Texas-Austin
17. Texas A&M University
18. University of Washington-Seattle
19. University of Arizona (The)
20. University of Wisconsin-Madison
NEXUS
Austin Community College
Northern Virginia Community college
Central New Mexico Community College
Oakland Community College
Columbus State Community College
Palm Beach Community College
Cuyahoga Community College
Pima Community College
El Camino Community College
Portland Community College
El Pa,so Community College
Riverside Community College
Florida Community College-Jacksonville
Salt Lake Community College
Houston Community College
San Jacinto Community College
Mesa Community College
Tidewater Community College
Miami Dade College
Valencia Community College
55
Appendix 1
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Boston University
National University
Brigham Young University-Provo
New York University
Columbia University in the City of NY
Northeastern University
DePaul University
Nova Southeastern University
Embry-Riddle Aeronautical University-Daytona Beach
Park University
George Washington University
Saint Leo University
Harvard University
Syracuse University
Indiana Wesleyan University
Temple University
Johns Hopkins University
usc
Liberty University
Webster University
f-VI ~ ! 1 d I= I III J
Academy of Art University
American Intercontinental University
American Public University System
Argosy University
Art lnstitute(s)
Ashford University
Capella University
Colorado Technical University
DeVry University
Grand Canyon University
Heald College
Kaplan University
Keiser University
South University
Strayer University
Sullivan University
TUI University
University of Phoenix
Walden University
Western International University
56
Appendix 1
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Harvard University
Yale University
Princeton University
Sarah Lawrence College
Smith College
Amherst College
Bryn Mawr College
Vassar College
Harvey Mudd College
Wellesley College
Bowdoin College
Swarthmore College
Skidmore College
*For a complete list of the 58 colleges and universities charging $50,000 or more in tuition, see
http://chronicle.com/article/Table-Dozens-More-Colleges/49002/
NEXUS
57
Appendix 1
1 - Number of Students
IPEDS data- Full -time equivalent enrollments are derived from the fall enrollment survey for Public and Private Institutions
Path for For-Profits
1. 12 Month Enrollment
2. 12 Month Unduplicated Headcount
3. Gender
4. 2007-08
5. Level of Student- all students total
6. Select From List of Variables- Grand total
2 - Direct Government Support
IPEDS data
Path
1. Finance
2. Public institutions - GASB 34/35
3. Revenue and other additions
4. 2007-08
5. Federal operating grants and contracts
6. State operating grants and contracts
7. Local/private operating grants and contracts
10. Local appropriations, educational district taxes, and similar support
Note- Public institutions in Pennsylvania were excluded from this analysis because they use FASB standards.
NEXUS
58
Appendix 1
Private Not-For-Profit- FASB Standards
!PEDS data
Path
1. Finance
4. 2007-08
5. Federal grants and contracts
7. Local grants and contracts
10. Local appropriations
Note -It was assumed that all not-for-profit institutions accounted for Pelland other grants as part of federal grants
and contracts
NEXUS
59
Appendix 1
Website- http:/ /federalstudentaid.ed.gov/datacenter
Path
2. Grant Volume- Grant Program- select AY 2007-2008 Q4
3. Q4 07-08 YTD tab
4. Sum disbursements
5. Federal Pell Grant Program
6. Academic Competitiveness
7. National Smart Program
IPEDS data
Path
1. Finance
4. 2007-08
Note -It was assumed that all federal grants and contracts for for-profit institutions were Pelland all state and local grants
were as reported in IPEDS.
NEXUS
60
Appendix 1
3- Student loan Interest Rate Subsidy
Path
2. Loan Volume- Direct Loan Program- AY 2007-2008 Q4, Tab 2
3. Federal Family Education Loan Program- AY 2007-2008 Q4, Tab 2
4. FFEL Subsidized-$ of disbursements
5. DL Subsidized-$ of disbursements
Note- FFEL and DL subsidized loans incur no interest while recipients are in-school. It was assumed that the interest-free
loans extended to students in-school amounted to a subsidy for higher education and the value of such subsidy was
calculated by taking the average 3-Mth Treasury Bill rates for July '07- June '08 (estimated cost to the Government) times
the subsidized loan disbursements during AY 2007-08.
4- Expected Interest Paid on Student loans
Path- Same as in Step 3 above
Notes
The amount of money earned in interest for loans during the 2007-08 school year was calculated by multiplying the
applicable interest rate times the amount of FFEL & DL disbursements
The interest rates were
FFEL & DL Unsubsidized- 6.8%
FFEL & DL Parents Plus- 8.5%
FFEL & DL Grad Plus- 8.5%
NEXUS
61
Appendix 1
5- Taxes Foregone (Paid) on Investment Income
IPEDS data
Paths
Finance
2007-2008
Investment income
Notes
Finance
2007-2008
Investment return
Finance
2007-2008
Investment income and
investment gains (losses)
included in income
Investment income
It was assumed that taxes not paid on investment income were a subsidy to public and not-for-profit institutions.
Investment income taxed at the corporate rate of 40 percent was added to the cost to taxpayers for public and not-
for-profit institutions. On the other hand the taxes paid by for-profit institutions were subtracted from the cost to
taxpayers.
The I PEDS definition of investment income for not-for-profit and for-profit institutions includes unrealized gains. It
was assumed that these gains will be realized at some point in the future and therefore included in the estimate
NEXUS
62
Appendix 1
6- Taxes Foregone (Paid) on Additions to Endowments
I PEDS data
Paths
Finance
2007-2008
Gifts, including contributions
from affiliated organizations; and
Capital grants and gifts
Notes
Finance
2007-2008
Private gifts, grants, and
contracts; and Contributions from
affiliated organizations
For-profit institutions
The tax not paid by the contributors was considered to be a subsidy for public and not-for-profit education.
The taxes foregone by contributors was assumed to be 25 percent of the total
Additions to investment capital for for-profit institutions was not considered in the calculations
NEXUS
63
Appendix 1
7 - Taxes (Paid) on Corporate Profits
Data Sources
IPEDS data
Apollo Group Annual Report- Fiscal 2008
IPEDS path
N/A N/A Finance
2007-2008
Total revenues and investment
return
Notes - The income tax paid by for-profit institutions was assumed to be the same as University of Phoenix's
10.8 percent rate for fiscal 2008. This amount was subtracted from the cost to taxpayers for the for-profit
institutions.
NEXUS
64
Appendix 1
8 -Sales and Other Taxes Foregone (Paid)
Notes- It was assumed that .5 percent of net revenues, estimated in step 8 above, were paid for sales, real estate, and
other state and local taxes. This amount was subtracted from the cost to taxpayers for the for-profit institutions.
Conversely, this amount was added to the cost to taxpayers for public and not-for-profit institutions.
9 - Research Expense
I PEDS data
Not-for-profit institutions For-profit institutions
Finance Finance Finance
Public institutions- GASB 34/35 Private not-for-profit institutions, Private for-profit institutions
Expenses and other deductions Expenses by function Expenses by function
N 2007-2008 2007-2008
Research- Current year total Research- Total amount Research and public service
The amount of money spent on research activities can be considered a benefit to society and was therefore deducted from
the cost to taxpayers for public and not-for-profit institutions.
NEXUS
65
Appendix 1
12
See Other Ways To Win: Creating Alternatives for High School Graduates, Kenneth Carter Gray, Edwin L. Herr, 2"d Ed., Thousand Oaks, CA: Corwin
Press, 2000.
13
AP-Univision Poll: College Dreams for Hispanics, Ricardo Alonzo-Zaldivar and Trevor Tompson (AP), Jul 28, 2010,
http:l/www.google.com/hostednews/ap/article/ALeqMSjUxEFfBJq40hE877S6 9 fldH3vAD9H8HQBOO
14
U.S. Department of Education- National Center for Education Statistics, 2007-08 National Postsecondary Student Aid Study (NPSAS:08).
15
See www.adaction.org/media/Report%20Summary.pdf
16
Bureau of Labor Statistics, Current Population Survey. Data are 2009 annual averages for persons age 25 and over. Earnings are for full-time wage
and salary workers. http://www.bls.gov/emp/ep chart OOl.htm . See Higher Education at the Crossroads, Apollo Group, Inc., August 2010, Exhibit 1,
p. 8; http://www.apollogrp.edu/lnvestor/Reports/Higher Education at a Crossroads FINALv2[1].pdf .
17
Source: University of Phoenix data based on institutional research on entering student income, registration survey completing student income and
end-of-program survey; national data from Culpepper and Associates compensation and benefits surveys, published in University of Phoenix
Academic Annual Report, http://www.phoenix.edu/about us/publications/academic-annual-report.html
18
Economic Impact of America's Career Colleges. Washington, D.C.: Imagine America Foundation, 2007, Table 1, Table 3, pp. 1, 9.
19
Parthenon Perspectives on Private Sector Post-Secondary Schools: Do They Deliver Value to Students and Society?, Robert Lytle, Roger Brinner, Chris
Ross, Boston: The Parthenon Group, 2010, p. 10.
20
Source: Educational Testing Service (ETSL Measure of Proficiency and Progress (MAPP) . Note: Masters colleges include institutions that offer
baccalaureate through graduate ;"Educational Testing Service (ETSL Measure of Proficiency and Progress {MAPP}, results published in University of
Phoenix Academic Annual Report, http://www.phoenix.edu/about us/publications/academic-annual-report.html . See Higher Education at the
Crossroads, Apollo Group, Inc., August 2010, Exhibit 18, p. 28.
21
Higher Education at the Crossroads, Apollo Group, Inc., August 2010, p. 29.
22
Source: National Postsecondary Student Aid Study, USDOE; see Chronicle of Higher Education, Almanac Issue 2010-11, August 27, 2010, p. 40.
66
Appendix 1
23
Estimated Repayment Rates by lnstitution--FY 2009; ge-cumulative-rates.xlsx ; analysis of data performed by Mark Schneider, AIR.
24
Higher Education at the Crossroads, Apollo Group, Inc., August 2010, Exhibit 20, p. 30.
25
0ffice of Management and Budget (OMBL Federal Credit Supplement, Budget of the U.S. Government, Presidenfs FY2011 (FY2010 subsidy
estimatesL Table 3 (DIRECT LOANS: ASSUMPTIONS UNDERLYING THE 2010 SUBSIDY ESTIMATES L pages 14-15.
http://www. whitehouse.gov /omb/budget/Su pplemental (p. 23 ).
26
For-Profit Colleges: Undercover Testing Finds Colleges Encouraged Fraud and Engaged in Deceptive and Questionable Marketing Practices,
Testimony Before the Committee on Health, Education, Labor, and Pensions, US Senate. (GA0-10-948T, August 4, 2010;
http://www.gao.gov/new.items/d10948t.pdf )
2
7
See, for example,
http://www.career.org/iMISPublic/AM/Template.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=21024;
http ://phx. corporate-ir. net/phoenix.zhtm l?c= 79624&p=irol-newsArticle&l D=145 707 6&highlight=; http://www .sun-
sentinel.com/news/broward/pembroke-pines/fl-kaplan-for-profit-investigation-20100805,0,7297093.story.
28
Higher Education: Information on Incentive Compensation Violations Substantiated by the Department of Education, February 23, 2010.{pp. 2,
10-12} GA0-10-370R Higher Education http://www.gao.gov/new.items/d10370r.pdf .
29
See http://www.phoenix.edu/about us/media relations/for-the-record/university-of-phoenix-responds-to-good-morning-america.html .
30
Melanie Sloan, "For-Profit Education: Will We Ever Learn?", posted August 18, 2010, http://www.huffingtonpost.com/melanie-sloan/for-
profit-education-will b 686100.html.
3
1
" Factors Affecting the Probability of Default: Student Loans in California", NASFAA Journal of Student Financial Aid, Jennie Woo, 2002;
Parthenon Perspectives on Private Sector Post-Secondary Schools: Do They Deliver Value to Students and Society?, Robert Lytle, Roger
Brinner, Chris Ross, Boston: The Parthenon Group, 2010, p. 29).
3
2
U.S. Department of Education, National Center for Education Statistics, Digest of Education Statistics 2008,
http://nces.ed.gov/pubs2009/2009020.pdf; Higher Education at the Crossroads, Apollo Group, Inc., August 2010, p. 27.
67
Appendix 2: Proposed Gainful Employment Definitions, Regulations
and Potential Consequences
Program
Federal fiscal year (FFY)
3 year period (3YP)
Prior 3 Year period
(P3YP)
Earnings Year
Loan repayment rate
Calc
Original Outstanding
Principal Balance (OOPS)
Loans Paid in Full (LPF)
Reduced Principal Loan
(RPL)
A program refers to any educational program offered by the institution under 668.8(c)(3) or (d);
A Federal fiscal year (FFY) is the 12-month period starting October 1 and ending September 30;
A three-year period (3YP) is the period covering the three most recently completed award years prior to the earnings
year;
A prior three-year period (P3YP) is the period covering the fourth, fifth, and sixth most recently completed award years
prior to the earnings year (i.e., the three years preceding the 3YP);
Earnings year is the most recent calendar year for which earnings data are available
- --
(OOPB of LPF plus OOPB of RPL)
(OOPB of all loans for students attending the program)
The OOPS is the amount of the outstanding balance on FFEL or Direct loans owed by students who attended the
program, including capitalized interest, on the date those loans entered repayment.
The OOPS of all loans includes the FFEL and Direct loans that entered repayment for the prior four FFYs.
LPF are loans to students who attended the program that have been paid in full. However, a loan that is paid through a
consolidation loan is not counted as paid in full for this purpose until the consolidation loan is paid in full.
The OOPS of LPF in the numerator of the ratio is the total amount of OOPS for these loans.
RPL represents a loan where payments made by a borrower during the most recently completed FFY reduced the
outstanding principal balance of that loan from the beginning of that FFY. RPL also includes loans for borrowers whose
payments during that FFY qualify for the Public Service Loan Forgiveness program, even if there is no reduction during
the FFY in the outstanding principal balance of those loans.
The OOPS of RPL in the numerator of the ratio is the total amount of the OOPS for these loans.
Exclusions from the calc The following are excluded from both the numerator and the denominator of the ratio:
(i) The OOPS of borrowers on an in-school deferment or a military-related deferment status.
(ii) The OOPS of borrowers entering repayment after March 31 of the most recent FFY.
Appendix 2
Discretionary Earnings
Threshold
Total Income Threshold
Annual Loan Payment
Average annual earnings
Discretionary Income
Prior 3YP data can be
used by the Institution as
a substitute for average
earnings data if:
Annual loan payment < Discretionary threshold * (Average Annual Earnings- (1.5 * Poverty Guideline))
(Discretionary threshold= either 30% (Low threshold) or 20% (high threshold))
Annual loan payment < Earnings threshold * Average Annual Earnings
(Earnings threshold= either 8% (high threshold) or 12% (low threshold))

The Secretary determines the median loan debt of students who completed the program at the institution during
the 3YP and uses this amount to calculate an annual loan payment based on a 10-year repayment schedule and
the current annual interest rate on Federal Direct Unsubsidized Loans.
' If data are available, the Secretary also calculates the median loan debt of students who completed the program
during the P3YP.
In general, loan debt includes title IV, HEA program loans, other than Parent PLUS loans, and any private
educational loans or debt obligations arising from institutional financing plans.
Loan debt does not include any debt obligations arising from student attendance at prior or subsequent
institutions unless the other and current institutions are under common ownership or control, or are otherwise
related entities.
o Note: Institutional debt only is calculated
The Secretary uses the most currently available actual, average annual earnings obtained from a Federal agency, of the
students who completed the program during the 3YP and, if the data are available, during the P3YP.
Notes:
We can't get these data; and it specifies that we will NOT be able to get this data in the future either
Earnings will likely come from the Social Security Administration, or some other federal entity
The difference between average annual earnings and 150 percent of the most current Poverty Guideline for a single
person in the continental U.S. The Poverty Guidelines are published annually by the U.S. Department of Health and
Human Services (HHS) and are available at http://aspe.hhs.gov/poverty
(i) The institution shows that students completing the program typically experience a significant increase in earnings
after an initial employment period and explains the basis for that earnings pattern; and
(ii) The institution provides the Secretary the information needed to calculate the annual debt measures under this
section, including the CIP code, and for each student who completed the program, the completion date, the amount
received from private educational loans, and the amount of debt incurred from institutional financing plans.
Appendix 2
Debt warning
disclosures
Restricted Programs
Ineligible program
On or after July 1, 2012, unless the program meets both the repayment requirement AND the Income
requirements, the Secretary notifies the institution that it must:
(1) Include a prominent warning in its promotional, enrollment, registration, and in all other materials,
including those on its Web site, and in all admissions meetings with prospective students, that is designed
and intended to alert prospective and currently enrolled students that they may have difficulty repaying
loans obtained for attending that program
(2) Disclose to current and prospective students, the program's most recent loan repayment rate and most
recent debt measures.
The Secretary notifies an institution whenever one of its program's is placed on a restricted status under
paragraph:
(1) The institution must provide annually to the Secretary the employer affirmations specified in paragraph
(2) The institution must make the debt warning disclosures; and
(3) Limits the enrollment of title IV, HEA program recipients in that program to the average number enrolled
during the prior three award years
Except for the transition year (2012) after July 1, 2012 a program becomes ineligible if it does not satisfy at
least one of the debt thresholds. In this case:
The Secretary notifies the institution that the program is ineligible on this basis, and the institution may
not disburse any title IV, HEA program funds to students who begin attending that program after the
date specified in the Secretary's notice.
However, the institution may disburse title IV, HEA program funds to students who began attending the
program before it became ineligible for the remainder of the award year and for the award year
following the Secretary's notice.
Appendix 2
Transition year for
Ineligible Programs
(i.e. Award year
beginning July 1, 2012)
The Secretary caps the number of ineligible programs:
(A) Sorting all programs subject to this section by category based solely on the credential awarded as
determined by the Secretary (e.g., certificate, associate degree, baccalaureate degree, and graduate and
professional degree) and then within each category, by loan repayment rate, from lowest rate to highest rate;
and
(B) For each category of programs, beginning with the ineligible program with the lowest loan repayment
rate, identifying the ineligible programs that account for a combined number of students that completed the
programs in the most recently completed award year that do not exceed five percent of the total number of
students who completed programs in that category. For each ineligible program that falls within the five
percent grouping by category during the transition period, the Secretary notifies the institution that the
program no longer qualifies as an eligible program.
For every other ineligible program (i.e. those not in the 5% category), the Secretary notifies the institution
that:
(A) It must limit the enrollment of title IV, HEA program recipients in that program to the average number of
title IV, HEA program recipients enrolled during the prior three award years;
(B) It must provide the employer affirmations; and
(C) It must provide the debt warning disclosures.
Employer Affirmations Documentation from employers not affiliated with the institution affirming that the curriculum of the
additional program aligns with recognized occupations at those employers' businesses, and that there are
projected job vacancies or expected demand for those occupations at those businesses. The number and
locations of the businesses for which affirmation is required must be commensurate with the anticipated size
ofthe program.
Appendix 2
DOE Approval for Adding
Additional Programs
Delay in Approval
Calculating the measures
for new programs
Before an institution offers an additional program that is subject to the requirements of this section, the institution
must apply to the Secretary to have that program approved as an eligible program. As part of its application, the
institution must provide:
(i) If the additional program constitutes a substantive change as provided under 34 CFR 602.22(a)(l), documentation
of the approval of the substantive change by its accrediting agency;
(ii) Projected student enrollment for the next five years for each location of the institution that will offer the additional
program; and
(iii) Documentation from employers not affiliated with the institution affirming that the curriculum of the additional
program aligns with recognized occupations at those employers' businesses, and that there are projected job vacancies
or expected demand for those occupations at those businesses. The number and locations of the businesses for which
affirmation is required must be commensurate with the anticipated size ofthe program.
In determining whether to approve the additional program, the Secretary may restrict the approval for an initial period
based on the projected growth estimates provided by the institution and the demonstrated ability of the institution to
offer programs subject to this section.
If the additional program constitutes a substantive change based solely on program content, the Secretary calculates
the loan repayment rate and debt measures for that program as soon as data are available. Otherwise, the Secretary:
(i) Calculates the loan repayment rate by using loan data from the additional program and, for the first three years,
loan data from all other programs currently or previously offered by the institution that are in the same job family as
the additional program. Any loans from the programs in the same job family that enter repayment after the third year
that the loan repayment rate is calculated for the additional program, are not included in that program's loan
repayment rate.
(ii) Calculates the debt measures by using the loan debt incurred by students in the additional program and in all other
programs currently or previously offered by the institution that are in the same job family as the additional program
1
until loan debt data are available for a 3YP solely for the additional program.
72
Appendix 2

Jmr.
Above
45%
35%to
45%
Below
35%
I
Gainful Employment Proposed Rule
Above 12% of Total Income
AND
Above 30.% of Discretionary
Income
Restricted
Ineligible
m
r:.1m:1:11
11
F. IT.
Neither Other Column
!"adjusted" Fully Eligible I
Restricted I
Restricted
Below 8% of Total Income
OR
Below 20% of Discretionary Income
Fully Eligible
73
Appendix 2
Overview of Consequences
Pass the Loan Repayment test (e.g. Loan repayment rate
of at least 45%)
AND
Pass the Debt Burden thresholds (e.g. either a debt to
earnings ratio of 20% or less of discretionary income OR
8% or less of average annual earnings.)
Pass the Loan Repayment test
OR
Pass the Debt Burden Thresholds
Fail the highest level of the loan repayment test (less
than 45% but more than 35%)
AND
Fail both of the highest limits of the Debt Burden
thresholds (e.g. either a debt to earnings ratio of
between 20%- 30% of discretionary income or more
than 8%, but less than 12% of average annual earnings.)
Loan repayment rate below 35%
AND
Fail either of the lower limits of the Debt Burden
thresholds (debt-earnings ratio above 30% of
discretionary income and 12% of annual earnings)
Program not in existence long enough to demonstrate
repayment and debt-earnings outcomes.
Consequences
Eligible None.
Eligible Institutions must warn consumers and current students
of high debt levels and provide the most recent debt
measures for the program.
Restricted Institutions must:
(1) demonstrate employer support for the program, and
(2) warn consumers and current students of high debt
levels and provide the most recent debt measures for
the program.
(3) Enrollment growth is subject to limits (no more than
the average new enrollment over the past 3 years)
Ineligible No new students may receive title IV aid. Current
students may continue to receive aid for the rest of the
year and one additional award year. While phasing out a
program, institutions must warn current and prospective
students of high debt loads and reduced ability to repay
their loans from projected earnings and provide the
most recent debt measures for the program.
Adding new Institution must demonstrate employer support for the
programs program, and the new program is subject to limits on
enrollment growth at the discretion of the DOE.
SAMPLE LETTER for Member of the U.S. House of Representatives
Secretary Ame Dtmcan
400 Maryland A venue Southwest
Dear Secretary Duncan:
I am wri ting to request that the Department ';t,'ithdraw the Notice of Proposed Rulemaking published on Jul y 26,
2010, regarding Gainful Employment. If the draft mle is adopted, it will cut off access to postsecondary education
for hundreds of thousands of students at a time when our country desperately needs more skilled workers.
The Department's most recent proposal to make programs primarily in private sector colleges and universities
ineligible based on a complicated formula that does not tmly measure educational quality- generally referred to as
"gainfttl employment" - should be rejected, because:
It will eliminate access to higher education for many working adults and lower income students.
It will eliminate programs we all deem necessary yet not impact programs that are of questionable value.
By requiring data from the IRS, it raises privacy concerns for students and graduates.
It impacts almost exclusively the proprietary sector of higher education ,.vhile ignoring the same issues
concerning student debt found at public and private non-profit institutions.
It is beyond the Department's statutory authority.
In the reauthorization of the Higher Education Act of 2008, Congress added numerous additional protections, but
we never once debated the Gainful Employment regulations. And it would make these dramatic changes without
Congress being directly involved, even though just two years ago Congress completed action on a comprehensive
updating of the HEA.
I believe Congress, the Administration and the industry should take a more comprehensive look at the retum on
investment of higher education for students and taxpayers. That is why we are in the process of developing a
legislati ve proposal that will create a Quality Index for postsecondary institutions that will consider various
outcomes including graduation, j ob placement, student loan repayments, and pass rates on various credentialing
examinations. Such a metric wi ll also take into account the type of student being educated, understanding that
students with various "risk factors," such as the first to attend college or being a working parent, present additional
challenges to institutions that accept them.
Attached is an outline of the Quality Index prepared by Representative Robert Andrews, (COl-New Jersey). I
strongly urge the Secretary to adopt his as the gainful employment language.
V cry truly yours,
Member of Congress
cc. Speaker Nancy Pelosi
Office of the Speaker
H-232, US Capitol
WashingtoD, DC 20515
Rep. Rob Andrews' Proposed Quality Index f01 Higher Education to be issued in lieu of the present
gainful employment language
Goal: to assure that schools, irrespective of ownership, offering career preparation education are
providing value added for taxpayers.
To achieve this goal, we propose an index as follows:
A. Weighted average factors
I. Job placement in jobs paying at least the 25th percentile of Bureau ofLabor Statistics
reported income for that job in that region (50 percent of score)
ll. Graduation from an accredited program (30 percent of score)
ill. Loan default rate (20 percent of score)
B. Multiplier to take into account a school ' s effort to train those most in need. To calculate the
multiplier, take the percentage ofPell eligible students and add it to l , so a school with 38 percent
Pell eligible has a multiplier of 1.38. Multiply the weighted average of the factors by the multiplier
in order to produce the quality index score.
Success Threshold: To determine the success threshold for this index, one would take the target return
for taxpayers on aid dollars invested, and then determine the score necessary to generate that return. This
number becomes the success threshold.
Consequences: Schools failing to meet the success threshold would be required to develop and
implement remediat1on plans for a given number of years. Schools chronicall y failing to meet the
threshold for a given number of years wouJd lose Titl e IV eligibility for the program in question.
From: Kanter Martha
To: Yum Georgia
CC:
Date: 9/7/2010 11:36:12 PM
l(b)(5)
From: Kvaal, James
Sent: Tuesday, September 07, 2010 7:35PM
To: Cunningham, Peter; Kanter, Martha; Hamilton, Justin
Subject: RE: A Message from Dr. John Sperling, Founder- University ofPhoenix
(b)(5)
-----Original Message-----
From: Cunningham, Peter
Sent: Friday, September 03, 2010 7:40AM
To: Kanter, Martha
Cc: Kvaal, James
(b){5)
From: Kanter, Martha
Sent: Thursday, September 02, 201 0 10:24 PM
To: Weiss, Joanne; Martin, Carmel; Yuan, Georgia; Rose, Charlie; Gomez, Gabriella; Ochoa, Eduardo; Miller, Tony;
peter.cunnigharn@ed.gov
Subject: FYI: A Message from Dr. John Sperling, Founder- University ofPhoenix
September 2, 201 0
President's goals without for-profit colleges. The states do not have the funding needed to increase capacity whereas
institution.
As the largest institution in the sector-465,000 students with 90,000 graduates last year-the University of Phoenix
illustrates the strengths and weaknesses of for-profit colleges and universities. The NEXUS study documents the financial
shows that not only will the proposed reforms require a m ~ o r increase in Department ofEducation oversight staff, they
performers.
millions oflow-income Americans now denied access to the education they need to give them a chance to join the
middle class.
The worst of these regulations concerns the definition of"gainful employment" and a new regulation that sets the
Representative Robert Andrews (New Jersey- OJ) has proposed a definition of gainful employment that would correct
Duncan setting forth the negative consequences resulting from the Department's defmition while proposing an alternative
[ cid:imageOO l .gif]
John G. Sperling
Founder
From: Yuan Georgia
To: Finley, Steve
CC: Kanter. Martha
Date: 9/8/2010 6:42:06PM
l(b)(S)
Sent: Tuesday, September 07, 2010 11:36 PM
To: Yuan, Georgia
Subject: FW: A Message from Dr. John Sperling, Founder- University of Phoenix
l(b)(5)
From: Kvaal, James
Sent: Tuesday, September 07, 2010 7:35PM
(b)(5)
To: Kanter, Martha
Cc: Kvaal, James
(b)(5)
Sent: Thursday, September 02, 2010 10:24 PM
peter.cunnigham@ed.gov
September 2, 2010
Attn. Legi.slativeDirector
Department ofEducation, seconded by the HELP Committee, has proposed new rules that will seriously undercut the
access for millions of underserved and nontraditional students who could not complete their education in a traditional
institution.
shows that not only will the proposed refonns require a major increase in Department ofEducation oversight staff, they
It would seem wiser to restore the status quo ante when the Department ofEducation was pursuing a refonn that would
order to expose cheating on the tests, would be a far more productive use ofDepartment of Education resources than
performers.
millions oflow-income Americans now denied access to the education they need to give them a chance to join the
middle class.
The worst of these regulations concerns the definition of"gainful employment'' and a new regulation that sets the
percentage requirements, apparently anived at with insufficient attention to their potential negative consequences, would
applied to Historically Black Colleges and Universities, over 90% of them would have to close their doors.
the many faults of the definition proposed by the Department of Education. He has written to Education Secretary Arne
Duncan setting forth the negative consequences resulting from the Department's definition while proposing an alternative
[cid:image001.gif]
John G. Sperling
Founder
.................................................................................................................................................................................................................................................................................................
From: Yuan Georgia
To: K vaal, James
Cunningham_ Peter
Hamilton. Justin
Kanter Martha
CC: Finley Steve
Date: 9/9/2010 11:52:46 AM
From: Finley, Steve
Sent Thursday, September 09, 201 0 11 : 15 AM
To: Yuan, Georgia
(b)( 5)
From: Kvaal, James
Sent Tuesday, September 07, 2010 7:35PM
(b)(5)
Sent: Friday, September 03, 20'1 07:40AM
To: Kanter, Martha
Cc: Kvaal, James
(b)(5)
To: CUrullingham, Perer
September 2, 2010
institution.
Perhaps the most important finding of the case study is the fact that for -profit institutions operate at no cost to taxpayers
truly benefit taxpayers, namely to require all institutions of higher education to measure the leaming outcomes of their
performers.
universities are a vi tal sector of the American higher education system that deserve the support of the Department of
millions of low-income Americans now denied access to the education they need to give them a chance to join the
middle class.
The worst of these regulations concerns the definition of"gainful employment'' and a new regulation that sets tl1e
Duncan setting forth the negative consequences resulting from the Department's definition while proposing an altemative
suppmt as well. I have attached a draft of a letter of support which we hope you will use as a model for a letter from you
John G. Sperling
Founder
From: Shireman Bob
To: Yum Georgia
CC:
Date: 4/16/2010 10:15:16 AM
Subject: FW: Analysis ofKaplan/DeVry/EDMC Proposal
A more detailed response.
From: Kantrowitz, Mark [mailto:Mark.Kantrowitz@Monster.com]
Sent:Tuesday, Aprill3, 2010 11:19PM
To: Shireman, Bob
Cc: Kantrowitz, Mark
Subject: Analysis ofKaplan/DeVry/EDMC Proposal
Kaplan, DeVry and EDMC propose combining a 15% debt-service-to-income ratio with a 20-year repayment term at
the Stafford loan interest rate. My analysis was of each of these components separately, not in combination.
For example, the following table is from my report for a 15% debt-service-to-income ratio with a 10-year term:
2007-08 NPSAS
Implications of 15% Debt-to-Income Threshold
Associate' s
Degree
Bachelor's
Degree
Median Income
$35,535
$42,092
Monthly Loan Payment at 15% ofincome
$444.19
$526.15
Equivalent Loan Balance (6.8%, 10 year)
$38,598
$45,720
Percentage of Graduates with Less Debt
For-Profit Colleges
93.3%
84.0%
Non-Profit Colleges
91.0%
86.0%
Public Colleges
97.6%
94.6%
The following table is from my report for a 20-year term with an 8% debt-service-to-income ratio:
2007-08 NPSAS
Implications of20-Year Repayment Tenn
Associate' s
Degree
Bachelor' s
Degree
Median Income
$35,535
$42,092
Monthly Loan Payment at 8% of Income
$236.90
$280.61
$31,035
$36,761
For-Profit Colleges
85.2%
63.6%
Non-Profit Colleges
86.2%
75.2%
Public Colleges
95.7%
88.1%
The following table, which is not from my report but uses the same methodology, shows the results of combining these
two proposals, a 15% debt-service-to-income ratio with a 20-year term.
2007-08 NPSAS
and 20-YearRepaymentTerm
Associate' s
Degree
Bachelor' s
Degree
Median Income
$35,535
$42,092
Monthly Loan Payment at 15% oflncome
$444.19
$526.15
$58,193
$68,931
For-Profit Colleges
99.7%
98.8%
Non-Profit Colleges
98.6%
96.8%
Public Colleges
99.9%
99.4%
Such a proposal would not have any effect on for-profit colleges. I believe they are proposing such an outlier because
they lack the data to evaluate the impact of the US Department of Education' s proposals on their businesses so they
want to err on the side of not affecting their businesses at all .
As I mentioned previously, I think it is in their strategic best interest to propose narrower restrictions when they have the
data to evaluate the impact on their business. Any proposal that successfully separates the wheat from the chaff (where
they count themselves in the wheat) will benefit them by shifting student market share from the colleges that lose federal
student aid funding to them. They could end up increasing enrollments as a result. I believe that some of the better for-
profit colleges would not just seek thresholds that knock out XYZ Beauty Academy (hypothetical name), but also larger
competitors with high default rates such as ATI Career Training Center, Corinthian (Everest College/Institute), Lincoln
Education (Lincoln College of Technology), and Career Education Corporation (Katherine Gibbs School). Though I
think Kaplan is overlooking the fact that several of their campuses have very high default rates.
Mark
Mark Kantrowitz
Publisher ofFinAid.org and FastWeb.com
Author, FastWeb College Gold
FinAid Page LLC
PO Box 2056
Cranbeny Township, P A 16066-1056
Tel: 1-724-538-4500
Fax: 1-724-538-4502
Email: mkant@finaid.org, mkant@fastweb .com
www.fastweb.com www.finaid.org www.collegegold.com
NOTICE:
This message, and any attachments, contain(s) infonnation that may be confidential or protected by privilege from
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From: Yuan C'Jeorgia
To: Miller. Tony
CC:
Date: 4/16/2010 10:29:20 AM
FYI
From: Shireman, Bob
Sent Friday, April16, 2010 10:15 AM
To: Yuan, Georgia
A more detailed response.
From: Kantrowitz, Mark [mailto:Mark.Kantrowitz@Monster.com]
Sent: Tuesday, April 13, 2010 11:19 PM
To: Shireman, Bob
Cc: Kantrowitz, Mark
Subject: Analysis ofKaplan/DeVry/EDMC Proposal
Kaplan, De Vry and EDMC propose combining a 15% debt-service-to-income ratio with a 20-year repayment term at
the Stafford loan interest rate. My analysis was of each of these components separately, not in combination.
For example, the following table is from my report for a 15% debt-service-to-income ratio with a 10-year term:
2007-08 NPSAS
Associate's
Degree
Bachelor's
Degree
Median Income
$35,535
$42,092
MonthJy Loan Payment at 15% of Income
$444.19
$526.15
$38,598
$45,720
For-Profit Colleges
93.3%
84.0%
Non-Profit Colleges
91.0%
86.0%
Public Colleges
97.6%
94.6%
The following table is from my report for a 20-year term with an 8% debt-service-to-income ratio:
2007-08 NPSAS
Implications of20-Year Repayment Term
Associate' s
Degree
Bachelor's
Degree
Median Income
$35,535
$42,092
Monthly Loan Payment at 8% of Income
$236.90
$280.61
$31 ,035
$36,761
For-Profit Colleges
85.2%
63.6%
Non-Profit Colleges
86.2%
75.2%
Public Colleges
95.7%
88.1%
The following table, which is not from my report but uses the same methodology, shows the results of combining these
two proposals, a 15% debt-service-to-income ratio with a 20-year term.
2007-08 NPSAS
and 20-Year Repayment Term
Associate' s
Degree
Bachelor' s
Degree
Median Income
$35,535
$42,092
Monthly Loan Payment at 15% oflncome
$444.19
$526.15
$58,193
$68,931
For-Profit Colleges
99.7%
98.8%
Non-Profit Colleges
98.6%
96.8%
Public Colleges
99.9%
99.4%
Such a proposal would not have any effect on for-profit colleges. I believe they are proposing such an outJjer because
they lack the data to evaluate the impact of the US Department ofEducation' s proposals on their businesses so they
want to err on the side of not affecting their businesses at all.
As I mentioned previously, I trunk it is in their strategic best interest to propose narrower restrictions when they have the
data to evaluate the impact on their business. Any proposal that successfully separates the wheat from the chaff (where
they count themselves in the wheat) will benefit them by shifting student market share from the colleges that lose federal
student aid funding to them. They could end up increasing enrollments as a result. I believe that some of the better for-
profit colleges would not just seek thresholds that knock out XYZ Beauty Academy (hypothetical name), but also larger
competitors with rugh default rates such as ATI Career Training Center, Corinthlan (Everest College/Institute), Lincoln
Education (Lincoln College of Technology), and Career Education Corporation (Katherine Gibbs School). Though 1
think Kaplan is overlooking the fact that several of their campuses have very high default rates.
Mark
Mark Kantrowitz
Publisher ofFinAid.org and FastWeb.com
Author, FastWeb College Gold
FinAid Page LLC
PO Box 2056
Cranberry Township, P A 16066-10 56
Tel : 1-724-538-4500
Fax: 1-724-538-4502
Email: mkant@finaid.org, mkant@fastweb.com
www.fastweb.com www.finaid.org www.collegegold.com
NOTICE:
This message, and any attachments, contain(s) inforrnation that may be confidentiaJ or protected by privilege from
disclosure and is intended only for the individuaJ or entity named above. No one else may disclose, copy, distribute or
use the contents of this message for any purpose. Its unauthorized use, dissemination or duplication is strictly prohibited
and may be unlawful. If you receive this message in error or you otherwise are not an authorized recipient, please
immediately delete the message and any attachments and notify the sender.
From: Rose, Charlie
To: Yum Georgia
CC:
Date: 9/15/2010 8:11 :34 AM
Subject: FW: ANDY ROSEN REQUEST FOR MEETING
FYI
From: Miller, Tony
Sent Wednesday, September 15, 2010 7:57AM
To: Rose, Charlie
Subject Fw: ANDY ROSEN REQUEST FOR MEETING
l(b)(5)
Sent using BlackBerry
From: Rebecca Campoverde
To: Miller, Tony
Cc: Sova, Alexandra
Sent Tue Sep 14 16:23:11 2010
Subject ANDY ROSEN REQUEST FOR MEETING
Secretary Miller,
Andy Rosen, Kaplan, Inc. ' s Chairman and CEO, appreciates your receptivity to engage in dialogue on significant issues.
He is interested in sitting down with you to outline the Kaplan Commitment, which he included in concept form in a
recent letter to the Secretary:
"Kaplan's goal, however, is to go even further by making an introductory portion of our program "risk free" to our
students. That is, we want to enable any students who choose to enroll in our programs to have a multi-week period,
depending on the length of their program, in which they can assess whether the program is right for them. If they decide
for any reason it is not, we will refund all tuition payments to the student or to the Department ofEducation. This
approach, assuming it meets with regulatory and other approvals (and we invite your office's help to ensure that it does),
will not only let students get a real experience with our courses before incurring any expenses or future debt, but will
diminish any motivation to "oversell" students into programs. While this approach will be expensive for us to implement,
it will help us meet our goal of ensuring that every one of our students is in class because he or she is committed to being
there after fully understanding the commitment he or she is making. At tl1e same time, it will serve as an important
protection for taxpayers."
Andy would appreciate some time with you in very near future to discuss this with you and assess how it may be
possible to expedite approvals. I will follow up with your staff to see if there is time on your schedule in the next week or
so. Thank you for your consideration.
Becky
Rebecca Campoverde
Vice President, Government Relations
Kaplan, Inc.
202-334-6684 (0)
703-629-8532 (C)
Rebecca. Campoverde@kaplan.com
This transmission may contain information that is privileged, confidential and exempt from disclosure under applicable
law. If you receive tlus transmission in error, do not read, use or copy it. Please immediately contact the sender and
destroy the material in its entirety, whether in electronic or hard copy format. Thank you.
From: Jenkins, Harold
To: Yum Georgia
CC:
Date: 4/13/2010 7:53:10 PM
Subject: FW: Another article on gainful employment
From: Finley, Steve
Sent: Tuesday, April13, 2010 5:35PM
To: Siegel, Brian; Burton, Vanessa; Scaniffe, Dawn; Morelli, Denise; Marinucci, Fred; Jenkins, Harold; Woodward,
Jennifer; Wolff, Russell; Sann, Ronald; Wanner, Sarah; Varnovitsky, Natasha
Subject: FW:
CREDIT SUISSE
Research Analysts
Kelly Flynn, CFA
617 556 5752
13 April 2010
Americas/United States
Equity Research
Education Services (Business & Professional Services) I MARKET WEIGHT
Education Services
=
UPGRADE RATING
keny.nynn@credit-suisse.com Upgrade DeVry and ITT On New Gainful
Patrick Elgrably, CFA E I I . h
312 750 2974 mp oyment ns1g ts
patrick.elgrably@ credit-suisse .com
Adam Shatek, CPA We are upgrading ITT (ticker ESI) and DeVry (ticker DV) to Outperform from
312 750 3317 Neutral due to new insights on the DOE's Gainful Employment stance. We
adam.shatek@credit-suisse.com are raising our ITI price target to $135 from $105 and our DeVry price target to
$75 from $55 as DCF discount rate reductions reflect perceived decreased
Gainful Employment risks. We detail our DCF analysis assumptions for DV and
ESI below. We are restricted on EDMC. All other Neutral ratings are
unchanged (see next page for details}.
We believe DOE's latest GE proposal leaves 8%110 year parameters
unchanged. Following discussions with industry contacts last night, we believe
that the Department of Education on Friday submitted its Gainful Employment
and other program integrity proposed language to the Office Of Management
and Budget (the OMB) for vetting. We believe the goal is to publish the Notice of
Proposed Rule Making by May 15, or June 1 at the latest, and to publish final
regulations by November 1. We also believe the 8% debt-service-to-income
ratio and 10 percent repayment period inputs remain unchanged as of now and
that the "90% of graduates in repayment" exemption remains unchanged.
But, we believe DOE added a 50% completion exemption. Based on our
discussions, we believe one big change in the new draft proposal is the add back
of the "exemption" (that was removed in January after appearing in the initial
draft language) for schools with certain student completion and job placement
rates. We believe the completion rate cut off is now a more generous 50%
(versus 70% included in initial draft) and the placement rate cut-off is 70% (same
as in initial draft language; we believe most companies with placement rates
have rates above 70%).
We think 50% completion rate exemption would help ESI, DV, & EDMC
regulatory positioning the most. We believe the 50% exemption, although not
eliminating Gainful Employment risks, would most significantly improve the
positioning for companies with placement rates at or close to 50% that would,
without an exemption, have potentially seen earnings prospects decimated by a
new Gainful Employment regulation; DeVry, ITT and Education Management fit
this profile. Although none of these companies release completion rates, the
DOE data (which likely understates actual completion rates because it only
includes first-time, full time students and not transfers or part time students) is
close enough to 50% to make us think these companies likely have 50%
completion rates or could achieve them in coming years without decimating
earnings prospects; most recent DOE completion rate data points are -39% for
ESI (ESI also said on recent call that 60% make it through first year), - 31% for
DV and -41 % for EDMC's Art Institute (-56% of company's students). Further,
we believe ESI's valuation, and DeVry's to a lesser extent, have been among
those most negatively impacted by Gainful Employment concerns.
DOE flexibility may also fuel more investor optimism. We also acknowledge
that the 50% completion rate change, if in fact it occurs, could fuel investor
optimism that the DOE could ease its stance further in coming months in
response to more pressure that may arise after the NPRM is posted.
DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON
TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. U.S. Disclosure:
Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be
aware that the Firm may have a conflict of interest that could affect the objectivity ot this report. Investors should consider this
report as only a single factor in making their investment decision.
CREDIT SUISSE
Sector Implications/Thesis Update
Countercyclicality and other sector regulatory concerns remain; other ratings
unchanged. We continue to worry that countercyclicality will hurt growth in coming
quarters and we believe that. even if the Gainful Employment proposal is eased somewhat.
the broader regulatory landscape is likely to remain challenging for the foreseeable future;
we expect the DOE to tighten the Incentive Compensation rule and to generally seek to
crack down on schools' recruiting underqualified, under-informed students. Further, our
thesis on other companies under coverage is not changed significantly by our changing
view on Gainful Employment. Our concerns about APEI , APOL, COCO, LINC and UTI are
largely unrelated to Gainful Employment. CPLA, STRA and LOPE trade at premium
valuations already, and we are not confident they would make the cut on the 50%
completion or graduation loan repayment Gainful Employment exemptions. For BPI and
CECO, although shares look cheap, we are also not confident Gainful Employment
exemptions apply, and we believe these companies also face other significant regulatory
risks. We are restricted on EDMC.
Valuation
Our price target changes largely reflect decreases in our discount rate used in the DCF
analyses due to lower perceived Gainful Employment risks, in our view.
Our $135 ESI price target is derived from our DCF analysis. We summarize our DCF
assumptions below:
2010-2020 revenue Compound Annual Growth Rate (CAGR) of 4.9%.
2009 operating margin of 37.9% going to 39.2% by 2020.
A Weighted Average Cost of Capital (WACC) of 16%.
Terminal free cash flow growth of 3%.
Working capital changes and capital expenditures that remain in-line with historical
ratios.
Our $75 DV price target is derived from our DCF analysis. We summarize our DCF
assumptions below:
2010-2020 revenue Compound Annual Growth Rate (CAGR) of 10.7%.
2009 operating margin of 19.7% going to 20.2% by 2020.
A Weighted Average Cost of Capital (WACC) of 14%.
Terminal free cash flow growth of 3%.
Working capital changes and capital expenditures that remain in-line with historical
ratios.
Price Price Rating Target Price
Year'
EPS EPS FY1E
Company ccy 09 Apr 10 Prev. Cur. Prev. Cur. End Ccy Prev. Cur.
DeVry Inc. (DV) US$ 65.06 N 0 55.00 75.00 Jun 09 uss - 3.41
ITI Educational Services (ESI US$ 108.78 N 0 JVI 105.00 135.00 Dec09 US$ - 10.50
13 April 2010
EPS FY2E EPS FY3E
Prev. Cur. Prev. Cur.
- 4.05 - 4.65
- 11.69 - 12.63
o- Outperform, N- Neutral, u- Underperform, R- Restricted
Source: Company data, Credit Suisse estimates.
[VJ = StOCk considered volatile (see DISclosure Appendix).
Education Services 2
CREDIT SUISSE 13 April 2010
Companies Mentioned (Price as of 09 Apr 10)
American Public Education, Inc. (APE!, $46.03, NEUTRAL, TP $41.00)
Apollo Group Inc. (APOL, $63.14, NEUTRAL [V], TP $65.00)
Bridgepoint Education (BPI, $23.60, NEUTRAL [V], TP $18.00)
Capella Education Company (CPLA, $90.90, NEUTRAL, TP $72.00)
Career Education Corp. (CECO, $31.70, NEUTRAL [V], TP $28.00)
Corinthian Colleges, Inc. (COCO, $17.51 , NEUTRAL [V], TP $14.00)
DeVry Inc. (DV, $65.06, OUTPERFORM, TP $75.00)
Education Management Corporation (EDMC, $22.60, RESTRICTED [V])
Grand Canyon Education (LOPE, $25.68, NEUTRAL, TP $21.00)
ITT Educational Services, Inc. (ESI, $108.78, OUTPERFORM [V], TP $135.00)
Lincoln Educational Services (LINC, $25.70, NEUTRAL [V], TP $21.00)
Strayer Education, Inc. (STRA, $238.70, NEUTRAL, TP $195.00)
Universal Technical Institute (UTI, $23.05, NEUTRAL [V], TP $19.00)
Disclosure Appendix
Important Global Disclosures
I, Kelly Flynn, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and
securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in
this report.
See the Companies Mentioned section for full company names.
3-Year Price, Target Price and Rating Change History Chart for DV
DV Closing Target
Price Price Initiation/
Date {USS) {USS) Ratins Assumetion
4/27/07 34.52 29
6/18/07 35.22 NC
2/21/08 43.86 65 0 X
6/20/08 58.54 N
7/30/08 56.75 R
10/8/08 45.19 52 N
12/5/08 58.37 53
4/21/09 42.12 44
8/14/09 51.89 50
10/28/09 56.13 52
1/27/10 63.32 55
67
62
51
52
47
42
37
32

- aosngPae& TaJQet Pri:e Rating
O:Oulperlo<m; f'I=Ne.rtral; U:Unde<pertotm; R:Restrcled; NR:Nol Rated; NC:NOI Co.eted
3-Year Price, Target Price and Rating Change History Chart for ESI
ESI Closing Target
165
----------------------------11!i-llf-------------------
Price
Date (USS)
4/27/07 97.9
6/18/07 113.52
2/21/08 60.17
2/25/08 54.02
6/20/08 88.4
10/24/08 74.1
2/2109 129.43
4/21/09 101.31
Price Initiation/
(USS) Ratins Assumeti on
110
65
61
81
84
165
105
NC
N
0
N
X
145 -------------------------------------------------
- OosilgPae& Rating
O:Outperlo<m: f'I=Ne.rtral; U=Underpertotm: R=Restri:led: NR=Nol Ra1ed: NC:Nol Co.ered
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total
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risk} over the next 12 months.
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Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months.
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Restricted 2%
For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underpertorm most closely correspond to Buy,
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Price Target: (12 months) for (DV)
Method: Our $75 target price for DV is derived from our Discounted Cash Flow (DCF)based model. Our target price is based on the following
assumptions: 2010-20 revenue CAGR (compound annual growth rate} of 10.7%, 2010 operating margin of 19.7% going to 20.3% by 2020, a WACC
(weighted average cost of capital) of 14% and terminal free cash flow growth of 3%.
Risks: The following factors may affect our projected results and $75target price for DeVry: its heavy reliance on IT-related education which could
hurt results if IT spending declines, an economic recovery which could curt countercyclical post-secondary education companies, changes in the
regulatory and accreditory environments, and the impact of a downturn in the student lending environment which could threaten the magnitude of
federal loans to DeVry's students.
Price Target: (12 months) for (ESI}
Method: Our $135 target price for ESI is derived from our Discounted Cash Flow (DCF)-based model. Our base case DCF has the following
assumptions: 200919 revenue CAGR of 4.9%, operating margins going from 37.9% to 39.2% from 2010-20, a WACC of 16%, and terminal free
cash flow growth of 3%.
Risks: The following factors may affect our projected results for ESI and our $135 price target: its heavy reliance on IT-related education which could
hurt results when IT spending declines, an economic recovery which has the potential to negatively impact countercyclical post-secondary education
services companies, impact of greater regulatory and accrediting agency requirements and the recent downturn in the student lending environment,
which impacts the magnitude of federal loans provided to ITI students.
Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the
target price method and risk sections.
The subject company (DV, ESI) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit
Suisse.
Credit Suisse provided investment banking services to the subject company (DV, ESI) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (ESI) within the past 12 months.
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (DV, ESI} within the next 3
months.
Important Regional Disclosures
Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.
An analyst involved in the preparation of this report has visited certain material operations of the subject company (ESI} within the past 12 months.
The analyst may not have visited all material operations of the subject company. The travel expenses of the analyst in connection with such visits
were not paid or reimbursed by the subject company, other than de minimus local travel expenses.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (DV) within the past 12
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CREDIT SUISSE
13 April201 0
Americas/United States
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ITT and DV Upgrade.doc
(b)(5)
From: Manheimer, Ann
Sent: Thursday, April l5, 2010 9:47AM
To: Finley, Steve
Subject: FW: Application ofGE
(b)(5)
From: Kolotos, John
Sent Thursday, Aprill5, 2010 9:16AM
To: Manheimer, Ann
Subject: RE: Application of GE
From: Pinley, Steve
To: Wanner Sarah
Yuan. Georgia
CC: Jenkins. Harold
Date: 4/15/2010 4:27:48PM
Sub.iect: FW: Applicati on of GE
(b)(5)
Sent: Thursday, Aprill5, 2010 8:52AM
To: Kolotos, John
(b)(5)
From: Pauline Abernathy [mailto:pabernathy@ticas.org]
To: Manheimer, Ann
Right. My understanding is that HEOA was intended to exempt UofPhoenix'sLiberal Arts BA only. The question is did
it only exempt their liberal arts BA or did it incorrectly exempt all Phoenix programs? And, can you also confirm that if a
nonprofit is purchased by a for -profit, all of the school's programs would be subject to GE because it is now for-profit,
regardless of whether it used to be regionally accredited and was offering a BA in liberal arts before it was purchased?
Thank you.
From: Manheimer, Ann [mailto:Ann.Manheirner@ed.gov]
Sent: Thursday, April 15, 2010 8:41AM
To: Pauline Abernathy
Cc: Manheimer, A.tm
Pauline- hang on- I want to double check on an exception for liberal arts programs in the HEOA 2008
From: Manheirner, Ann
Sent: Wednesday, Aprill4, 2010 5:00PM
Subject FW: Application ofGE
Here is what I have come up with- is this helpful? Enough info (I have boiled it down)?
GE applies to certificate programs at all schools and to all programs offered at for-profit schools.
In the case where a proprietary school buys a nonprofit, the BA programs (which were not previously subject to GE)
would now be subject to GE.
Sent: Monday, April12, 2010 11:00 AM
To: Manheimer, Ann
Cc: Debbie Frankle Deanne Loonin
Subject: Application ofGE
Ann,
Per our conversation, it would help to understand to which entities the GE standard currently applies. The confusion
appears to stem in part from the provisions added in the HEOA and in part from reported differences among the FSA
Handbook, regs and statute. I wrote up the questions and issues based on information from Deanne and Debbie, but any
inaccuracies are my own. Thank you!
The FSA Handbook, I am told, says in order to be considered an 'institution of higher education' for title N purposes,
an institution has to offer programs no less than one year in length, along with being non-profit. Other institutions are in a
separate category, as proprietary or vocational institutions. But once the institution is eligible, each individual program
may or may not be eligible. Gainful employment pertains solely to program eligibility, not institutional eligibility (we
believe). This would suggest that gainful employment would apply to everything at proprietary and vocational colleges,
and all sub-degree Qess than two year programs) at institutions of higher education.
The HEOA added a category that allows a proprietary institution to offer programs leading to a baccalaureate degree in
Jjberal arts if the school previously provided such programs and is regionally accredited. There is no gainful employment
requirement here.
Questions:
*If a proprietary school like Univ. ofPhoenix meets the HEOA provision standards, are then none of its programs
subject to the GE requirement, or is just their BA in liberal arts not subject to GE? I believe Congress intended the latter
but is this how ED interprets it as well?
* If a proprietary school buys a nonprofit that has previously offered a BA in liberal arts and is regionally accredited, are
all of the proprietary school's programs now exempt from GE? I don't believe Congress ever intended this to apply to
for-profits that purchased a nonprofit, but is this how ED interprets it?
For the nonprofit schools, there could be an argument that a general eligibility stamp of approval would .flow to all of their
programs, even non-degree programs. However, the FSA handbook reportedly states that a school's eligibility does not
necessarily extend to all of its programs. The school must ensure that a program is eligible before awarding FSA funds.
There is, however, another distinction that may be important. The provisions in 101(b) state that a non-profit may be an
eligible institution of higher education if it provides not less than a one-year program of training to provide students for
gainful employment. This section does not say that it must be an eligible program. The same issue arises in the regulations
at 34 C.F.R. 600.4. The regs say only that these institutions must provide an educational program, not an eligible
educational program. However, the eligible program regulations at 668.8(c) use the term "eligible program" in refening to
non-profit institutions of higher education, but do not specify time requirements as is the case for proprietary institutions.
Clearly non-profits may offer non-degree programs that by definition must prepare students for gainful employment. This
should be sufficient to conclude that the definition of gainful employment would apply here. However, there is some
ambiguity because the statute does not specifically say that the program must be "eligible." Does this just mean that they
do not have to refer to the definitions in 1088 re: clock hours? One would think that the school cannot qualify to offer
non-degree programs based on their eligibility qualifications offering degree programs and so they must independently
ensure that each program is eligible. This would mean that if it is a non-degree program at an institution of higher
education (meaning a non-profit), the program must be independently eligible and so must prepare students for gainful
employment. Is this how ED sees it? Margaret Reiter asked this question in an e-mail to Fred Sellers during the neg reg.
In contrast, in order to be an eligible PROPRIETARY institution of higher education, the school must provide an
ELIGIBLE program of training to prepare students for gainful employment in a recognized occupation.
It is therefore clear that the proprietary institutions must also offer "eligible" programs. These are defined in section
1 088(b). As Margaret pointed out, this section does not explicitly refer back to section 1002. These are mostly time-
related categories.
Pauline Abernathy
Vice President
The Institute for College Access & Success
www.ticas.org and www.projectonstudentdebt.org
We moved! TICAS' main number is now 510.318.7900. My direct line is 510.318.7903.
(b)(5)
From: Kolotos, John
Sent: Thursday, April 15, 2010 9:16AM
To: Manheimer, Ann
(b)(5)
To: Kolotos, John
(b)(5)
To.: Finley, Steve
CC:
Date: 4/15/2010 9:46:50 AM
Sent: Thursday, April15, 2010 8:47AM
To: Manheimer, Ann
Right. My understanding is that.HEOA was intended to exempt UofPhoenix's Liberal Arts BA only. The question is did
it onJy exempt their liberal arts BA or did it incorrectly exempt all Phoenix programs? And, can you also confirm that if a
nonprofit is purchased by a for-profit, all of the school's programs would be subject to GE because it is now for-profit,
regardless of whether it used to be regionally accredited and was offering a BA in liberal arts before it was purchased?
Thank you.
From: Manheimer, Ann [mailto:Ann.Manheimer@ed.gov]
Sent: Thursday, April IS, 2010 8:41AM
Cc: Manheimer, Ann
Pauline - hang on - I want to double check on an exception for liberal arts programs in the HEOA 2008
Sent: Wednesday, April 14, 2010 5:00PM
Here is what I have come up with - is this helpful? Enough info (I have boiled it down)?
GE applies to certificate programs at all schools and to all programs offered at for-profit schools.
In the case where a proprietary school buys a nonprofit, the BA programs (which were not previously subject to GE)
would now be subject to GE.
Sent: Monday, April 12, 2010 11:00 AM
To: Manheimer, Ann
Cc: Debbie Frankie Deanne Loonin
Subject: Application of GE
Ann,
Per our conversation, it would help to understand to which entities the GE standard currently applies. The confusion
appears to stem in part from the provisions added in the HEOA and in part from reported differences among the FSA
Handbook, regs and statute. I wrote up the questions and issues based on information from Deanne and Debbie, but any
inaccuracies are my own. Thank you!
The FSA Handbook, I am told, says in order to be considered an 'institution of higher education' for title IV purposes,
an institution has to offer programs no Jess than one year in length, along with being non-profit. Other institutions are in a
separate categol)', as proprietary or vocational institutions. But once the institution is eligible, each individual program
may or may not be eligible. Gainful employment pertains solely to program eligibility, not institutional eligibility (we
believe). This would suggest that gainful employment would apply to evel)'thing at proprietal)' and vocational colleges,
and all sub-degree Oess than two year programs) at institutions of higher education.
The HEOA added a category that allows a proprietary institution to offer programs leading to a baccalaureate degree in
liberal arts if the school previously provided such programs and is regionally accredited. There is no gainful employment
requirement here.
Questions:
*If a proprietal)' school like Univ. of Phoenix meets the HEOA provision standards, are then none of its programs
subject to the GE requirement, or is just their BA in liberal arts not subject to GE? I believe Congress intended the latter
but is this how ED interprets it as well?
* If a proprietary school buys a nonprofit that has previously offered a BA in liberal arts and is regionally accredited, are
all of the proprietary school ' s programs now exempt from GE? I don't believe Congress ever intended this to apply to
for-profits that purchased a nonprofit, but is this how ED interprets it?
For the nonprofit schools, there could be an argument that a general eligibility stamp of approval would flow to all of their
programs, even non-degree programs. However, the FSA handbook reportedly states that a school's eligibility does not
necessarily extend to all of its programs. The school must ensure that a program is eligible before awarding FSA funds.
There is, however, another distinction that may be important. The provisions in lOl(b) state that a non-profit may be an
eligible institution of higher education if it provides not less than a one-year program of training to provide students for
gainful employment. This section does not say that it must be an eligible program. The same issue arises in the regulations
at 34 C.F.R. 600.4. The regs say only that these institutions must provide an educational program, not an eligible
educational program. However, the eligible program regulations at 668.8(c) use the term "eligible program" in referring to
non-profit institutions of higher education, but do not specify time requirements as is the case for proprietal)' institutions.
Clearly non-profits may offer non-degree programs that by definition must prepare students for gainful employment. This
should be sufficient to conclude that the definition of gainful employment would apply here. However, there is some
ambiguity because the statute does not specifically say that the program must be "eligible." Does this just mean that they
do not have to refer to the definitions in 1088 re: clock hours? One would think that the school cannot qualify to offer
non-degree programs based on their eligibility qualifications offering degree programs and so they must independently
ensure that each program is eligible. This would mean that if it is a non-degree program at an institution of higher
education (meaning a non-profit), the program must be independently eligible and so must prepare students for gainful
employment. Is this how ED sees it? Margaret Reiter asked this question in an e-mail to Fred Sellers during the neg reg.
In contrast, in order to be an eligible PROPRIETARY institution of higher education, the school must provide an
ELIGIBLE program of training to prepare students for gainful employment in a recognized occupation.
It is therefore clear that the proprietary institutions must also offer "eligible" programs. These are defined in section
1088(b ). As Margaret pointed out, this section does not explicitly refer back to section 1002. These are mostly time-
related categories.
Pauline Abernathy
Vice President
The Institute for College Access & Success
www.ticas.org and www.projectonstudentdebt.org
We moved! TICAS' main number is now 510.318.7900. My direct line is 510.318.7903.
From: Yuan Georgia
To: Holland, Linda
CC:
Date: 9/3/2010 5:32:40 PM
FW: Confidential Memorandum on meetings during the period between the publi cation of proposed rules and
Subject: fmal rules
(b)(5)
Thanks,
Georgia
From: Yuan, Georgia
Sent: Wednesday, August 11, 2010 4:25PM
To: Rose, Charlie; Weiss, Joanne; Kanter, Martha; Kvaal, James; Miller, Tony; McFadden, Elizabeth; Gomez,
Gabriella; Ochoa, Eduardo; Bergeron, David; Martin, Carmel
Cc: Arsenault, Leigh; Adams, Kristen; Miceli , Julie
Subject: Confidential Memorandum on meetings during the period between the publication of proposed rules and final
rules
Dear everyone
(b)(5)
Georgia
Georgia Yuan
Postsecondary and Regulatory Setvice
LBJ 6E341
202-401-6399
Deliberative Process Draft
Meetings During Public Comment Periods- August 10} 2010
(b)(5)
Page 3
(b)(S)
Page 3
(b)(5)
Page 3
From: Bergeron, David
To: Chesly. Susan
Kvaal James
Kolotos John
Sellers Fred
CC: Madzelan Dan
Yuan, Georgia
Finley. Steve
Date: 8/14/2010 5 26.:34 PM
Subject: FW: Data request related to repayment rate
(b)(S)
From: Kelly Bozarth [Kelly.Bozarth@strayer.edu]
Sent: Saturday, August 14, 2010 4:24 PM
To: Bergeron, David
Subject: Data request related to repayment rate
Dave,
Thank you for your time on the call today. Per your request, I'm forwarding this data request to your attention. We are
requesting the following items to assist us in reconstructing the published rate repayment calculation. Please contact me
with any questions regarding this request.
1. Please confirm the date ranges used in the FY09 calculation
* Numerator: repayments during 10/1/08-9/30/09
* Denominator: loans entering repayment 10/1/04-3/31/08
1. Numerator: Please provide the Date Entered Repayment (DER001) reports as of October 1, 2008 and as of
September 30, 2009 so that we can calculate the RPL using the same reports used in the Department's calculation.
These reports are not available at this point in time via NSLDS.
1. Denominator: Please provide the data or reports used to calculate the denominator in the published calculation. When
we pull the School Cohort Default Rate History (DRC 03 5) reports for the last four federal fiscal years, we calculate a
different denominator (even after removing in-school deferments).
1. Repayment Rate excluding consolidations- per your suggestion, please provide our repayment rate calculation
excluding the impact of all consolidation loans. This will help us reconcile our calculations.
1. Information on consolidated loans
* The percentage of consolidated loans with one vs multiple consolidations
*The repayment detail of consolidation loans (showing repayments by consolidated loan, ideally by student)
1. Consolidation Loan Question: Please confirm that the numerator of the published calculation includes the OOPB of all
underlying loans that were subsequently consolidated. In our analysis, we found it difficult to isolate each underlying loan
for a student that was subsequently consolidated. Given the significant impact to our calculation, please provide the detail
on consolidation repayments:
a. Please provide data that would allow us to verify that the OOPB' s of all underlying loans were included in the
numerator when a repayment was made
b. Specifically, please provide (1) the list of consolidated loans by student name, (2) reduced principle payments (RPL)
on these loans for the period measured, and (3) the OOPB of the original loan added back to the numerator related to
theseRPL' s.
Please contact me directly, or feel free to have your team contact me directly, if we can provide further clarifications on
these requests. We appreciate your attention to this request.
Regards,
Kelly
Kelly Bozarth
Strayer Education, Inc.
SVP & Corporate Controller
Direct: 703-248-6775
Mobile: 571-289-1457
Kelly .Bozarth@strayer.edu
(b)(5)
thanks
From: K vaal James
To: Gomez. Gabriella
Yuan Georgia
CC:
Date: 9/22/2010 8:30:06PM
SubJect: FW: draft on meetings
(b)(5)
CONFIDENTIAL
1
(b)(5)
1
(b)(5)
1
From: Kanter Martha
To: Weiss, Joanne
CC:
Date: 9/3/2010 2:55:42 PM
Fw: First Report From U. of Phoenix Research Center Attacks Critics ofF or-Profit Education-
Subject:
Administration -The Chronicle ofHigher Education
Sent using BlackBeny
From: Martha
To: Kanter, Martha
Sent: Fri Sep 03 11:38:44 2010
Subject: First Report From U. ofPhoenix Research Center Attacks Critics ofF or-Profit Education- Administration-
The Chronicle of Higher Education
http://chronicle.com/article/First-Report-From-U-of/124231/
Sent from my iPhone
From: Yuan, Georgia
To: Haro, Adrian
From: Yuan Georgia
To: Rose, Charlie
CC:
Date: 9/24/2010 5:05:48 PM
Subject: FW: For 12:30 meeting
Cc: Bergeron, David; Kvaal, James; Canada, June
Subject: For 12:30 meeting
(b)(5)
Georgia
Georgia Yuan
Postsecondary and Regulatory Setvice
LBJ 6E341
202-401-6399
(b)(5)
CONFIDENTIAL
1
(b)(S)
1
(b)(5)
1
From: Palumbo Gayle
To: Fernandez..Rosario, Martina
Toney Dyon
Dickerson. Patricia
Shepard Nan
Wolfl: Russell
Woodward Jennifer
CC:
Date: 5/28/2010 5:50:12 PM
Subject: FW: For Profit Education Industry
Attachments: ED Presentation SOBN.ppt
Another satisfied University ofPhoenix customer. ..
And I don' t even know how I got on her mailing li st.
From: Mary Houston [mailto:l<b)(6) :J@yahoo.com]
Sent: Friday, May 28, 2010 2:44PM
To: sally.stroup@ed.gov
Cc: Tondra.Claibome@phoenix.edu; Henderson, Linda; Hillard, Dale; Wittman, Donna; Palumbo, Gayle
Subject: Fw: For Profit Education Industry
Dear Ms. Stroup,
I just read the IRA SOHN CONFERENCE Presentation by Steve Eisman. It names you as the prime example as to
how, as the head lobbyist for the Apollo Group, and then becoming the Assistant Secretary ofPost-Secondary
Education for the DOE under President Bush, the For-Profit Education Industry is just as socially destructive and
morally bankrupt as the subprime mortgate industry.
Since becoming a victim of the University of Phoenix's corruptness in the tactics of Title IV financial aid handling, I have
dedicated myself to see to it that UoP/ Apollo and people like yourself are brought down to the level of people like
myself, who are scraping for crumbs, and practically begging for mercy from our debts. Debts that greed and corruption
from people such as yourself have piled on top of mainstream America.
Shame on all of you responsible for the state of affairs in our country. I continue to hope and pray that God will repay all
of you according to your deeds.
Sincerely,
Mary Houston
----- Forwarded Message ----
From: Robert MacArthur
To: Robert MacArthur
Sent Wed, May 26, 2010 3:10:01 PM
Subject For Profit Education Industry
IRA SOHN CONFERENCE
May 26,2010
mortgage paper.
]
6
clear.
graduates.
6
institutions.
6
to meet his quota.
securitizations.
asylum.
54,000 students.
SOLUTIONS
6
U.S. government.]
6
scenano.
slower pace.]
6
this industry.
time.]
6
From: Martin, Cannel
To: Miller. Tony
Rogers. Margot
Cunningham, Peter
Rose Charlie
Kanter, Martha
Gomez, Gabriella
Shireman. Bob
Yuan, Georgia
CC: Duran, Maribel
Date: 5/28/20'1 0 3:50:26 PM
Subject: FW: For-profit education industry
Attachments: ED Presentation SOHN PPI
FYI. You may have gotten directly but just in case. rll take a look to see if any of it is worth asking Maribel to give to
Arne.
From: Eisman, Steven [ mailto:seisman@fppartners.com]
Sent: Friday, May 28,2010 3:14PM
Subject For-profit education industry
Hello,
My name is Steven Eisman and I am the Portfolio Manager at FrontPoint Partners Financial Services fund. I wanted to
industty. My presentation was very negative and I wanted to bring to your attention many of the unsaid or unknown
the intended outcomes. Our analysis highlights how changing the key mettics (specifically the debt service% and the
(resulting in lower student debt levels) under the proposed 8% debt service ratio and 1 0-yr repayment, under a 10%
ratio and a 15-yr repayment period, many schools will actually be able to raise ttrition by 5% or more. Moving to a 20-
substantially (in some cases by 200/o or more). While I don' t claim to know the Administration' s ultimate objectives, I
revenue-per-student (and thus, profit-per-student) for these schools, and that is why the for-profit industry is fighting so
hard to loosen the metrics. I just want to ensure that the Administration is aware of how sensitive the outcomes are to
assumptions.
Steven Eisman
917-934-1770
seisman@fppartners. com
IRA SOHN CONFERENCE
May 26,2010
mortgage paper.
]
6
clear.
graduates.
6
institutions.
6
to meet his quota.
securitizations.
asylum.
54,000 students.
SOLUTIONS
6
U.S. government.]
6
scenano.
slower pace.]
6
this industry.
time.]
6
From: Yuan Georgia
To: Bergerm1 David
Madzelan Dan
Finley, Steve
CC:
Date: 5/28/2010 4:05:10 PM
Subject: FW: For-profit education industiy
Attachments: ED Presentation SOHN PPT
FYI- this just came to us. I did receive it directly.
Georgia
From: Martin, Carmel
Sent: Friday, May 28, 2010 3:50PM
To: Miller, Rogers, Cunningham, Rose, Charlie; Kanter, Martha; Gomez, Gabriella; Shireman,
Yuan, Georgia
Cc: Duran, Maribel
Subject: FW: For-profit education industry
FYI. You may have gotten directly but just in case. I'll take a look to see if any of it is worth asking Maribel to give to
Arne.
From: Eisman, Steven [mailto:seisman@fppartners.com]
Sent: Friday, May 28,2010 3:14PM
Subject: For-profit education industry
Hello,
My name is Steven Eisman and I am the Portfolio Manager at FrontPoint Partners Financial SeiVices fund. I wanted to
industry. My presentation was very negative and I wanted to bring to your attention many of the unsaid or unknown
the intended outcomes. Our analysis highlights how changing the key metrics (specifically the debt seiVice% and the
(resulting in lower student debt levels) under the proposed 8% debt seiVice ratio and 10-yr repayment, under a 10%
ratio and a 15-yr repayment period, many schools will actually be able to raise tuition by 5% or more. Moving to a 20-
substantially (in some cases by 20% or more). While I don' t claim to know the Administration' s ultimate objectives, I
revenue-per-student (and thus, profit-per-student) for these schools, and that is why the for-profit industry is fi ghting so
hard to loosen the metrics. I just want to ensure that the Administration is aware of how sensitive the outcomes are to
assumptions.
Steven Eisman
917-934-1770
seisman@fppartners. com
IRA SOHN CONFERENCE
May 26,2010
mortgage paper.
]
6
clear.
graduates.
6
institutions.
6
to meet his quota.
securitizations.
asylum.
54,000 students.
SOLUTIONS
6
U.S. government.]
6
scenano.
slower pace.]
6
this industry.
time.]
6
From: Rose, Charlie
To: Yum Georgia
CC:
Date: 9/2/2010 10:39:26 PM
Subject: Fw: FYI: A Message from Dr. John Sperling, Founder- University ofPhoenix
l(b)(5)
Charlie
Sent: Thu Sep 02 21 :24:24 2010
September 2, 2010
As founder of the University ofPhoenix, I am writing to you and to every Member of Congress concerning recent
Department ofEducation, seconded by the HELP Committee, has proposed new rules that will seriously undercut the
President' s goals without for-profit colleges. The states do not have the funding needed to increase capacity whereas
institution.
example the case of the University of Phoenix, whose massive database on its operations and its academics has been
Perhaps the most important finding of the case study is the fact that for -profit institutions operate at no cost to taxpayers
truly benefit taxpayers, namely to require all institutions of higher education to measure the leaming outcomes of their
performers.
universities are a vi tal sector of the American higher education system that deserve the support of the Department of
millions of low-income Americans now denied access to the education they need to give them a chance to join the
middle class.
The worst of these regulations concerns the definition of"gainful employment'' and a new regulation that sets tl1e
Duncan setting forth the negative consequences resulting from the Department's definition while proposing an altemative
suppmt as well. I have attached a draft of a letter of support which we hope you will use as a model for a letter from you
John G. Sperling
Founder
From: Ferguson, Keith
Sent: Saturday, September 04, 2010 2:12PM
To.: Finley, Steve
CC:
Date: 9/4/2010 4:48:36 PM
Subject: FW: gainful employment
To: Ochoa, Eduardo; Kanter, Martha; Miller, Tony; Kvaal, James
Subject: RE: gainful employment
Hello all,
I have set up the following number:
I will not be able to activate the line personally. Martha, will you handle the leader code?
You should be set. Let me know if you have questions.
Keith
From: Ochoa, Eduardo
Sent: Saturday, September 04, 2010 10:45 AM
To: Kanter, Martha; Miller, Tony; Kvaal, James
Cc: Ferguson, Keith
6 pm it is. Let us know the conference call number and participant code.
Eduardo M. Ochoa
Assistant Secretary for Postsecondary Education
1990 K Street, NW
Sent: Saturday, September 04, 2010 10:21 AM
To: Miller, Tony; Kvaal, James
Cc: Ochoa, Eduardo; Ferguson, Keith
Subject: Re: gainful employment
OK- 6 pm
From: Miller, Tony
To: Kanter, Martha; K vaal, James
Sent: Sat Sep 04 08:01:22 2010
I Nonresponsive
To: Miller, Tony; Kvaal, James
Sent: Sat Sep 04 07:36: 17 2010
(b)(5)
From: Miller, Tony
To: Kvaal, James
Cc: Kanter, Martha; Ochoa, Eduardo
Sent: Fri Sep 03 21:05:33 2010
James ,
(b)( 5)
Thanks,
Tony
From: Kvaal, James
Sent: Friday, September 03, 2010 6:37PM
To: Miller, Tony; Weiss, Joanne; Rose, Charlie; Cunningham, Peter; Gomez, Gabriella; Yuan, Georgia
Subject: gainful employment
(b)(5)
Please let me know if you have any questions.
thanks
From: Kvaal, James
Sent Friday, September 03, 2010 6:37 PM
From: Kanter. Martha
To: Finley. Steve
CC:
Date: 9/4/2010 4:47:44 PM
To: Miller, Tony; Weiss, Joanne; Rose, Charlie; Cunningham, Peter, Gomez, Gabriella; Yuan, Georgia
Subject gainful employment
(b)(5)
Please let me krloN if you have any questions.
thari<s
From: Kvaal, James
Sent: Friday, September 03, 2010 6:37PM
From: Kanter Martha
To: Bergeron. David
Finley, Steve
CC:
Date: 9/4/2010 4:41:58 PM
To: Miller, Tony; Weiss, Joanne; Rose, Charlie; Cunningham, Peter; Gomez, Gabriella; Yuan, Georgia
Subject: gainful employment
(b)(5)
Please let me know if you have any questions.
thanks
Dear Bob and Martha
(b)(5)
From: Yuan, Georgia
To: Shirema11 Bob
Kanter. Martha
CC:
Date: 3/31/2010 11:16:54AM
Sub.iect: FW: Gainful Employment follow up
The two schools that are being invited back are Corinthian and EDMC.
(b)(5)
Georgia
From: Miller, Tony
Sent Wednesday, March 31, 2010 10:22 AM
To: Yuan, Georgia
Subject: Gainful Employment follow up
(b)(5)
Thanks,
Tony
From: Yuan Georgia
To.: Canada. June
CC:
Date: 9/14/2010 9:27:56 AM
Subject: FW: GE documents
Attachments: l(b)(S)
~ = = = = = = = = = = = = = = = = = = = = = = ~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Please print these
Sent: Monday, September 13, 2010 10:45 PM
To: Rose, Charlie; Weiss, Joanne; Cunningham, Peter; Martin, Carmel; Gomez, Gabriella; Yuan, Georgia
Cc: Kvaal, James
Subject: GE documents
(b)(S)
Martha
From: Kvaal, James
Sent: Monday, September 13, 2010 6:12PM
To: MiUer, Tony
Cc: Kanter, Martha
Subject: FW: GE documents
Tony,
(b)(S)
Thanks
James
DRAFT* PRELIMINARY * PREDECISIONAL
INTERNAL DRAFT
(b)(5)
(b)(5)
lNTERNAL DRAFT
(b)(5)
Please print
From: Arsenault, Leigh
Sent: Wednesday, July 21, 2010 11:21 AM
From: Yuan Georgia
To: Canada., June
CC:
Date: 7/21/2010 1:25:32 PM
Subject: FW: GE documents, revised
To: Bergeron, David; Yuan, Georgia; Martin, Phil; Kvaal, James
Subject GE documents, revised
All, thanks for your feedback and comments. Attached are the cleaned-up documents.
Thanks!
Leigh
(b)(S)
1
(b)(5)
1
(b)(S)
INTERNAL
(b)(5)
(b)(S)
(b)(S)
(b)(S)
From: Yuan Georgia
To: K vaal, James
CC: Arsenault Leigh
Date: 9/28/2010 12:59:42 PM
Subject: FW: GE- Meetings- Attorney-Client Communication; Privileged and Confidential
(b)(5)
From: Yuan, Georgia
Sent: Friday, September24, 2010 5:35PM
To: Kvaal , James; Weiss, Joanne
Cc: Bergeron, David; Rose, Charlie
Subject: GE- Meetings- Attorney-Client Communication; Privileged and Confidential
(b)(5)
(b)(5)
Georgia
Georgia Yuan
Postsecondary and Regulatory SeiVice
LBJ 6E341
202-401-63 99
(b)(5)
CONFIDENTIAL
2
(b)(S)
2
(b)(S)
2
FYI
From: Kvaal, James
From: Yuan, Georgia
To.: Finley, Steve
CC:
Date: 9/16/2010 8:56:42 PM
Subject: Fw: GE schedule on a spreadsheet
To: Yuan, Georgia; Bergeron, David; McFadden, Elizabeth
Sent: Thu Sep 16 19:01:57 2010
Subject: RE: GE schedule on a spreadsheet
(b)(5)
(b)(S)
From: Yuan, Georgia
Sent Thursday, September 16, 2010 2:21 PM
To: Bergeron, D a v i d ~ Kvaal, James; McFadden, Elizabeth
Subject: GE schedule on a spreadsheet
(b)(5)
Georgia Yuan
Postsecondary and Regulatory SeiVice
LBJ 6E341
202-401-6399
From: Hamilton, Justin
Sent: Thursday, August 12, 2010 5:45PM
To: Weiss., Joanne
Rose, Char1ie
Peter
Martin. Cannel
Gomez Gabriella
Miller, Tony
CC:
Yuan Georgia
Kvaal, James
Date: 8/1 2/2010 10:13:48 PM
Subject: FW: Heads up on Gainful Employment
To: Gannet Tseggai; Dan Pfeiffer; Roberto Rodriguez; Heather Higginbottom; K vaal, James; Kanter, Martha;
Cunningham, Peter; Abrevaya, Sandra; Jennifer Psaki
Subject: Heads up on Gainful Employment
(b)(5)
From: Miller Tony
To: Yum Georgia
CC:
Date: 4/13/2010 5:58:18 PM
Subject: FW: Kaplan, DeVry, EDMC Letter to Dep. Sec. Miller
l(b)(5)
From: AndrewS. Rosen [mailto:andrew.s.rosen@kaplan.com]
Sent: Monday, April12, 2010 11:04 AM
To: Miller, Tony
Cc: Kanter, Martha; Shireman, Bob; Fine, Stephanie; Rebecca Campoverde
Subject: Kaplan, DeVry, EDMC Letter to Dep. Sec. Miller
Dear Tony:
Attached, in advance of our meeting on Thursday, is a letter on behalf ofKaplan, DeVry and Education Management
Corp. in response to your request for suggestions regarding the issue of excessive student debt. We look forward to
discussing these and other issues when we meet.
Best regards,
Andy
Andrew S. Rosen
Chairman and CEO
Kaplan, Inc.
6301 Kaplan University Avenue
Fort Lauderdale, Florida 33309
(954) 515-3888
www.kaplan.com
The Honorable Anthony Wilder Miller
Deputy Secretary
U.S. Department of Education
400 Maryland A venue, SW
Dear Secretary Miller:
April 12, 2010
Thank you for soliciting input on the Department of Education's (ED) proposed Gainful
Employment (GE) regulation at our recent meetings. We are writing on behalf of our
institutions (Kaplan, DeVry, and Education Management Corporation), which together offer
opportunities for over three hundred thousand students to attend college annually. We are
deeply committed to educating and preparing our students for the new jobs of the 21st century,
and to ensuring that our students receive high-quality, results-oriented education, without being
burdened by excessive debt.
We understand and support what you are trying to accomplish. We believe that together we
can flnd a solution that addresses student debt and simultaneously enables the Administration
to achieve its goals of expanding access to quality higher education, particularly among non-
traditional students. We believe both sets of goals are achievable.
We thought it would be most helpful to (a) describe the contribution of the private sector in
achieving the Administration's goals, (b) explain the impact of the latest GE proposal made
public, and (c) offer a constructive alternative to this GE proposal that would address the ED's
concerns without restricting students' access to college opportunities.
Quality Private Sector Colleges Play A Critical Role in Achieving Administration Goals
President Obama has said he wants America to have the highest percentage of college
graduates in the world by 2020. This goal will require educating millions of additional college
students at a cost of many billions of dollars and cannot be met without the participation of
quality private sector colleges like ours. The private sector currently educates some 2.7 million
students a year and has the resources to help alleviate the fmancial burden of achieving the
Administration's goal. Moreover, the private sector attracts more non-traditional students - a
critical requirement to increasing the number of college graduates.
Aprill2, 2010
Page2
Not only do private sector colleges attract more non-traditional students, but we also help them
graduate and achieve gainful employment at significantly higher rates. A recent report by The
Parthenon Group, using ED data for public and private two-year and less institutions, shows
that students at private sector colleges graduate at rates roughly 50 percent higher than public
schools. The study further shows that private sector college students achieve higher percentage
wage increases (54% vs. 36%) after completing their education.
1
The Current GE Proposal Would Dramatically Limit Students, College Opportunities
Kaplan, DeVry, and EDMC share the ED's goal of ensuring that students receive a quality
education and enter programs with a full understanding of the costs, without incurring
excessive debt. We would support regulation that appropriately addresses over-borrowing
while enabling high-quality institutions to continue their good work of building capacity and
innovation in higher education.
The GE criteria proposed by the ED at the end of the most recent Negotiated Rulemaking
session attempt to define "gainful employment" by establishing an 8 percent debt-service-to-
income threshold based on median student debt for college graduates. Income would be based
either on the Bureau of Labor Statistics (BLS) 25th percentile wage data, or actual earnings of
college graduates. Loan payments would be based on a 10-year repayment plan.
This proposal as written would have a number of unintended consequences. A recent study by
Mark Kantrowitz, a respected independent authority on financial aid, concludes:
"The 8% debt-service-to-income threshold is so strict that it would preclude for-profit
colleges from offering Bachelor's degree programs. It would also eliminate many
Associate 's degree programs at for-profit colleges. Even non-frofit colleges would find
it difficult to satisfy this standard if they were subjected to it. "
Kantrowitz further found that:
"The proposed use of Bureau of Labor Statistics wage data ... will disproportionately
harm minority and female students. "
3
Kantrowitz also points out that the proposed GE rule tasks institutions with a job without
providing the tools necessary to complete the job:
1
Parthenon Perspectives on Private Sector Post-Secondary Schools, February 24, 2010, by Robert Lytle, Roger
Brinner and Chris Ross; p. 8; Source: NCES BPS 2004-2006.
2
What is Gainful Employment? What Is Affordable Debt?, Mark Kantrowitz, March 1, 201 0, p. 1.
3
Ibid.
April 12,2010
Page 3
"The debt-service-to-income threshold effectively establishes borrowing limits based on
field of study and degree programs, but does not give colleges the controls needed to
enforce these limits. Current sub-regulatory guidance precludes colleges from
establishing lower loan limits. "
4
Another study conducted by Charles River Associates reaches similar conclusions, estimating
that 18 percent of private sector programs will be disqualified from participation in Title IV
programs and that this would impact one-third of private sector students. This means that
hundreds of thousands of entering students would be displaced annually from private sector
colleges.
5
By 2020, approximately 5.4 million students who otherwise would be on track to
attend college would be denied access by the proposed GE regulation.
6
Finally, the GE proposal would result in significant job loss among the hundreds of thousands
of faculty members, administrators, and staff who work in the private post-secondary sector,
and in non-degree programs in public sector and independent schools as well.
Students Will Be Protected by Transparent Cost and Debt Information.
We remain concerned that defining "gainful employment" by student debt levels is beyond
Congressional intent. We believe that the necessary data to both defme the problem and
support a sufficient and informed policy have not yet been compiled and analyzed. We are
certain there are numerous consequences of the GE proposal that are not currently
contemplated by the ED.
For these reasons, we propose that student debt concerns be addressed by mandating that all
institutions disclose to students the information students need to make informed decisions prior
to taking on student debt, as well as warn students about programs that fail to meet a minimum
debt-service-to-income ratio under a new student consumer "lemon law." Prospective students
who receive sufficient information at the time of enrollment are in the best position to make an
informed decision regarding whether or not to attend an institution. We believe the information
students need to make decisions concerning the appropriate amount of debt to incur for a given
program should be provided in a disclosure form to students.
The form would include: (a) the cost of the program of study, (b) a reasonable projection of
potential earnings in the students' chosen field upon graduation and throughout the life of their
employment in that field, (c) a reasonable estimate of the debt students typically incur to
complete their program, and (d) students' repayment plan options. A proposed disclosure form
4
Ibid. p. 2.
5
Report on Gainful Employment, Charles Rivers Associates, April2, 2010, prepared by Jonathan Guryan, PhD,
and Matthew Thompson, PhD, p. 38.
6
Executive Summary to Report on Gainful Employment, Charles Rivers Associates, April 2, 2010, prepared by
Jonathan Guryan, PhD, and Matthew Thompson, PhD, p. I.
April12, 2010
Page4
is attached as Appendix 1. The accuracy of the information contained in the disclosure form
would be ensured by the misrepresentation prohibition that received tentative agreement at the
last Negotiated Rulemaking session. The proposed misrepresentation prohibition provides,
among other things, that:
If the Secretary determines an institution has engaged in substantial misrepresentation,
the Secretary may revoke or limit that institution's participation in the Title IV
programs.
Misrepresentation is defined as any false, erroneous or misleading statement an
institution makes directly or indirectly to a student, prospective student, or any member
of the public, an accrediting agency, State agency, or the Secretary.
A misleading statement includes any statement that has the capacity, likelihood, or
tendency to deceive or confuse. The omission of information may also be interpreted as
a misrepresentation.
In addition to this disclosure, schools would be required to warn students prior to enrollment of
any program that fails to meet a debt-service-to-income ratio test. The debt-service-to-income
ratio would be based on the approach recently proposed by the ED, with appropriate
modifications discussed below. Institutions offering programs that fail the test would be
required to warn students in appropriate marketing materials, and in a written disclosure signed
by the student prior to enrollment, that (a) the program has failed a debt-service-to-income-
ratio test, and (b) student borrowers enrolling in the program should expect to have difficulty
meeting their repayment obligations upon graduation.
To ensure that the debt-service-to-income ratio is appropriately directed at identifying "outlier"
programs we propose that the ratio currently contained in the GE proposal be adjusted as
follows:
Formula applied to non-degree programs only.
)> Degree programs confer lifetime benefits that don't correlate easily to
specific job codes, such as higher lifetime earnings, higher income growth
rates, greater employability, better career advancement and job stability.
7
In
addition, degree holders tend to change jobs and pursue careers seemingly
unrelated to the degrees, but using the skills they developed in college.
Including degrees in the ratio definition would dramatically undervalue these
programs.
)> By applying the formula only to non-degree programs, both private and
public institutions are impacted in the same manner.
A debt-service-to-income threshold of 15 percent, based on median student debt for
college graduates, and assuming a current unsubsidized Stafford loan interest rate of
6.8% to calculate the annual repayment amount.
'Kantrowitz, pp. 20-21.
April 12,2010
Page 5
};;> The 15 percent debt-service-to-income threshold is referenced in the
Kantrowitz study as a well as a recent study published by the College
Board,
8
and is within the range generally used by personal financial
counseling professionals.
Income based either on the BLS 50th percentile wage data, or actual earnings of
graduates if the latter are higher than the BLS 50th percentile.
};;> The 50th percentile of the BLS wage data more accurately reflects the long-
term potential earnings of a graduate. Moreover, there is no reason to
assume that non-degree program graduates, regardless of their backgrounds,
would be unable to achieve average earnings.
Loan payments based on a 20-year repayment plan.
};;> The 20-year loan repayment plan is also referenced in the Kantrowitz study
and supported by the fact that borrowers are permitted to, and do, choose
repayment plans covering a period of up to 25 years.
Exclude prior school debt from the calculation and provide institutions the
regulatory ability to control student borrowing, thereby enabling compliance with
ratio and 90/ 1 0 requirements.
};;> Absent the regulatory ability to control student borrowing, the GE
calculation should be based only on direct cost of education.
Eliminate the ED pre-approval requirement for new programs.
};;> State regulatory bodies and accrediting agencies already require approval of
all new programs.
We also recommend that the ED consider alternative routes to compliance with the debt-
service-to-income ratio test, specifically by establishing: (1) target graduate cohort default rates
(GCDRs) (e.g., 12.5% GCDR on a two-year calculation; 15% on a three-year calculation), (2)
targets for actual post-graduation salaries that include a multiplier of 1.5x to recognize the fact
that lifetime earnings are significantly higher than BLS rates, and (3) thresholds for post-
graduate employment rates.
We believe that the proposal contained in this letter provides an innovative and effective way to
protect students from institutions that over promise and under deliver to students, thus leaving
students with too much debt and not enough return on investment.
8
How Much Debt Is Too Much, Sandy Baum and Saul Schwartz, The College Board, 2006, p. 12.
April 12,2010
Page6
We appreciate the opportunity to provide this input and we look forward to sitting down with
you soon to discuss these matters further.
Yours Truly,
Andrew S. Rosen
Chairman and CEO, Kaplan, Inc.
Daniel Hamburger
President and CEO, DeVry Inc.
Todd S. Nelson
CEO, Education Management Corporation
Enclosures
cc: The Honorable Martha J. Kanter
Mr. Robert Shireman
APPENDIX 1
INSTITUTIONAL DISCLOSURES RELATED TO EXPECTED EARNINGS AND DEBT
You have requested information about our _....;.A=c=co=u=n"'-'t=in"""'g.__ ___ program
Program Level: D Associates [g)Bachelors 0 Masters Ocertificate/Diploma
Here are some important disclosures for the award year ending June 30, 2010
During the year ended June 30, 2009 , 75.8 %of students enrolled in this program graduated or
continue to be actively enrolled at the institution while 24.2 % ceased enrollment.
Of the students who graduated, 88.6 % were employed in their field of study, or a related field,
within six months of graduation with an average annual salary of approximately$ 46,300 per year.
This academic program corresponds to the following Standard Occupational Classification (SOC)
codes as reported by the Bureau of Labor Statistics (BLS): 13-2011 . The weighted annual
salaries for these SOC codes at the 25th and 75th percentiles are $ 45,900 and $ 78,210 ,
respectively. For information related to salaries from these and other occupations, please visit
http://www.bls.gov/oes/current/oes_nat.htm.
The cost of this program of study for a student enrolled full-time and with no transfer credits is
$ 62,040 . The average annual tuition increase for the most recently concluded three years was
4.6 %
The average education loan debt of students incurred at this institution and who graduated from this
program during the prior award year was $ 33.100 . This amount includes $ 30,900 of federal
student loan debt and $ 2,200 of institutional loan debt. This does not include any debt incurred
while attending another institution. Additionally, 4.6 %of graduates obtained private student loans
from third parties.
If this average education loan debt was 100% federal loans with an average interest rate of 6.8% and
you chose to repay using a 10 year standard repayment term, the annual total of 12 monthly
payments would be $ 4,571.04 . If you chose to pay using a graduated repayment plan (over 10
years), the total of your first 12 monthly payments would be$ 3,138.60 . For more information
concerning repayment options on federal loans, please visit
https:/ /studentloans.gov/myDirectLoan/index.action.
The latest official Cohort Default Rate (FY07) from the US Department of Education indicates that
1.7 % of graduates in thi s program defaulted on their federal loans.
PLEASE NOTE THAT YOUR ACTUAL EXPERIENCE MAY BE DIFFERENT THAN THE AVERAGES AND
STATISTICS PRESENTED ABOVE.
Steve, Russ-FYI.
From: Jenkins Harold
To: Finley. Smvt}
Wolf Russell
CC:
Date: 8/14/2009 3:13:34 PM
Subject: FW: Letter from Andy Rosen
From: Rebecca Campoverde [mailto:Rebecca.Campoverde@kaplan.com]
Sent: Friday, August 14, 2009 3:09PM
To: Kanter, Martha
Cc: Shireman, Bob; Plotkin, Hal; Jenkins, Harold; OBergh, Jon; Arsenault, Leigh
Subject: Letter from Andy Rosen
Secretary Kanter,
Attached please find a Jetter and enclosure from Kaplan Chairman and CEO Andy Rosen, following up on the
discussion of90-10 last week and why compliance on a consolidated basis makes sense. We look fotward to further
discussions on this and other issues.
Becky
Becky Campoverde
Vice President, Government Relations
Kaplan, Inc.
202-334-6684 (0)
703-629-8532 (C)
Rebecca. Campoverde@kaplan.com
This transmission may contain information that is privileged, confidential and exempt from disclosure under applicable
law. If you receive this transmission in error, do not read, use or copy it. Please immediately contact the sender and
destroy the material in its entirety, whether in electronic or hard copy format. Thank you.
ANDREWS. ROSEN
Chairman and CEO
August 14, 2009
The Honorable Martha Kanter
Under Secretary
400 Maryland Avenue, SW
Via Electronic Mail
Dear Secretary Kanter:
Thank you again for allowing me to introduce you to Kaplan last week. I appreciate your time and
interest. I trust that the Kaplan University presentation this week to Jon O'Bergh provided a good
overview of our approach to learning assessment and how the results are used to improve student
learning. I understand that we are currently gathering additional information in this area for your staff.
You also expressed an interest in the option of consolidated compliance with the 90-10 requirement,
which I indicated would benefit students because it would enable companies such as Kaplan to serve low
income students better. Providing a company-wide figure on 90-10 would allow us to balance the impact
of Title IV revenues across all of our institutions. This would reduce the unintended effect of increasing
tuition in order to create a cost gap not covered by Title IV funds.
Enclosed is additional information regarding the consoJidated option for 90-10. I have asked Becky
Campoverde, our Vice President for Government Relations, to follow up with your staff regarding 90-l 0
and other issues that may be of interest to you. As you know, Kaplan supports the President's goals for
increasing access to postsecondary education, containing costs, and enhancing completion. We look
forward to helping the Administration reach its objectives, as well as to a continuing dialogue with you
and your staff.
Andrew S. Rosen
En c.
Cc: Robert Shireman, Harold Jenkins, Jon O'Bergh, Hal Plotkin
Kaplan, Inc.
6301 Kaplan University Avenue, Fort Lauderdale, fl 33309
Compliance with 90/10 on a Consolidated Basis
1. The factors that significantly impact 90/l 0 are arbitrary and unrelated to the stated
reason for the rule (i.e., limiting institutional dependence on Title IV funds in
particular and, more specifically, preventing institutions from enrolling
unqualified students merely because those students are eligible for Title IV
funding). These factors include:
a. The location of the institution (urban vs. suburban), and the economic
level ofthe school's community, which impact the number of low and
moderate income students.
b. The availability and amount of education grants in the state where an
institution is located, which can tum on a dime. In Ohio, a $60 million
state grant program for proprietary schools was completely eliminated
effective July 1, 2009. Other states have cut back on grant availability to
students across-the board.
2. For institutions under common ownership and control, it would be more
appropriate to look at the institutions' 90/ 10 compliance on a consolidated basis
because the control is within a single entity, the parent company.
a. This would provide a better measure of the financial and operating
policies and financial condition of the consolidated institutions.
b. A consolidated approach to 90/10 would allow companies with multiple
institutions to better serve students in low income areas, as the fear of non-
compliance by individual institutions would be eliminated.
c. Overdependence on Title IV funds would be evident on a consolidated
basis, minimizing chances for abuse.
d. The U.S. Department of Education currently looks at entities under
common ownership and control on a consolidated basis from a financial
responsibility perspective (i.e. composite score).
3. Allowing 90110 compliance to be reported on a consolidated basis would
encourage companies with balanced portfolios of institutions to open and
maintain schools that educate large numbers of low income students, while also
holding down tuition rates for those students.
Charlie
From: Rogers, Margot
From: Rose Charlie
To.: Yuan. Georgia
CC:
Date: 4/20/2010 9:27:30 AM
Subject: Fw: Letter to Hon. Tony Miller
To: Rose, Charlie; Cunningham, Peter; Gomez, Gabriella
Sent: Tue Apr 20 08:26:36 2010
Subject: FW: Letter to Hon. Tony Miller
(b)(5)
From: Yale, Matt
Sent: Tuesday, April20, 2010 8:37AM
To: Duran, Maribel
Cc: Rogers, Margot
Subject: FW: Letter to Hon. Tony Miller
(b)(5)
From: AndrewS. Rosen [mailto:andrew.s.rosen@kaplan.com]
Sent: Monday, Aptil 19,2010 7:01PM
To: Miller, Tony
Cc: Kanter, Martha; Martin, Carmel; Shireman, Bob; Yale, Matt; Yuan, Georgia; Fine, Stephanie; Rebecca
Campoverde
Subject: LettertoHon. Tony Miller
Dear Tony:
Thank you for inviting us to meet with you and your team on Thursday. Following up on that session, attached is some
additional input from Kaplan, DeVry and Education Management Corp. We believe it is possible to address the
Department' s concerns without losing all the many positives that private sector educators offer students. The attached
letter outlines some paths to do so. We would welcome the opportunity to continue to provide feedback on these and
other issues before your office.
Best regards,
Andy
Andrew S. Rosen
Chairman and CEO
Kaplan, Inc.
6301 Kaplan University Avenue
Fort Lauderdale, Florida 33309
(954) 515-3888
www.kaplan.com
Deputy Secretary
400 Maryland Avenue, SW
Dear Secretary Miller:
Aprill9, 2010
Thank you for meeting with us this past Thursday to discuss the Department of Education' s (ED)
proposed Gainful Employment (GE) regulation. We appreciate the candid discussion, and want to
follow up on several items that arose in our meeting.
We appreciated your reinforcement of the ED's public statements that it views private sector
presence in the higher education marketplace as positive. We also believe that it is not the ED' s
intention to eliminate private sector institutions or eliminate private capital from higher education.
We view these as important points because the GE proposal made during Negotiated Rulemaking -
which would substantially eliminate proprietary institutions' ability to offer degrees - is not
consistent with the ED' s goals.
Our comments come from a sincere concern for the students we serve, an understanding of the
limited educational opportunities afforded to these students, and the success stories of their fellow
students who graduated before them. We educate hundreds of thousands of students each year,
enabling them to obtain jobs and begin careers that are transformational not only for those students,
but for generations to follow. We each offer non-degree, associate, baccalaureate and graduate
degree programs. Across our three organizations, we enroll more than 300,000 students and employ
more than 50,000 faculty and staff each year.
As we discussed, while the ED's GE proposal will exclude fully one-third of our students from the
programs they currently attend, its effect on degree programs is the most severe. The ED's GE
proposal is tmworkable for the vast majority of degree programs in our sector and will result in as
many as half of the two million plus degree students at our colleges being denied Title IV funds.
This includes, among countless examples, Bachelor' s of Science in Nursing students, at a time when
our country faces a growing nursing shortage. Private sector colleges are a vital source of new
capacity in nursing education as well as in allied health fields, where they educate 54% of all such
professionals. We do not believe this could possibly be the intent of the ED, which is why we are
asking you to revise your proposal to avoid these unintended consequences.
April19, 2010
Page2
Likewise, we reiterate that the 50% graduation rate exception described recently does little to
ameliorate the impact of the ED's last GE proposal. With the nation's median aggregate college
graduation rate at less than 50% for all types of colleges (private, public and non-profit alike-
including elite colleges with 90%+ graduation rates), even this exception would exclude the students
at more than half of all colleges from participation in the Title IV program. Many of those excluded
students would be the very ones Congress was attempting to help through the Stafford and Pell
programs, and those for whom there are few other educational opportunities today.
We understand the objectives of the proposed GE regulations are focused on two concerns:
1. The ED's concern that a material segment of students take on disproportionate debt for value
received. More specifically, a concern that the risk tolerance of these students essentially
means that no amount of warning would deter them from making a poor enrollment decision
and "over-borrowing" - i.e., borrowing more than their ultimate job prospects would enable
them to repay.
2. The ED's concern about the risk that certain investors could purchase schools with the
intention of growing revenue by dramatically increasing enrollment without regard to
educational quality, and then turning a quick profit by re-selling the institution to another
buyer or to the investing public through a securities offering. The concern here is that such
investors would take advantage of the difference between their short timetable and the
inherently longer term during which regulatory problems mature - - all while drawing federal
financial aid and increasing the overall student debt burden.
As we discussed in our meeting, we share your concern about student over-borrowing and believe
our proposal can solve that problem without harming quality schools. Section 1 of this letter
expounds further on our student debt proposal and offers additional alternatives.
We also understand your concerns about the incentives certain investors might have and believe that
the ED has the tools to constrain them without harming students across the sector. The ED's ability
to constrain such investors is discussed in Section 2 of this letter.
1. Our Proposal and Simple Modifications To the Debt-Service-To-Income Ratio Can Solve
the Problem of Student Over-Borrowing without Harming Students of Quality Schools
We continue to believe that student debt concerns can be addressed quickly and meaningfully by: (a)
mandating that institutions disclose to students the information students need to make informed
decisions prior to taking on debt, and (b) implementing a student consumer "lemon law'' that warns
students prior to enrollment about programs that fail to meet a minimum debt-service-to-income
ratio (Appendix A). This approach has at least four advantages over the ED' s GE proposal: (1) it
addresses the concern that defining "gainful employment" by student debt levels is beyond
April19, 2010
Page 3
Congressional intent; (2) it is a less draconian approach from an enforcement perspective; (3) it
avoids the risk of inadvertently eliminating quality programs if the ratio parameters are not set
appropriately; and (4) it will immediately address the ED's concerns while still allowing the ED and
schools to complete the data collection and analysis necessary to develop a more studied approach, if
necessary. This approach would indeed give the ED new tools to address the risk for programs that
do not provide value commensurate with their cost.
Under our proposal, in addition to disclosure, a school would be required to warn students if that
school had failed certain debt-service-to-income metrics. The proposed metrics would roughly
follow those in the ED's latest GE proposal, but with the following modifications:
a. Any Debt-Service-To-Income Ratio Should Apply
Only To Non-Degree Programs
As you are aware, the GE requirement contained in the Higher Education Act (HEA) applies to all
program offerings at proprietary institutions including Associate's, Bachelor's and Master's and
doctoral-level and professional degrees (other than a de minimis number of"liberal arts" programs)
and only non-degree programs at public and private nonprofit institutions. While we believe that a
debt-service-to-income formula is inappropriate, we are especially concerned with a formula that is
inherently biased against degree programs (and with corresponding alternative measures that are
biased as well).
There are a number of reasons why debt-service-to-income ratios such as those contained in the
ED's GE proposal should not apply to degree programs. First, it is very unlikely that Congress
intended the GE requirement to apply to degree programs. When the GE requirement was first
introduced by Congress in the 1965 HEA, very few proprietary schools were degree granting.
Second, the at-risk students the ED is seeking to protect are much more likely to enroll in non-degree
programs than in degree programs. Third, the lifetime benefits conferred by degree programs, such
as higher lifetime earnings, higher income growth rates, greater employability, better career
advancement and job stability, don't readily lend themselves to a formulaic approach to measuring
value using job codes and BLS statistics. For.these reasons, debt-service-to-income ratios should not
apply to degree programs.
To accomplish the above and to overcome our concerns with the ED's debt-service-to-income
proposal, we recommend the ED use the following language, which tracks the last language
proposed at the Negotiated Rulemaking session (bolded to show changes/additions):
(a) General. (1) An institution ... offering an eligible non-degree program ... shall
be required to warn students that they are likely to have difftculty meeting their repayment
obligations in such program where . . . at the end of each three-year period . . . the debt to
earnings ratio associated with the program is twelve percent or less ....
April19, 2010
Page4
(b) Debt to earnings ratio.{Ajn institution calculates the ratio for the three-year
period by-
( 1) Determining the median loan debt of students who completed or graduated from
the non-degree program (loan debt includes title IV, HEA programs (except Parent PLUS),
institutional loans and private educational loans) during the three-year period and using the
mean loan debt to calculate an annual loan payment based on a 15-year repayment schedule
and the current annual interest rate on Unsubsidized Federal Stafford Loans or Direct
Unsubsidized Loans;
(2) Using the most current Bureau of Labor Statistics (BLS) data ... to detennine the
annual earnings, at the 25th percentile, made by persons employed in occupations related to
the training provided by the non-degree program; ...
b. Alternatively, There Should Be a Tiered Approach
To the Debt-Service-To-Income Formula
Should the ED be inclined to include degree programs, we recommend different formulae for non-
degree programs, Associate's degree programs, and Bachelor's degree programs. Post-baccalaureate
programs would not be included as those students, having successfully completed at least a
Bachelor's level of education, are more sophisticated consumers and better equipped to make
informed borrowing decisions.
We recommend the following graduated degree metrics:
Program Level Debt-service-to- BLS Percentile Years in
income threshold Repayment
Non-Degree 12%
25m
15
Associate's Degree 15%
50Ul
15
Bachelor's Degree 15%
50m
20
These numbers are consistent with the studies by Kantrowitz and Baum referenced in our April 12,
2010 letter.
c. Any Formula Should Contain An Exclusion for Prior School Debt
As we also discussed, prior school debt should be excluded from any debt-service-to-income ratio
test. By excluding prior debt, the ED can ensure that students who may have failed in the past will
continue to have an opportunity to succeed in the future, without penalizing schools for giving the
students that opportunity.
April 19,2010
PageS
d. There Are Other Alternatives Worth Exploring
In the event the ED chooses to pursue a debt-service-to-income ratio test, we reiterate our
recommendation that the ED consider alternative routes to compliance as part of that test. These
alternatives include maintaining target graduate cohort default rates (GCDRs) at 12.5% over two
years and 15% over three years. They also include a threshold for post-graduate employment rates.
We recommend setting a minimum employment rate of70% within six months following
graduation. As we discussed, the employment rate would be measured using methodologies similar
to those of the larger national accrediting agencies, but with additional flexibility, particularly for
degree programs, as degree-seeking students are likely to use their degree for general employment
advancement.
2. The ED Has an Array of Powerful Tools to Constrain Certain New Investors
As we discussed, most private sector higher education companies are invested in students for the
long haul. Certainly, Kaplan, DeVry, and EDMC- as well as other higher education organizations-
are focused on building enduring institutions that create value for our students, our employees, and
our communities. Our institutions will only succeed to the extent our students succeed. We are
passionate about our students' achieving their learning outcomes, securing good jobs, and becoming
contributing members of society. Our reputation is essential to attracting students, faculty, and
employees. Indeed, most of our alumni quietly but successfully enter into essential roles in the
American economy - working hard, paying taxes, and raising their families. Their enthusiasm is
what encourages other students to join our institutions - and any unhappiness or frustration with
their learning experiences would quickly hamper our institutions' ability to attract new students.
We understand your concern that some firms may invest in higher education with different motives
and according to a vastly different timetable. They may see an opportunity to purchase a struggling
institution, grow it rapidly, and exit the business before difficulties like poor completion,
employment rates, cohort default rates or other problems mature -- all at the students' and the
taxpayers' expense.
We respectfully submit that the HEA currently provides the ED with ample measures to prevent
such a scenario from occurring. A number of such measures are enumerated below. A chart
providing additional detail regarding these measures is attached as Appendix B to this letter.
1. The ED has the authority to condition or withhold Title IV approval from new owners
who do not have a demonstrated track record.
2. The ED may condition or disallow the resumption of Title IV participation following a
change in ownership.
April19,2010
Page6
3. Following a change in ownership, the ED may terminate an institution's eligibility to
participate in the Title IV programs without the institution having the usual due process
rights to contest the termination.
4. The ED has the ability to ensure that no students receive Title IV funds until the ED is
satisfied that the students are eligible for the funds and the school is worthy.
We appreciate your meeting with us and we sincerely hope that you have found these observations
and ideas useful. We look forward to discussing these matters further. Should you so desire, we
would be happy to provide you with further clarifications and are available to meet at your
convenience.
Yours Truly,
Andrew S. Rosen
Chairman and CEO, Kaplan, Inc.
Daniel Hamburger
President and CEO, DeVry Inc.
Todd S. Nelson
CEO, Education Management Corporation
Enclosures
cc: The Honorable Martha J. Kanter
The Honorable Carmel Martin
Mr. Robert Shireman
Mr. Matthew A. Yale
Ms. Georgia Yuan
Appendix A
XVZ UNIVERSITY
INSTITUTIONAL DISCLOSURES RELATED TO EXPECTED EARNINGS AND DEBT
You have requested information about our Veterinary Assistant program
WARNING: The annual loan repayment burden for graduates of this program at XVZ University
exceeds the maximum debt-to-earnings ratio as recommended by the U. S. Department of
Education.
Program Level: 0Associates Osachelors IZ!certificate/Diploma
Here are some important disclosures for the award year e ~ d i n g June 30, 2009
During the year ended June 30, 2009, 81.2% of students enrolled in this program graduated or
continued their enrollment into the next year while 18.8% withdrew from schoo1.
1
Of the students who graduated and were available for employment
2
, 73.4% were employed in their
field of study, or a related field, within six months of graduation with an average annual salary of
$23,600 per year.
------------------
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
XYZ University
Veterinary
Assistant
Graduates' 1st
year Salaries
$5,000
$-
Cost of Program Average Loan debt for Average earnings for
Graduates all Accounting
graduates at 25th
percentile
Average earnings for
all Accounting
graduates at 75th
percentile
The weighted annual salaries for this occupation at the 25th and 75th percentiles are $20,809 and
$30,706, respectively.
3
The cost for this program of study at XYZ University for a student enrolled full-time and with no
transfer credits is $28,440. The average annual tuition increase for the three most recent years was
4.6%.
The average education loan debt incurred at this institution for graduates of this program during the
2009 award year was $27,400. This amount includes $20,300 of federal student loans and $17,100 of
institutional loans. Additionally, 2.0% of graduates obtained private student loans from third parties.
1
Appendix A
$4,000.00
$3,000.00
$2,000.00
$1,000.00
$-
Loan Repayment as a Percentage of 25th Percentile of
Salaries for Veterinary Assistant Occupations
Annual loan repayment
10 year standard plan
Annual loan repayment Recommended maximum
15 year extended repayment annual loan repayment
plan
If this average education loan debt was 100% federal loans with an average interest rate of 6.8% and
you chose to repay using a 10 year standard repayment term, the annual total of 12 monthly
payments would be $3,783.34. If you chose to pay using a 15 year extended repayment term, the
total of your first 12 monthly payments would be $2.918.76.
3
The latest official Cohort Default Rate (FY07) from t he US Department of Education indicates that
3.6% of graduates in this program defaulted on their federal loans.
NOTE: YOUR ACTUAL EXPERIENCE MAY BE DIFFERENT THAN THE AVERAGES AND STATISTICS
PRESENTED ABOVE AND THAT THE DATA PRESENTED WILL CHANGE IN THE FUTURE.
(Student Signature)
(Date)
(1) Withdrawal rates ore calculated for the selected program using the methodology required for the Institutional
Post-secondary Enrollment Data Survey to the U. S. Department of Education. The graduation and continuing
enrollment rate represents the complement of the withdrawal rate.
(2) Graduates in the following categories are considered unavailable for employment and ore not counted in the
placement rote calculation: graduates who ore pursuing further education, ore deceased, ore in active military
service, have medical conditions that prevent them from working, ore continuing in o career unrelated to their
program of study because they currently earn salaries which exceed those paid to entry-level employees in their
field of study, or ore international students no longer residing in the country in which their school is located.
(3) Salaries are from the Bureau of Labor Statistics as reported for the Standard Occupational Classification (SOC)
codes that correspond to the Classification of Instructional Program (CIP) code for this academic program. For
information related to salaries from these and other occupations, please visit
http://www.bls.gov/oes/current/oes nat.htm.
(4) Costs are based on tuition rates and fees currently charged to students in the indicated program of study.
(5) The recommended loon repayment is calculated using a debt-to-earnings ratio of 12% of the 25th percentile of
salaries as reported from the Bureau of Labor Statist ics for the Standard Occupational Classification (SOC) codes
that correspond to the Classification of Instructional Program (CIP) code for this academic program.
(6) For more information concerning repayment options on federal loans, please visit
https://studentloans.qov/myDirectLoon/index.action.
2

.... , - " . \
Title N Eligibility
Terminates Upon
Institutional Change in
Ownership
An institution that changes
ownership must enter into a
new program participation
agreement at the ED's
discretion. The ED may
review all aspects of the
institution and may deny
ongoing Title IV
participation.
Additional Program
Participation Agreement
Conditions
ED has discretion to include
additional provisions in new
participation agreement
Disallowance of Title IV
Participation
May revoke Title IV
participation following a
change
Reimbursement or
Heightened Cash
Monitoring
Ability to place institution on
cash management
restrictions, even in absence
of change in ownership
Annual Compliance Audits
May annually review
institution's compliance with
Department regulations
Program Review
Requirements
ED may conduct a full
program review of any
institution in addition to the
review associated with
applying/or eligibility
APPENDIXB
tsammary
.
. -
,
Title N eligibility terminates when an institution changes
ownership. The new ownership must re-apply for
participation in Title N programs. Under ED's current
practice, the ED may extend the current program
participation agreement under a "provisional certification."
The ED wiU not approve the new owners without a
demonstrated track record (as indicated by at least two years
of audited fmancial statements) in higher education unless
they ( 1) post a letter of credit (typically 25 percent of the
Title IV aid disbursed to the institution's students during the
previous fiscal year), and (2) agree to growth restrictions
(typically the inability to offer new programs or open new
locations until the ED has reviewed and approved fmancial
aid and compliance audits for a full fiscal year of operations
under the new ownership).
The ED has the ability to add any additional conditions in
any new program participation agreement that the Secretary
requires the institution to meet in order for the new
institution to participate in Title IV.
Before the expiration of a provisionally certified institution's
period of participation, if the Secretary determines that the
institution is unable to meet its responsibilities under its
program participation agreement, the Secretary may revoke
the institution's provisional certification for participation in
that program.
Even in the absence of a change in ownership, the ED has
the ability to place a school on the reimbursement or
heightened cash monitoring method of Title N payments,
so that no students receive Title N funds until the ED is
satisfied that the students are eligible for the funds and the
school is worthy of administrating the funds.
Once the ED has confirmed the institution's eligibility for
Title IV, the institution must file annual compliance audit
statements with the ED. Thus, the ED can monitor the
institution's management and take action as needed.
In addition to the fact that an institution that changes
ownership will be required undergo new Title IV eligibility
review, the ED can review any program at any time to
detennine compliance or issues.

....... ,.'1'
34 C.F.R. 600.20(g) and (h)
34 C.F.R. 600.3l(a)
34 C.F.R. 668.13
34 C.F.R. 668.14
34 C.F.R. 668.23
34 C.F.R. 668.13{cX4)(ii)
34 C.F.R. 668.13(d){l)
34 C.F.R. 668.162
34 C.F.R. 668.175(d)(2Xi)
34 C.F .R. 668.23(b)
34 C.F.R. 668.24(f)
From: Erceg_ Marta
To: Yum Georgia
Mitchelson Mazy
CC:
Date: 4/28/2010 7:01:40 PM
Sub.iect: Fw: Media reports- background for noon meeting
(b)(S)
To: Erceg, Marta
Sent: Wed Apr 28 11:02:21 2010
Subject: FW: Media reports- background for noon meeting
From: Yuan, Georgia
Sent: Wednesday, April28, 2010 I 1:12AM
To: Clark, Teresa
Cc: Rosenfelt, Phil; Rogers, Margot
Subject: Media reports- background for noon meeting
Teresa-
(b)(5)
Georgia Yuan
DeVry leads ed. stocks lower as Credit Suisse downgrades on regulatory, job market concerns
Associated Press
04/26/10 9:30AM PDT
NEW YORK- De V ry led decliners in education stocks Monday after a Credit Suisse analyst said the for-profit
school could be hurt by proposed regulatory changes and an improving job market that could slow enrollment.
The administration has pushed hard for gainful employment regulations, which stipulate that graduates of schools must not
spend more than 8 percent of their income on paying student loans.
It's meant to help improve school quality - making sure students are qualified and the courses help increase their
incomes - as student loan defaults soar.
If schools failed to pass this test, the government could block their access to federal loans for students, the bulk of their
revenues.
In early April, the Education Department said schools with 50 percent graduation rates and 70 percent job placement
rates would be exempt from a proposed rule linking graduates' incomes to required debt payments.
Analyst Kelly Flynn, however, said Washington sources believe the more lenient proposal might not wind up in a draft of
the law that will be posted by mid-May or June.
Flynn downgraded DeVry and ITT Educational Services Inc. to "neutral" from "outperform," cutting target prices to $65
from $75 and $110 from $135, respectively.
Shares ofDeVry Inc. fell $4.59, or 6.6 percent, to $64.87, while ITT stock dropped fell $2.07, or 1.8 percent, to
$109.71.
Shares of Apollo Group Inc., which runs the largest for-profit school, the University ofPhoenix, also slid 93 cents, or
1.5 percent, to $62.60, while Corinthian Colleges Inc. stock fell 59 cents, or 3.3 percent, to $17.30. Career Education
Corp. fel161 cents, or 1.8 percent, to $33.49 and Strayer Education Inc. dropped $2.54, or 1 percent, to $250.49.
Meanwhile, Flynn cited DeVry's warning on slower enrollment growth in one of its divisions and ITT's warning on higher
advertising spending.
For-profit schools have seen big gains in enrollment because of the recession and high unemployment. As the job market
improves, people may not feel as much as a need to bolster their resumes.
APRJL 26, 2010, 10:57 A.M. ET
Debt, Job Rule Uncertainty Hits Shares OfF or-Profit Colleges
NEW YORK (Dow Jones)--A government proposal to hold colleges accountable for graduating students with high debt
loads and low income levels came front and center, again, after Credit Suisse analysts reversed their assumption that the
Department ofEducation had softened its stance on the subject.
Monday morning, Credit Suisse issued a note saying the Department ofEducation has returned to a stiffer set of rules on
post-graduation debt and gainful employment levels that colleges must meet. The news hit share prices offer-profit
universities that had rallied on expected softer rules.
Credit Suisse downgraded ITT Educational Services Inc. (ESI) and DeVry Inc. (DV) to neutral from outperform and
slashed their price targets, citing the potential fallout from their new take on gainful employment as well as concerns of
countercyclicality. ITT recently was off2.9% to $108.53, while DeVry was down 6.5% to $64.96. Credit Suisse had
upgraded the schools two weeks ago.
Other for-profit schools, including Strayer Education Inc. (STRA), Career Education Corp. (CECO), Corinthian
Colleges Inc. (COCO) and Apollo Group Inc. (APOL), were also trading down.
The Department ofEducation originally said schools could face scrutiny that could put federal assistance--often the
primary revenue stream for for-profit colleges--at risk if they did not have at least a 70% graduation rate and 70% job
placement in field of study. Two weeks ago, Credit Suisse, and others, sent out notes saying they believe the Department
of Education had softened the graduation level to 50%, sending shares higher, with some hitting 52-week highs.
"Oddly, we suspect the big upward move the stocks had when the investment community found out about the 50%
exemption may have led to pressure on the DOE to remove the 50% exemption," the firm wrote Monday.
Some education insiders have had mixed feelings on predicting the gainful-employment measure, arguing that it's
improper to say what the Department of Education will put forth and irs best to wait until the official proposal is released
for public comment. That will happen by mid-June.
"I'm not sure who thinks they have what access to what's in this draft," said one for-profit school official, but "I would
really not be jumping to any conclusions just yet." He said there's no way of knowing "whether it's been hardened,
softened, pureed, whatever."
Representatives from the Department of Education weren't immediately available for comment.
http://online.wsj .com/article/BT-C0-20100426-710339.html?mod=rss_Hot_Stocks
Georgia Yuan
Postsecondary Education and Regulatory Service
400 Maryland A venue SW 6E341
202-401-6000
To: Woodward, Jennifer
Marinucci, Fred
CC: WoLff, Russell
Date: 2/19/2010 12:25:24PM
Subject: FW: Meeting follow-up
FYI.
From: Shireman, Bob
Sent: Friday, February 19, 2010 11:21 AM
To: Jenkins, Harold
Subject: Fw: Meeting follow-up
From: Shireman, Bob
To: Wolff, Russell
Cc: Manheirner, Ann
Sent: Fri Feb 19 10:01:30 2010
(b)(5)
-Bob
From: Babel, Tom [mailto:Tbabel@devry.com]
To: Shireman, Bob
Subject: Meeting follow-up
Bob,
Thanks for making the time to talk Tuesday morning. I appreciate the opportunity, especially given the impact the
weather had to have on your schedule. I also appreciate the insight into the Department's tirneline in putting together
draft regulations for the Notice ofProposed Rulemaking and appreciate the urgency in providing input into that process.
As I mentioned, we (DeVry) are working with other institutions and within CCA to develop "guidance" on regulations
for both the definition and measurement of Gainful Employment and prohibitions of Incentive Compensation. We are part
of a small group that has a meeting tentatively scheduled with Michael Dannenberg next week to discuss the Gai n:fu]
Employment objectives and solutions and hope to have a recommendation that we can share with you shortly after that
meeting.
With regard to Incentive Compensation, as I mentioned, the issue with the proposed regulation is less the actual language
(although some of it is certainly contentious among our colleagues), than the clarification provided by the general
counsel ' s office in the quad following the Department's last iteration of the proposed rules. Specifically, his remarks
extended the prohibition to include:
o Prohibition of incentive compensation applies to merit increases provided as part of an employee's annual performance
evaluation, if they contain any quantitative measurements related to enrollment of students or awarding of financial aid.
o Prohibition of compensation based on success in securing student enrollments is meant to read "in whole or in part".
o Prohibition of incentive compensation to persons and entities includes supervisory and management personnel and 3rd
parties. The Department did not dispute examples that included Presidents of Universities.
o "Indirectly" reference can be extended to prohibit incentive compensation determined on factors such as revenue if it
can be shown that revenue is derived from successfully enrolling students.
o Success in securing enrollment extends to any quantification of enrollment objectives and performance, including
minority recruiting, specific academic programs and athletics.
o Quantitative metrics related to the recruiting or enrolling of a student or the awarding of financial aid may not be used
for merit-based adjustments. This extends to scheduling appointments, attending college nights, making telephone calls
and number of financial aid awards in addition to counting applications and enrollments.
o Prohibition includes measuring the performance of an admissions officer in contributing to a non-profit institution' s
enrollment growth goal.
o 401K/403B contributions may be prohibited. The assumption is that the OGC official was referring to a discretionary
contribution made from revenue received from success in enrolling students.
o Prohibition extends to compensation based on successful persistence or graduation.
We think this extension of the prohibitions goes far beyond and is even contrary to Congressional intent and makes
problematic the actual performance evaluation of people involved in recruiting and financial aid functions as well as some
very legitimate enrollment programs specifically designed to diversify higher education by addressing underrepresented
students.
DeVry looks forward to working with the Department to assure that students receive accurate and clear information as
they choose the institution and program that best serves their educational goals.
Torn
Thomas Babel
Vice President
Student Finance Po11cy and Indusny Relations
DeVrylnc.
3005 Highland Parkway
Downers Grove, lL 60515
p: 630.515.3133
m: 630.776.4614
f: 630.353.9903
e: tbabel@devry.com
www.devry.edu
(b)(5)
Harold
From: Shireman, Bob
Sent: Friday, February 19, 201011:21 AM
To: Jenkins, Harold
Subject: Fw: Meeting follow-up
From: Shireman, Bob
To: Wolff, Russell
Cc: Manheimer, Ann
Sent: Fri Feb 19 10:01:30 2010
(b)(5)
-Bob
From: Babel, Tom [mailto:Tbabel@devry.com]
To: Shireman, Bob
Subject: Meeting follow-up
Bob,
To.: Yuan. Georgia
CC:
Date: 2/25/2010 3:15:12PM
Thanks for making the time to talk Tuesday morning. I appreciate the opportunity, especially given the impact the
weather had to have on your schedule. I also appreciate the insight into the Department' s timeline in putting together
draft regulations for the Notice ofProposed Rulemak:ing and appreciate the urgency in providing input into that process.
As I mentioned, we (DeVry) are working with other institutions and within CCA to develop "guidance" on regulations
for both the definition and measurement of Gainful Employment and prohibitions of Incentive Compensation. We are part
of a small group that has a meeting tentatively scheduled with Michael Drumenberg next week to discuss the Gainful
Employment objectives and solutions and hope to have a recommendation that we can share with you shortly after that
meeting.
With regard to Incentive Compensation, as I mentioned, the issue with the proposed regulation is less the actual language
(although some of it is certainly contentious among our colleagues), than the clarification provided by the general
counsel' s office in the quad following the Department's last iteration of the proposed rules. Specifically, his remarks
extended the prohibition to include:
o Prohibition of incentive compensation applies to merit increases provided as part of an employee's annual performance
evaluation, if they contain any quantitative measurements related to enrollment of students or awarding of financial aid.
o Prohibition of compensation based on success in securing student enrollments is meant to read "in whole or in part".
o Prohibition of incentive compensation to persons and entities includes supervisory and management personnel and 3rd
parties. The Department did not dispute examples that included Presidents of Universities.
o "Indirectly" reference can be extended to prohibit incentive compensation determined on factors such as revenue if it
can be shown that revenue is derived from successfully enrolling students.
o Success in securing enrollment extends to any quantification of enrollment objectives and performance, including
minority recruiting, specific academic programs and athletics.
o Quantitative metrics related to the recruiting or enrolling of a student or the awarding of financial aid may not be used
for merit-based adjustments. This extends to scheduling appointments, attending college nights, making telephone calls
and number of financial aid awards in addition to counting applications and enrollments.
o Prohibition includes measuring the performance of an admissions officer in contributing to a non-profit institution' s
enrollment growth goal.
o 401K/403B contributions may be prohibited. The assumption is that the OGC official was referring to a discretionary
contribution made from revenue received from success in enrolling students.
o Prohibition extends to compensation based on successful persistence or graduation.
We think this extension of the prohibitions goes far beyond and is even contrary to Congressional intent and makes
problematic the actual performance evaluation of people involved in recruiting and financial aid functions as well as some
very legitimate enrollment programs specifically designed to diversify higher education by addressing underrepresented
students.
DeVry looks forward to working with the Department to assure that students receive accurate and clear information as
they choose the institution and program that best serves their educational goals.
Tom
Thomas Babel
Vice President
Student Finance Policy and Industry Relations
DeVrylnc.
3005 Highland Parkway
Downers Grove, IL 60515
p: 630.515.3133
m: 630.776.4614
f: 630.353.9903
e: tbabel@devry.com
www.devry.edu
From: Rogers Margot
To: Yum Georgia
Rose Charlie
Kanter. Mart:ba
CC:
Date: 4/27/2010 11 :23:26 AM
i(b)(S)
Subject: Fw: More on the Department ofEclucation's Gainful employment r e g ~ , _ ____ _ , ~
FYI
From: Miller, Tony
To: Rogers, Margot
Sent: Tue Apr 27 10:03:02 2010
Subject: Fw: More on the Department ofEclucation's Gainful employment regJ'- <b_l<_
5
l ____ _,
Fyi
From: Gordon, Robert M.
To: Miller, Tony; Shireman, Bob
Cc: Sunstein, Cass R.
Sent: Tue Apr 27 09:59:26 2010
Subject: FW: More on the Department of Education's Gainful employment regj,_ <b_J<S _l ___ __,
Tony and Bob,
(b)(S)
Thanks,
Robert
APRa 26, 2010, 10:57 A.M. ET
Debt, Job Rule Uncertainty Hits Shares Of For-Profit Colleges
NEW YORK (Dow Jones)--A government proposal to hold colleges accountable for graduating students with high debt
Department of Education had softened its stance on the subject.
post-graduation debt and gainful employment levels that colleges must meet. The news hit share prices of for-profit
Credit Suisse downgraded ITI Educational Services Inc. (ESI) and DeVry Inc. (DV) to neutral from outperform and
slashed their price targets, citing the potential fallout from their new take on gainful employment as well as concerns of
Colleges Inc. (COCO) and Apollo Group Inc. (APOL), were also trading down.
improper to say what the Department of Education will put forth and it's best to wait until the official proposal is released
for public comment. That will happen by mid-June.
http://online.wsj .com/article/BT-C0-20100426-710339.htrnl?mod=rss_Hot_Stocks
Sharon Mar
Policy Analyst I Information Policy
OMB I Office oflnfonnation and Regulatory Affairs
Tel: 202.395.6466 1 Fax: 202.395.5167 1 smar@omb.eop.gov
From: Yuan Georgia
To: Rosenfelt. Phil
CC:
Date: 4/27/2010 7:11:04 PM
Subject: Fw: More on the Department of Education's Gainful employment reg- ._ l(b_)_(5_) ___ _,
To: Yuan, Georgia; Rose, Charlie; Kanter, Martha
Sent: Tue Apr 27 10:23:26 2010 l<bl(S)
Subject: Fw: More on the Department ofEducation's Gainful employment regiL_ _____ ____,
FYI
From: Miller, Tony
To: Rogers, Margot
Sent: Tue Apr2710:03:02 2010
Subject: Fw: More on the Department of Education's Gainful employment
____
Fyi
From: Gordon, Robert M.
To: Mill er, Tony; Shireman, Bob
Cc: Sunstein, Cass R.
Sent: Tue Apr 27 09:59:26 2010 l(b)(S)
Subject: FW: More on the Department ofEducation's Gainful employment reg-L_ _____ _,
Tony and Bob,
(b)(5)
Thanks,
Robert
APRIL 26, 2010, 10:57 A.M. ET
Debt, Job Rule Uncertainty Hits Shares OfF or-Profit ColJeges
NEW YORK (Dow Jones)-A government proposal to hold colleges accountable for graduating students with high debt
Department ofEducation had softened its stance on the subject.
post-graduation debt and gainful employment levels that colleges must meet. The news hit share prices of for-profit
Credit Suisse downgraded ITT Educational Services Inc. (ESI) and De Vry Jnc. (DV) to neutral from outperform and
slashed their ptice targets, citing the potential fallout from their new take on gainful employment as well as concerns of
Colleges Jnc. (COCO) and Apollo Group Jnc. (APOL), were also trading down.
improper to say what the Department of Education will put forth and it's best to wait until the official proposal is released
for public comment That will happen by mid-June.
http://online.wsj .com/article/BT-C0-20100426-710339.html?mod=rss_Hot_Stocks
Sharon Mar
Policy Analyst I Information Policy
OMB I Office of Information and Regulat01y Affairs
Tel: 202.395.6466 1 Fax: 202.395.5167 1 smar@omb.eop.gov
From: Yuan Georgia
To: Brovm, Robinette
CC:
Date: 5/5/2010 2:44:12 PM
Subject: FW: More on the Department of Education's Gainful employment reg- J '- <b_><s_> ___ _...J
Robin
l(b)(S)
Please let me know if you need any other information.
Georgia
Georgia Yuan
Postsecondary Education and Regulatory Service
400 Maryland A venue SW 6E341
202-401-63 99
Sent: Tuesday, April27, 2010 11:23 AM
To: Yuan, Georgia; Rose, Charlie; Kanter, Martha
Subject: Fw: More on the Department of Education's Gainful employment reg- ._ l<b_Hs_> ____ _,

Responsive Document - CREW: Department of Education: Regarding For-Profit Education: 8/16/2011 11-00026-F (Ginns Redactions2) (PART 1)

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Responsive Document - CREW: Department of Education: Regarding For-Profit Education: 8/16/2011 11-00026-F (Ginns Redactions2) (PART 1)

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